Industry braces for cut in production, more layoffs

KARACHI: With the World Bank (WB) estimating a growth rate of 2.0 per cent, Pakistan’s industry is bracing for a sharp decline in productive activities and an equally sharp increase in layoffs.

“At least one million informal workers – mostly from the textile sector – are likely to lose their jobs,” says Secretary General of the National Trade Union Federation Pakistan (NTUF) Nasir Mansoor.

Pakistan is one of Asia’s biggest exporters of textile products and a financial blow to this sector is hurting the country’s workforce. There has been a 14.8 per cent decline in Pakistan’s textile exports, according to data released by the Pakistan Bureau of Statistics (PBS). The country’s exports stood at $1.3 billion in January 2023; it had recorded textile exports of $1.5 billion last January. On a month-over-month (MoM) basis, the country had reported a decline of 2.5 per cent.

“The 2022 floods washed away at least 45 per cent of our cotton crop, leaving textile mills without an essential raw material. The other solution is to import raw material, but delays in LCs [letters of credit] opening have brought all operations to a halt,” Mansoor explains why Pakistan is lagging behind.

Earlier this year, during a joint press conference held by the textile associations in January 2023, representatives of the associations revealed that around 7 million workers in the textile sector and textile-related industries had been laid off since last summer. Officials from the industry also blamed the government regulations, including delays in LCs opening for the serious situation.

The Pakistan Association of Automotive Parts & Accessories Manufacturers also shared that around 25,000-30,000 workers in the auto sector had lost their jobs due to an unabated drop in annual sales.

A management-level official from an investment company in Pakistan, who spoke on condition of anonymity, said that the current macroeconomic conditions have affected sectors in a different manner. “Sectors that are more likely to get affected by the current economic conditions are those which depend heavily on import; import of raw materials or other products, like autos. Rising interest rates have allowed the banking sector to perform really well. But since this policy leads to demand compression, more mainstream companies are expected to default. And this assumption can be backed by the fact that almost all banks are taking more provisions for loan losses.

“Floods have already affected the agriculture sector. Companies that are not planning layoffs are likely to, at least, impose an unofficial freeze on hiring,” the official said.

Pakistan’s unemployment rate is a little over 6 per cent. And the problem has remained consistent for the country for years. According to the Pakistan Labour Force Survey, 2020-21, unemployment rate in the country declined from 6.9 per cent in 2018-19 to 6.3 per cent in 2020-21. Mansoor says: “This is not the first time Pakistan is going through a severe economic crisis. In 2020, because of Covid-19-induced lockdowns, at least 8 million employees were laid off on either temporary or permanent basis. But that was temporary and triggered because of disruptions in supply chain. This time, however, the situation is different.”

In 2022, when Finance Minister Ishaq Dar assumed office, the Finance Division opted for a dollar peg to control the free-fall of the currency. But this caused a letters-of-credit crisis in the country, with banks refusing to open LCs as low as $5,000.

Speaking to The News about the alarming economic situation, President of the Federation of Pakistan Chambers of Commerce and Industry (FPCCI) Irfan Iqbal Sheikh says that “delays in opening of LCs, unclear containers stuck at ports, and the government’s import restrictions on several raw materials and machinery parts paralysed industries.

“Many companies have already suspended their operations because they do not have resources. The next three to four months are going to be tough for the economy.

“Thousands of containers with crucial raw material were stuck for weeks,” Irfan Sheikh says adding that Pakistan’s economic situation is likely to get “much worse” unless the government comes with “clear-cut decisions” regarding import restrictions. “If the country cannot possibly import particular items, the government should tell what can be imported and what not. When companies will not have enough material to continue their production, how are they going to perform,” he asks.

In his comment to The News on how the current macroeconomic conditions have affected businesses, Chief Executive Officer of the Pakistan Business Council (PBC) Ehsan Malik said, “Businesses are impacted by three main factors: compression of demand due to high inflation, which affects volumes; control over imports, which affects the ability to produce and hence the capacity utilised and overheads recovered; and higher cost of borrowing.

“Aside from some sectors like auto, which have had to shut down production, others have been running between 25 per cent and 60 per cent of capacity. Those businesses with processes that are sophisticated, requiring specialist skills, have retained the critical employees. Others have laid off casual and contract workers,” he explained.

The PBC CEO further said, “Within the textiles sector, which is also affected by shortage of local cotton due to flood damages, and also due to delay in clearing of imported cotton, it is estimated that up to 3 million people have been rendered unemployed. The total unemployed across all sectors is estimated at about 5 million.” He says that one has to additionally face a loss due to reduced overtime. “The 18 per cent GST levied under the mini budget is likely to further compress demand from the formal sector. It, therefore, does not forebode well for employment levels.”

In a country like Pakistan where workers are unprotected mainly due to their employment status, any layoffs leave people without any severance packages or access to any social welfare programme. Mansoor explains what he calls it a “bleak situation”, “since we have special laws for workers -- which bind companies to offer different perks to their employees -- many companies carry out their hiring processes through third-party contracts. All workers become informal and their dismissal becomes easy as these workers cannot go to the court.”

And even if there are no reports of layoffs across the country, the existing workers are expected to work more to compensate for staff shortages and rising operational costs. Mansoor shares, “Most companies ask informal workers to come in for 15 days in a month. And while they submit a month’s worth of work, they are paid for the 15 days they come to office.”

Another official from one of Pakistan’s biggest conglomerates, who also spoke on condition of anonymity, said that “fears of layoffs are valid, but most companies are trying to retain their staff and use their expertise for all sorts of work. Industries are opting for a hiring freeze on a temporary basis, and things will improve as soon as the country’s foreign exchange reserves increase.” He also agrees that the first quarter is likely to see a complete freeze on hiring.

If the first two months of the year 2023 are anything to go by, Pakistan’s labour market is likely to witness massive layoffs to weather a slump in the global economy. In early February, Alibaba-backed Daraz – the country’s largest online marketplace – announced its plans to lay off 11 per cent of its workforce. This number came to around 300 employees.

A report by i2i Ventures — a VC fund — had predicted a gloomy year for Pakistan’s startup landscape, published last year. The i2i Ventures predicted startups in Pakistan would attract less funding; in 2022, they attracted a total of $65.5 million as compared to $177 million raised in the same quarter in 2021.