The rupee plunged over eleven percent against the dollar in the last months. Following this currency devaluation, the impact assessment of the devaluation on different sectors of economy, and whether it will be able to achieve its desired results of boosting the exporting sectors, is currently being debated.
Exporters have welcomed the move with caution, since this will also increase the already surging cost of doing business by increasing the prices of energy, raw materials and transportation. However, for raw material producers, like cotton farmers, the devaluation is God-sent. They will benefit from both the devaluation of currency and the rise in international price of cotton, as payment for domestic cotton is directly linked to internationally prevailing prices.
Textiles, the country’s largest exporting sector, will be impacted by the devaluation by a small increase in export volume as well as by the negative impacts of doing business at an increased cost. In the form of higher energy prices, the Reclassified Liquefied Natural Gas has become unaffordable, whereas the cost of raw materials has also increased. Where the latter accounts for 70 percent of the finished product, the former constitutes almost 15 percent.
For sustainable growth in the textile sector, free availability of quality raw material is required. Being the major raw material in textiles, cotton has gradually deteriorated both in quality and in quantity over the last decade. The government now plans, as reported by several newspapers, to halt cotton imports or impose duties during crop harvest in an effort to ensure farmers get an attractive price and are encouraged to plant more in the next season. However, this appears to be untrue since the country already faces a shortfall of three to four million bales a year to maintain its current production level, let alone meet the increased requirement of rising exports.
According to a report submitted to the cabinet by a special committee on cotton, production has faced virtual stagnation since 1991-92, fluctuating within the range of 10 to 12 million bales. In 2015-16, the output dropped even below 10 million bales – 9.9 million. Pakistan’s annual consumption needs are estimated at 15 million bales, turning the country into a net importer of cotton. If we put a ban on cotton imports or impose import duties our textile sector will starve and any textile production will not remain competitive. Therefore, the industry which has recently shown growth will start declining once again.
Pakistan’s cost of manufacturing is already highest in the region. So if raw material price is further increased by 10 percent, as compared to the global price, there is no chance for the cotton spinning sector to survive. We have already lost one-third of our spinning capacity in the last four years due to a high cost of business. If duties are imposed on cotton imports now, we will likely lose another one-third of our spinning capacity. Pakistan’s industry already gets cotton at a price almost five percent higher than India due to crop shortage. The rate of cotton in India today is around Rs7,200 per bale, compared to Rs7,900 per bale in Pakistan.
Internationally, the price of cotton was around 68 cents per pound at the start of the cotton season. Now it has currently risen to more than 82 cents per pound, and is expected to further increase. There has been a hike in the international cotton prices. A dollar was worth Rs105 during the last cotton season and is equivalent to Rs115 now; it will probably be more than Rs120, at least, during the next season. So phutti (cotton) rates will automatically be much higher the following year.
Cotton prices in Pakistan are fixed in accordance with New York’s prices. So the devaluation of currency will already be getting farmers a much higher price for their cotton. With the devaluation and a higher international price there is certainly no requirement to impose any duty on cotton this season, as the farmers would reap substantially higher financial returns from the cotton crop.
In the early 2000s, when the Argentinian currency lost its value, the agricultural produce became the country’s most precious currency. Grains were considered more reliable and more welcomed than cash because they are priced in dollars. They were traded for new vehicles, homes and watches. Even the Ford Motor Company, General Motors Corporation and Toyota Motors started country-wide sales pitches and taught their employees how to swap vehicles for grains.
Restricting cotton import by imposing duty as a policy response to the declining cotton production is not the solution to the problem. We need imported cotton to meet our consumption and expansion requirements, especially if exports are to grow.
Policymakers should focus on increasing the cotton cultivation area and production, especially as the issue of water scarcity intensifies. Among all Kharif crops, cotton requires the minimum amount of water, hence, special attention should be paid to increase its growing area this season.
If the textile industry stagnates due to paucity of raw materials, cotton farmers will suffer and will have to export raw cotton instead, as in the case of sugar farmers. They will have to sell their produce at prices lower than the domestic price. On the other hand, the textiles export sector will also shrink, creating with an even greater trade deficit, which would be dangerous for the country’s economic security.
Shahid Sattar is a former member of the Planning Commission. Hira Tanveer is a policy analyst.
Link: Devaluation benefits