Export Processing Zones in Pakistan

Muhammad Waseem Ahmed

Department of Economics
University of Karachi

Abstract:

Export Processing Zones (EPZs) are designated areas where foreign firms are
allowed to establish and operate factories for the production of goods destined for
export. Pakistan has established several EPZs to attract foreign investment and boost
exports. This paper analyzes the effectiveness of EPZs in Pakistan in promoting
exports, attracting foreign investment, and creating employment opportunities. The
paper concludes that although EPZs have contributed positively to the economy of
Pakistan, their potential has not been fully utilized. The paper recommends
measures to enhance the effectiveness of EPZs in Pakistan.

Introduction:

Export Processing Zones (EPZs) in Pakistan are designated areas established by the
government to facilitate export-oriented industrialization and attract foreign
investment. The first Export Processing Zone (EPZ) in Pakistan was established in
Karachi in 1980. It is known as the Karachi Export Processing Zone (KEPZ) and was
the pioneer in promoting export-oriented industries in the country.
Since then, several other EPZs have been set up in different parts of Pakistan.

1. Sialkot Export Processing Zone (SEPZ) - Established in 2000.

2. Risalpur Export Processing Zone (REPZ) - Established in 2002.
3. Gwadar Export Processing Zone (GEPZ) - Established in 2003.
4. Islamabad Capital Territory Export Processing Zone (ICTEPZ) - Established in
2007.
5. Faisalabad Export Processing Zone (FEPZ) - Established in 2009.
6. Haripur Export Processing Zone (HEPZ) - Established in 2009.
7. Multan Export Processing Zone (MEPZ) - Established in 2015.
8. Rachna Industrial Park (formerly Gujranwala EPZ) - Established in 2015.

It's important to note that in recent years, the concept of EPZs has evolved into
Special Economic Zones (SEZs) in Pakistan. SEZs encompass a broader range of
economic activities and provide a more comprehensive framework for industrial
development and foreign investment.

The purpose of EPZs is to provide a favorable environment for export-oriented

industries by offering them a range of incentives and facilities. These include
exemptions from customs duties, taxes, and other levies on imported machinery,
equipment, and raw materials used for production. In addition, EPZs offer a
simplified regulatory framework, streamlined procedures for setting up and
operating businesses, and access to world-class infrastructure and services.
EPZs in Pakistan have been successful in attracting foreign investment and
generating employment opportunities. They have helped to increase exports and
foreign exchange earnings and have contributed to the overall development of the
country's economy. The EPZs have been particularly successful in promoting the
textile and garment industry, which accounts for a significant share of Pakistan's
exports.

Analysis:

Export Processing Zones (EPZs) have been established in many developing countries
as a tool for promoting exports, attracting foreign investment, and creating
employment opportunities. In Pakistan, EPZs have been established in different parts
of the country to overcome economic challenges and boost the country's exports.

This paper provides an in-depth analysis of the effectiveness of EPZs in Pakistan in

achieving these goals. The analysis focuses on the contributions of EPZs to the
economy of Pakistan, the challenges faced by EPZs, and the measures that can be
taken to enhance the effectiveness of EPZs.

Contributions of EPZs to the Economy of Pakistan: The EPZs in Pakistan have

contributed significantly to the country's economy. According to the Board of
Investment (BOI), EPZs have attracted around $2.3 billion in foreign direct
investment (FDI) and generated more than $12 billion in exports since their
inception. The textile and garment industry is the major beneficiary of EPZs,
accounting for around 80% of the exports from EPZs. The EPZs have also contributed
to the creation of employment opportunities, as around 150,000 people are
employed in EPZs. This has helped to reduce unemployment and improve the
standard of living of many households.

The establishment of EPZs in Pakistan has also contributed to the development of

infrastructure in remote areas where EPZs are located. The government has invested
in building roads, ports, and electricity infrastructure in these areas to attract foreign
investment. The development of infrastructure has also benefited local communities
by improving access to services and transportation.

1.Incentives and Facilities:

1.1.Fiscal Incentives:

Export Processing Zones (EPZs) in Pakistan offer various fiscal incentives to attract
foreign investment and promote export-oriented industries. These incentives include
exemptions from customs duties, taxes, and levies on imported machinery,
equipment, and raw materials used for production within the EPZs. By providing
these exemptions, EPZs reduce the cost of setting up and operating businesses,
making them more attractive to investors.

1.2.Regulatory Framework and Streamlined Procedures:

EPZs in Pakistan provide a simplified and business-friendly regulatory framework to

facilitate the establishment and operation of businesses within the zones. The
regulatory processes and procedures are streamlined to minimize bureaucratic
hurdles and ensure a smooth and efficient business environment. This includes
simplified procedures for obtaining licenses, permits, and approvals, reducing
administrative red tape and promoting ease of doing business.

1.3.Infrastructure Development and Services:

EPZs in Pakistan offer world-class infrastructure and services to support export-

oriented industries. This includes well-planned industrial estates with access to
reliable utilities such as electricity, water, and gas supply. The zones are equipped
with modern transportation and logistics facilities, including roads, ports, and
airports, facilitating efficient movement of goods and materials. EPZs also provide
developed industrial plots, factory buildings, and warehouses for lease or sale to
investors.

1.4.Workforce and Skill Development Initiatives:

EPZs in Pakistan focus on developing a skilled workforce to meet the needs of

export-oriented industries. Special attention is given to vocational training and skill
development programs in collaboration with technical and vocational institutes.
These initiatives aim to enhance the productivity and competitiveness of the
workforce, ensuring a supply of skilled labor for the industries operating within the
EPZs. Additionally, EPZs often collaborate with educational institutions to provide
specialized training programs tailored to the needs of specific industries.
These fiscal incentives, streamlined regulatory procedures, infrastructure
development, and workforce skill development initiatives collectively create an
attractive and conducive environment for businesses within the EPZs. These
measures aim to promote investment, enhance export competitiveness, and drive
economic growth in Pakistan.

2.Sectoral Analysis:

2.1.Textile and Garment Industry:

Driving Force of EPZs The textile and garment industry has been a key driving force
behind the success of EPZs in Pakistan. EPZs have provided a favorable environment
for textile manufacturers, enabling them to take advantage of the fiscal incentives,
infrastructure, and skilled workforce available within the zones. Textile and garment
manufacturers within EPZs benefit from duty-free import of machinery and raw
materials, allowing them to produce high-quality products at competitive prices for
export markets. The sector has contributed significantly to Pakistan's exports,
foreign exchange earnings, and employment generation.

2.2.Electronics and Electrical Appliances:

EPZs in Pakistan have also attracted investments in the electronics and electrical
appliances sector. With the provision of fiscal incentives and specialized
infrastructure, EPZs have facilitated the establishment of electronic manufacturing
units. The zones offer an enabling environment for companies involved in the
production of consumer electronics, home appliances, and electrical components.
EPZs provide a platform for electronics manufacturers to access global markets,
leverage economies of scale, and benefit from the skilled labor pool available within
the zones.

2.3.Automotive Components and Manufacturing:

EPZs have played a role in promoting the automotive industry in Pakistan,

particularly in the manufacturing of automotive components. The zones offer a
conducive environment for companies involved in the production of auto parts,
accessories, and components. EPZs provide a range of benefits, including exemptions
from import duties and taxes on machinery and raw materials, enabling companies
to manufacture high-quality components at competitive prices. The automotive
sector in EPZs has contributed to the localization of the supply chain, reducing
dependence on imports and promoting exports of automotive components.

2.4.Pharmaceuticals and Chemicals:

EPZs have also attracted investments in the pharmaceuticals and chemicals sector.
The zones provide a platform for pharmaceutical manufacturers to produce and
export a wide range of products, including generic drugs, medicines, and chemicals.
EPZs offer incentives such as duty exemptions on imported machinery, equipment,
and raw materials, enabling pharmaceutical companies to enhance their production
capabilities and meet international quality standards. The pharmaceutical sector
within EPZs contributes to the availability of affordable medicines, strengthens the
healthcare system, and supports the export of pharmaceutical products.

2.5.Agro-Based Industries and Food Processing:

EPZs in Pakistan have also witnessed the establishment of agro-based industries and
food processing units. The zones offer a conducive environment for companies
involved in the production and processing of agricultural products, including fruits,
vegetables, grains, and dairy products. EPZs provide specialized infrastructure, cold
storage facilities, and streamlined procedures, enabling agro-based industries to
enhance their processing capabilities and meet international food safety standards.
The sector contributes to value addition, reduces post-harvest losses, and promotes
the export of processed agricultural products.

The diverse sectoral presence within EPZs showcases their versatility and ability to
attract investments across various industries. By providing sector-specific benefits
and infrastructure, EPZs have played a crucial role in driving economic growth,
export competitiveness, and employment generation in Pakistan.

3.Economic Impact and Contributions:

3.1.Export Growth and Foreign Exchange Earnings:

Export Processing Zones (EPZs) in Pakistan have significantly contributed to export

growth and foreign exchange earnings. The presence of EPZs has facilitated the
expansion of export-oriented industries, allowing them to access international
markets and compete effectively. EPZ-based industries, such as textiles, garments,
electronics, and automotive components, have recorded substantial export volumes.
The zones have played a crucial role in diversifying Pakistan's export basket and
reducing dependence on a few traditional export commodities. This export growth
has resulted in increased foreign exchange earnings, contributing to the country's
balance of payments and strengthening its economy.

3.2.Employment Generation and Labor Market Dynamics:

EPZs have been instrumental in generating employment opportunities in Pakistan.

The establishment of export-oriented industries within the zones has created a
significant number of jobs across various sectors. The textile and garment industry,
in particular, has been a major source of employment within EPZs. These zones
provide direct employment to skilled and unskilled workers, contributing to poverty
reduction and improving livelihoods. Additionally, the presence of EPZs has a
multiplier effect on job creation, as they stimulate the growth of related support
services, such as transportation, logistics, and maintenance, further expanding
employment opportunities.
EPZs also have a positive impact on labor market dynamics. They attract skilled
workers due to the availability of better job prospects and higher wages compared to
other sectors. This drives skill development and training initiatives, resulting in an up
skilled labor force. The transfer of technology and knowledge from foreign investors
to local workers within EPZs further enhances their employ ability and productivity.

3.3.Regional Development and Socioeconomic Benefits:

EPZs in Pakistan have played a crucial role in regional development and generating
socioeconomic benefits. The establishment of EPZs in different parts of the country
has helped to promote industrialization beyond major urban centers, leading to
balanced regional development. EPZs have attracted investments and job
opportunities to areas that were previously underdeveloped, contributing to the
upliftment of local economies and reducing regional disparities.
EPZs also have indirect socioeconomic benefits. They stimulate local businesses,
suppliers, and service providers, creating linkages with the surrounding
communities. This generates additional income and business opportunities for small
and medium-sized enterprises (SMEs) and local entrepreneurs, fostering
entrepreneurship and economic growth at the grassroots level.
Furthermore, EPZs contribute to the development of infrastructure and social
amenities in the surrounding regions. The demand for utilities, housing, healthcare,
education, and transportation services increases with the growth of EPZs, leading to
improved infrastructure and facilities for both the workers and local communities.
In summary, EPZs in Pakistan have made significant economic contributions by
driving export growth, increasing foreign exchange earnings, generating employment
opportunities, and promoting regional development. The positive effects ripple
through various sectors of the economy, leading to socioeconomic benefits for both
the EPZ workers and the surrounding communities.

4.Challenges and Limitations:

Despite the significant contributions of Export Processing Zones (EPZs) in Pakistan,

there are several challenges and limitations that need to be addressed to ensure
their sustained growth and competitiveness.

4.1.Infrastructure Constraints and Power Supply Issues:

One of the significant challenges faced by EPZs in Pakistan is the inadequate and
unreliable infrastructure. The availability and quality of transport, energy, and
communication infrastructure are critical for the efficient functioning of EPZs.
However, many EPZs in Pakistan face issues such as poor road networks, inadequate
water and sanitation facilities, and frequent power outages, which hamper their
productivity and competitiveness.
The power supply issues, in particular, pose a severe challenge to the EPZs in
Pakistan. The country's power sector faces significant constraints due to the lack of
investment in new capacity, inefficient operations, and transmission losses. This
results in frequent power outages, which can disrupt production processes, cause
delays, and increase operating costs for EPZ-based industries.

4.2.Compliance with International Labor and Environmental Standards:

Another challenge faced by EPZs in Pakistan is ensuring compliance with

international labor and environmental standards. As EPZ-based industries are
export-oriented, they are subject to the labor and environmental regulations of the
importing countries. Failure to comply with these regulations can lead to sanctions,
reputation damage, and loss of market access.
Pakistan has made progress in improving its labor laws and regulations, but more
needs to be done to ensure their effective implementation and monitoring. The EPZs
in Pakistan should strive to maintain high labor and environmental standards to
avoid any negative repercussions.

4.3.Administrative and Regulatory Hurdles:

EPZs in Pakistan face various administrative and regulatory hurdles, which can affect
their competitiveness. The bureaucratic procedures for obtaining licenses and
permits can be time-consuming and complex, leading to delays and additional costs
for investors. Furthermore, there is a lack of coordination between the different
government agencies responsible for managing the EPZs, which can result in
overlapping regulations and conflicting policies.
Streamlining the administrative and regulatory procedures for EPZs in Pakistan can
help reduce the compliance burden on investors and enhance the ease of doing
business in the country.

4.4.Diversification and Upgrading of Industries:

While EPZs in Pakistan have contributed significantly to the country's export growth,
there is a need to diversify and upgrade the industries operating within the zones.
The EPZs in Pakistan are currently dominated by the textile and garment industry,
which accounts for a significant portion of the country's exports. Diversifying into
other high-value industries, such as electronics, pharmaceuticals, and automotive
components, can help reduce the dependence on a single sector and increase the
competitiveness of the EPZs.

5.Transformation into Special Economic Zones (SEZs):

5.1.SEZ Policy and Framework:

Pakistan has recognized the need to transform Export Processing Zones (EPZs) into
Special Economic Zones (SEZs) to further enhance their effectiveness and
competitiveness. The government has introduced a comprehensive SEZ policy and
framework to facilitate this transformation. The SEZ policy aims to create a business-
friendly environment, attract investment, and promote industrialization and export-
oriented growth. It provides guidelines and incentives for the development,
management, and operation of SEZs in Pakistan.
The SEZ policy includes provisions for fiscal incentives, streamlined regulatory
procedures, infrastructure development, and support services within the SEZs. It also
emphasizes public-private partnerships (PPPs) and encourages collaboration
between the government, private sector, and international investors to drive the
development and success of SEZs.

5.2.Potential Benefits and Synergies:

The transformation of EPZs into SEZs offers several potential benefits and synergies.
SEZs can attract higher levels of foreign direct investment (FDI) by providing a more
comprehensive and investor-friendly framework. The expanded scope of SEZs allows
for the development of a broader range of industries, including high-tech
manufacturing, services, logistics, and technology parks, promoting economic
diversification.
SEZs can create synergies by fostering collaboration and linkages between different
industries, both within the zones and with the domestic economy. The clustering of
related industries within SEZs can lead to knowledge-sharing, technology transfer,
and economies of scale. SEZs can also act as hubs for innovation, research and
development (R&D), and entrepreneurship, facilitating the growth of knowledge-
intensive industries.
Furthermore, SEZs can drive regional development by attracting investments and
creating employment opportunities in underdeveloped areas. The establishment of
SEZs outside major urban centers can promote balanced regional growth and reduce
regional disparities.

5.3.Case Studies: Successful SEZ Implementation:

There have been successful examples of SEZ implementation in Pakistan. One

notable case is the Allama Iqbal Industrial City SEZ in Faisalabad. This SEZ is being
developed as a modern industrial estate, attracting investments in textile, garments,
and other industries. The SEZ offers a range of fiscal incentives, infrastructure
facilities, and support services, leading to increased investment and job creation.
Another example is the China-Pakistan Economic Corridor (CPEC), which includes the
development of several SEZs across the country. These SEZs aim to attract Chinese
investments and promote industrial cooperation between the two countries. The
Gwadar Port Free Zone, a key component of CPEC, has the potential to transform
Gwadar into a regional economic hub, attracting investments in various sectors,
including logistics, manufacturing, and trade.
These case studies demonstrate the successful implementation of SEZs in Pakistan
and highlight the potential for economic growth, investment attraction, job creation,
and regional development through the establishment of SEZs.

In conclusion, the transformation of EPZs into SEZs in Pakistan offers significant

potential for economic development and investment attraction. The SEZ policy and
framework provide a comprehensive framework to facilitate this transformation,
offering fiscal incentives, streamlined procedures, and infrastructure development.
The potential benefits of SEZs include increased FDI, economic diversification,
knowledge-sharing, and regional development. Successful case studies, such as the
Allama Iqbal Industrial City SEZ and the CPEC SEZs, demonstrate the positive
outcomes that can be achieved through the implementation of SEZs in Pakistan.

6. Conclusion:

6.1.Summary of Findings:

Export Processing Zones (EPZs) have played a significant role in Pakistan's economic
development, driving export growth, employment generation, and regional
development. The EPZs have provided a favorable environment for investment,
offering fiscal incentives, streamlined procedures, and support services to promote
industrialization and export-oriented growth.
The sectoral analysis of EPZs in Pakistan highlights the dominant role of the textile
and garment industry, followed by electronics and electrical appliances, automotive
components and manufacturing, pharmaceuticals and chemicals, and agro-based
industries and food processing.
Despite the significant contributions of EPZs to Pakistan's economic development,
they face several challenges and limitations, including infrastructure constraints,
compliance with international standards, administrative and regulatory hurdles, and
diversification and upgrading of industries.
The transformation of EPZs into Special Economic Zones (SEZs) offers significant
potential for further economic development, investment attraction, and regional
development in Pakistan. Successful case studies, such as the Allama Iqbal Industrial
City SEZ and the CPEC SEZs, demonstrate the positive outcomes that can be achieved
through the implementation of SEZs in Pakistan.

6.2.Implications for Policy and Practice:

The findings of this analysis have several implications for policy and practice. The
government needs to prioritize infrastructure development, particularly power
supply, to address the infrastructure constraints and support the growth of EPZs and
SEZs. The government should also ensure compliance with international labor and
environmental standards to promote sustainable and responsible investment.
The government needs to streamline administrative and regulatory procedures and
ensure a business-friendly environment to attract investment and promote
industrialization. The government should also encourage diversification and
upgrading of industries within EPZs and SEZs to promote economic diversification
and knowledge-intensive industries.
Public-private partnerships (PPPs) are crucial to the success of EPZs and SEZs. The
government needs to encourage collaboration between the private sector,
international investors, and academia to drive the development and success of EPZs
and SEZs.

6.3.Prospects and Challenges for Future Development:

The transformation of EPZs into SEZs offers significant prospects for future economic
development in Pakistan. SEZs can attract higher levels of investment, create
employment opportunities, and promote regional development. SEZs can also drive
economic diversification, knowledge-sharing, and innovation.
However, the successful implementation of SEZs in Pakistan faces several challenges.
The government needs to ensure a business-friendly environment, streamline
regulatory procedures, and address infrastructure constraints to attract investment
and promote industrialization. The government also needs to ensure compliance
with international labor and environmental standards to promote responsible and
sustainable investment.
In conclusion, the EPZs and SEZs have played a significant role in Pakistan's economic
development, and the transformation of EPZs into SEZs offers significant prospects
for future economic growth. However, the successful implementation of SEZs in
Pakistan requires the government's concerted efforts to address the challenges and
ensure a business-friendly environment for investment and industrialization.

7.Future Prospects and Policy Recommendations:

7.1.Enhancing Connectivity and Infrastructure:

The development of infrastructure, including roads, railways, and ports, is crucial to

the success of EPZs and SEZs. The government needs to prioritize infrastructure
development and ensure connectivity between EPZs and SEZs to promote trade and
investment. The government should also address power supply issues to provide a
reliable and uninterrupted power supply to industries.

7.2.Promoting Research and Development (R&D):

Promoting research and development is essential to drive innovation and

technological advancement in EPZs and SEZs. The government should encourage and
support R&D activities by providing incentives and funding support to industries. The
government should also establish research centers and technology parks to promote
collaboration between industries and academia.

7.3.Strengthening Linkages with Domestic Suppliers:

Strengthening linkages with domestic suppliers is crucial to promote local industries'

growth and development. The government should encourage EPZs and SEZs to
source inputs and raw materials from local suppliers. The government should also
support the development of domestic industries by providing incentives and funding
support.

7.4.Fostering Innovation and Technology Upgradation:

Fostering innovation and technology upgradation is essential to promote industrial

competitiveness and growth. The government should encourage and support
industries to adopt new technologies and innovative practices. The government
should also establish incubation centers and technology transfer offices to promote
innovation and technology diffusion.

7.5.Public-Private Partnerships (PPPs) and Investor-Friendly

Environment:

PPPs are crucial to the success of EPZs and SEZs. The government needs to
encourage and facilitate PPPs to promote investment and industrialization. The
government should also ensure a business-friendly environment by streamlining
administrative and regulatory procedures, addressing infrastructure constraints, and
providing fiscal incentives to investors.
Overall, the future prospects of EPZs and SEZs in Pakistan are promising. However, to
fully realize their potential, the government needs to address the challenges and
implement effective policies and strategies to promote investment, industrialization,
and regional development. Enhancing connectivity and infrastructure, promoting
R&D, strengthening linkages with domestic suppliers, fostering innovation and
technology upgradation, and promoting PPPs and investor-friendly environment are
key policy recommendations to drive the development and success of EPZs and SEZs
in Pakistan.

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