Liquidity Crunch Must End for Export Enhancement
Shahid Sattar & Madiha Nisar
Non-payment and delayed refunds accompanied with a complex filing process of refunds are some of challenges that exporters are struggling with. Blocking legitimate refunds by the Federal Board of Revenues (FBR) to show improved revenue collection has taken a heavy toll on exporters who were already reeling under the energy crisis and many other critical issues.
Delays in processing refunds under the outgoing government’s refunds schemes have blocked a substantial amount of 168.4 billion rupees of exporters. As per the estimates, refund over Rs. 15 billion are pending on account of income tax, Rs. 3 billion on account of Drawback of Local Taxes and Levies (DLTL) and a sum of more than Rs. 50 billion on duty drawbacks (DDY).
The current system of revenue targets for individual RTOS is net of any refunds hence In order to meet their net collection targets, regional tax offices (RTOs) adopt a go-slow policy and do not issue refund payment orders (RPOs) on time. They raise petty issues and delay the entry of the claims. The only way out of this dilemma is to assign the targets net of any refunds so that there is no inordinate delay in lodging of claims.
According to the law, refund claims must be cleared within 45 days but the authorities are flaunting the law with impurity. They continue to block payments for years which has damaged the export sector, especially the textile sector.
As a result of the hectic efforts by the industry to compel the government to pay blocked refunds, the former finance minister and advisor to FBR had made promises to pay Rs. 15 billion every month on account of refunds. Only the first installment of Rs. 15 billion was released and the hollow promises remained unfulfilled and hollow.
This illegitimate tactic of the finance ministry and FBR of the outgoing government has caused closure of many businesses while leaving others at the mercy of loan sharks which is slowly but surely killing the manufacturing sector.
According to an estimate, blocking of working capital of export sector has caused a huge loss of almost 500,000 jobs to the economy.
Consequently Pakistan is fast losing its share in the world export to Vietnam and Bangladesh. Pakistan is left with only 0.12 percent share in world total exports. The partial responsibility for this state of affairs is the lack of modernization and up-gradation due to the lack of liquidity/high cost of doing business.
Generally, tax authorities blame exporters for delay in refund for incorrectly filled columns in shipping bills or any mismatch in GST returns. This is because of faulty processes and procedure, with some mistakes committed by exporters. If the tax authorities at the field are ignorant, how can we expect a micro, small and medium enterprise exporter to be conversant with the tax laws, rules and procedures?
The situation can only be improved if the refund mechanism is fully automated. The government should fast-track the refunds process and should release at least 90% of the claimed amount immediately to help small and medium scale exporters tide over liquidity crisis arising out of delay in tax refunds and input tax credits.
It is proposed that each refund shall be lodged and paid within a maximum period of 60 days, failing which the claimant should be entitled to some significant penalty. For any claim that is partially disputed the undisputed amount shall be paid immediately and disputed amounts be settles within 6 months. Refusal to lodge sales tax refund claims should be made a cognizable offence.
To improve liquidity further Indirect exporters as long as they are zero rated should also be entitled to refunds as they supply their goods to exporters. Exempting them from refund claims serves no purpose except increase in cost of doing business. The facilities which are available to exporters, should also be made available to indirect exporters.
Moreover, zero rating is supportive to eliminate tax frauds once and for all as the system of collecting sales tax and then refunding is not only an exercise in futility but involves large number of sales tax personnel and precious time of FBR which can otherwise be utilized to bring more and more persons in the tax net to increase revenue for the FBR. This will serve the double purpose of expanding the tax net as well as exports.

Interest rate hike and devaluation are not the solutions!
Shahid Sattar & Madiha Nisar
The process through which changes in the monetary policy stance affect the aggregate demand and inflation is termed as the transmission mechanism of monetary policy. Interest rate channel is one of the five channels through which the monetary policy transmission works.
Claiming that inflationary pressures may be building, the State Bank of Pakistan has raised interest rate by a cumulative 4.25 percentage points in five rounds since January 2018 in an effort to rein in economic growth.
The state bank of Pakistan first hiked interest rates by 25 basis points in January this year, followed by 50 basis points in May, 100 basis points in July and 100 basis points in September.
Contrary to rational expectations of a moderate hike in policy rate, hawks of SBP came up with 150 bps increase on November 30th to take the policy rate at 10 percent while the core inflation is at 8.3 percent as of October 2018 and unemployment rate has reached a whopping 9 percent.
The latest increase of 150 bps in the interest rate is aimed at containing inflation, while the previous hike of 275bps was targeted at taming the unsustainable current account deficit, which ate up the country’s dollar reserves and posed import payment and debt repayment challenges.
But history shows that previous 275 bps hike in interest rate from May to October 2018 had no impact on inflation as it continued to inflate. Moreover, data of previous ten years shows that every policy rate hike in past years was accompanied with a more or less equal hike in inflation rate. The highest inflation rate of 17.19 percent was experienced in 2009 when interest rate was 14 percent, highest in last ten years. Previous data proves that inflation and interest rates have a side by side relationship, any increase in any of one will also cause an increase in other.
The target policy rate affects all other interest rates in the economy, eventually making it more expensive to borrow, and serving as a brake on the pace of economic activity. Typically, higher borrowing costs slow the economy by forcing consumers and businesses to cut back on spending and investment. But the impacts of rising interest rates affect different groups in different ways.
The growth momentum has already slowed down, which is visible from GDP growth forecast for fiscal year as it is downgraded to 5pc. In the last monetary policy statement released in July, the SBP had forecast GDP growth at 5.5pc while Asian Development Bank has anticipated it to be 4.8 pc for FY19. The continuous downgrades in the growth forecast suggests a sharply decelerating economy. The interest rate hike has added 0.75% of gross domestic product (GDP) to the budget deficit.
The other shock to growth is possibly coming from less than targeted cotton production, which would not only hurt agriculture growth but also have its toll on services growth.
The rate hike will most adversely impact the federal government by increasing its debt servicing cost. Increase in policy rate hike plus continuously depreciating currency will make it difficult for the government to curtail the fiscal deficit.
According to experts, a 1% increase in interest rate increases the cost of debt servicing by roughly Rs180 billion. The claim is proved by the history as after 250 bps increase in interest rate from May to September, Pakistan’s debt and liabilities surged to 30.87 trillion with an addition of 0.98 trillion within three months only (July-September). Gross public debt which is sole responsibility of government has also surged by 0.83 trillion within three months. The adverse impact of the latest policy rate hike on government’s debt servicing will be visible in upcoming data release of SBP.
Owing to higher interest rates and currency depreciation, Pakistan’s debt as well as debt servicing cost will further go up in the current fiscal year even if no fresh loan is taken.
Furthermore, in alliance with universally declining trend, and in response to increased policy rate by an aggressive 150 bps, the stock market in Pakistan remained volatile the past week, as the benchmark KSE 100 index made a net loss of over 1,800 points, slipping below the two touchstones of 40,000 points and 39,000 points.
It is said that there is a direct relationship between interest rates and the value of domestic currency. All else being equal, hike in interest rates leads to currency appreciation as investors see higher returns on their investments. But this assertion is not true for the economy of Pakistan as previous contractionary measures always resulted in more inflation and currency depreciation in Pakistan. Following the previous interest rate hikes the rupee has depreciated by almost 26 percent since January 2018.
In addition to nominal exchange rate, official data released by State Bank of Pakistan (SBP) revealed that Pak Rupee’s Real Effective Exchange Rate index (REER) has also decreased by 2.68 per cent in October, falling to a value of 108.1450 from 111.1276 in September.
Thus government’s claim that interest rate hike is to contain inflation and currency depreciation is not tenable. Take the example of the textile sector which has traditionally contributed more than 60 percent of the exports of Pakistan. The devaluing impact on the industry contrary to conventional wisdom is marginal if not already negative. This is because 80 percent of the input cost, cotton, energy, MMF, machinery and spare parts are all imported and dollar dominated.
The only rationale for the devaluation appears to be import curtailment. But even the imposition of RDs and currency depreciation failed to achieve this target in past. Despite high regulatory duties and currency devaluation, imports have increased by almost 13pc in fiscal year 2017-18 while exports improved by only 8pc. Considering inelastic nature of imports depreciation of currency will only contribute to increase in imports bills and will also violate the world trade organization’s treaties.
Increasing exports through devaluation is highly contentious. The ground realities suggest that long-term policy of maintaining the cost of doing business competitive to other countries, provide access to capital tax expansion and new industry and have a progressive outlook through innovation and new methods.

Power sector
Shahid Sattar and Asad Abbas
“”
November 20, 2019
Power shortages and high power tariffs in Pakistan have been at the root of many problems faced by the Pakistan economy; substantial reduction in the rate of GDP growth, economic stagnation, slow job creation, increasing unemployment, serious adverse impact on the federal budget, and extreme household consumer distress. As a result of the erratic and unreliable grid supply, industrial consumers have been forced to install relatively inefficient but reliable in-house capacity which by any standards is uneconomic.
Without sufficient and continuous power supply, it is impossible to achieve sustainable long term growth rates. A study by Pasha et al. (2013) on the impact of power shortages on economic activity estimated power outage costs at 7 percent of GDP and found that electricity shortages have reduced the country’s economic growth by about 2 percent per annum. This is primarily due to insufficient investment (especially during 1995-2015) to improve electricity generation capacity; the shortfall in electricity supply was as much as 32 percent of total demand. Together with poor governance and sector management, these problems led to higher losses in transmission & distribution and increased financial instability. Insufficient investment in the energy sector has also led to overloaded, antiquated and inefficient transmission and distribution systems. As a result, the gap between demand and supply widened, leading to prolonged power outages experienced by all consumers, where rural areas had more frequent breakdowns than urban areas as a matter of injudicious government policy.
Industry-specific price rates had reached levels that were significantly higher than in neighbouring countries and had contributed portentously rendering exports of Pakistan uncompetitive on world markets.
The current government recognized the severity of the highly uncompetitive industrial tariffs and announced regionally competitive tariff of 7.5 cents for export-oriented sectors. This regionally competitive (albeit implementation is currently patchy) tariff rates to have any real long term impact, would have to continue for at least 05 years so that the industry can grow and invest in expansion and rehabilitation to increase the exports.
Investment in power generation since 2014 has covered the demand-supply gap more than adequately but suffers from a fatal aw; unaffordable and uneconomic tariff rates. These tariffs have rendered the entire supply of energy a luxury item for the people and made our exports uncompetitive in the world market. Some examples of high-generation tariffs are as follows: 1320MW coal power plants that obtain USc 8.3601 & USc 9.16 tariffs per Kwh, while international tariffs are around 6 cents per Kwh. Solar power plants are operating at 18 to 19 cents/kWh tariff rates, whereas solar tariff in India our direct competitors are 7-8 cents/KWH whereas the current solar tariffs are below Rs 5/KWH or 3 cents/KWH.
Over the past eight years, frequent power breakdowns in Pakistan have instigated issues of law and order. However, an improvement in the supply situation over the last few years has reduced the frequency of protests against load shedding but resentment has shifted towards higher tariffs. The resolution of the power crisis is therefore crucial not only for the economy of Pakistan, but also for political stability.
Household consumption of electricity has increased since the last 42 years at an average annual rate of 10 percent per year. The government also actively pursued a rapid electrification policy for rural areas during this period. Resultantly, households’ share of total electricity consumption increased from
12 percent in 1971-72 to 47 percent in 2000-2001. This primarily was at the expense of industry, whose share in the same era fell from 54 percent to 30 percent.
Lifeline tariff for 50 units of consumption of the Rs 2/KWH is neither economic nor conducive to efficiency and requires the government to dish out massive annual subsidies. Alternative to the life line tariff is a direct subsidy to the poor consumers through existing channels such as BISP. This would inculcate a sense of efficiency and reduce wastage of electricity so that it can be used for productive purposes.
The shift in demand pattern has also resulted in industrial tariffs for certain categories and slabs becoming unsustainable, particularly in a regime where budget subsidies are require accordance with IMF conditionalities.
The period (2000-2007) witnessed a credit-driven consumption boom, increasing the use of electrical appliances across Pakistan. The Asian Development Bank’s (2008) report states that the prevalence of inefficient electrical appliances means that more than one quarter of the electricity used by households is wasted.
Energy intensity of Pakistani industries is among the highest in the world and stands for enormous energy consumption with an annual increase of 5 percent to 6 percent of electricity demand. In 1980, Pakistan had the same level of energy intensity as India; nonetheless, improvement in energy-use efficiency in India (at 1.9 percent per annum) and Sri Lanka (at 1.5 percent per annum) was somewhat faster than in Pakistan (at 1.3 percent per annum). Now Pakistan is 15 percent more energy-intensive than India.
Despite the presence of a variety of natural resources, Pakistan had been facing a signi cant constraint in the power generation. The level of investment in the sector decreased sharply particularly during the period 1995-2015, leading to a slower expansion of installed capacity than required as well as depriving the sector of key investments to improve efficiency.
Pakistan’s total installed power generation capacity has now surpassed peak demand. Power sector nancial problems stem primarily from poor governance and ineffective government policies that fail to change the prices charged to customers, despite signi cant cost increases.
More and more consumers are now opting to go out of the system because of the lower cost of self-generation since installed capacity is more than required (a classic capacity trap), the cost of idle capacity is borne by the consumers on the grid. With decrease in dependence of the consumers on electricity supplied by the grid, the grid will eventually become totally unaffordable as more and more consumers opt for self-generation.
Management-related issues include low levels of human resource capacity, corruption, rent-seeking and poor regulatory capacity. Although electricity transmission and distribution losses have decreased marginally in Pakistan (from-25-28% of total electricity generation in 1995 to 20% by 2017), the rate and degree of change is lower than many developing countries, including some utilities in South Asia. Continued high rates of losses have high nancial implications for both utilities and the government. Although the government has tried to introduce performance plans to track progress and ensure improvements over time, there is no documented evidence of effective enforcement
To defer the issue of payment to IPPs to reduce the circular debt, the government has planned to issue bonds to IPPs. These bonds will legitimate the billing and dues created by the IPPs through billing at rates which have generated them rate of return of over 60 percent in dollar terms. The matter is under investigation of NAB and such schemes should not be considered till such time as the NAB inquiry is under way. To avoid repetition of this disastrous situation, Nepra should conduct periodical
audits so that the generation tariffs do not generate returns over and above the policy committed 15 to 16 percent.
Dealing with the crisis in the power sector needs a multifaceted response. Some of the changes needed to tackle the issue include:
 Increasing efficiency in the sector by pushing generation and new investment by a conducive market based approach.
 Investors should start adopting market based approaches (e.g. bidding on the price of power they produce, develop their own customer base) and not rely on government guarantees, e.g., market-based power sector.
 Freely allowing Housing societies to generate distribute and sell power as Captive power units without requiring and licensing or tariff setting by Nepra.
 Finally, all Discos must be run by the boards in accordance with corporate principles.
Furthermore, the following changes in the administrative and legal system toward power consumption in addition to a shift of consumer attitudes need a radical change, some of these are:
a) New investments must be based on competitive bidding and a power market be operated to allow free sale and purchase of electricity generated.
b) The function of NEPRA needs rede nition towards a market based system.
c) Strengthening NEPRA’s nancially and provide an oversight to avoid costly mistakes of unjustifiable high priced generation tariffs being awarded.
d) Consumers need to accept that electricity is not a free commodity so they must pay for the power they consume; the police and judicial system must promptly investigate and prosecute all complaints about electricity theft.
e) Regular and ongoing investment to upgrade and maintain networks, and adopt state of the art management systems for better surveillance of distribution to companies.
f) Investment not only for maintenance of existing equipment, but also for acquiring modern technology and systems.
g) Strengthening the legal framework for investigating, prosecuting and penalizing theft and corruption.
h) Use Renewable Energy (RE) to lower costs through judicious injection of RE where the total cost of RE is less than the fuel component of the installed capacity.
i) Give high importance to initiatives such as energy conservation and adoption of more efficient energy usage practices are viable, desirable and sustainable.

Dismal saving and investment rates
Shahid Sattar and Asad Abbas
“”
November 07, 2019
Much of Pakistan’s current economic crisis revolves around the low savings and investment rates. This is the primary reason why Pakistan has been unable to compete with rest of the dynamic Asian region which has recorded phenomenal economic progress in the last three decades. Low savings rates have resulted in lower volumes of investible funds, whereas, low investment rate have stymied any growth potential. The intermittent phases of relatively high growth have been only due to the “seasonal” heavy inow of external grants, loans and remittances. This begs the question, how can Pakistan raise the savings rate and productivity on a sustainable basis so that it can achieve a higher output to generate exportable surpluses.
Source: World Bank Uncertain policies, poor governance, security threats, energy shortfalls, and an overall lack of investment from public sector (not that the public sector really made any difference) are the causes of the bleak investment levels in Pakistan. Besides this, in terms of “Business regulations”, Pakistan has plummeted from a ranking of 83 in 2011 to 136 (out of 175) in 2019. Unfavorable, rigorous and inconsistent business conditions in Pakistan have not only discouraged the foreign investors from investing but have also deterred local businesses from expanding.
The investment rate has also been a prisoner of the cyclic changes of political regimes, changing economic policies and the resultant volatility in the balance of payments.
The investment rate in Pakistan has decreased by 15 percent over the last ten years which indicates the decrease in non-financial investment by rms (as a percentage of GDP). A high investment to GDP ratio is a sign of long-term sustainable economic growth as investment yields modernization which in return increases the output. For a sustainable level of growth, domestic savings are vital as foreign inflows are subject to change in the exchange rates, external shocks and changing world economies.
According to World Bank’s Report (2019), Pakistan’s economy could reach $2 trillion by 2047 with the implementation of appropriate and innovative economic policies. The enormous gaps between investment and savings have contributed to the low growth potential of the economy over the last ten years. The saving rate of Pakistan has distressed the scale and current account balances resulting in a low investment in human and physical capital. The current account deficit, investment and saving gap are the result of the weak policy formulation of governments. The gap between domestic savings and investments implies that one-third of the country’s investment was financed by foreign resources. The improper funnelling of resources into uneconomic investments has also negatively impacted GDP growth. In developing countries, FDI is used as a proxy to ll the gap in financing investment when the domestic resources are insufficient.
Source: World Bank The fiscal deficit is an indication of consistent negative savings which leads to overall low savings and investment. In previous year savings in Pakistan were approximately 11 percent of the GDP, being extremely low and therefore limiting investment. This is less than half of the saving rate of Bangladesh, one-third of India’s and approximately 1/5th of China. High rate of population growth, weak tax incentives to save, deposit rates and real interest rates are the main factors that determine the levels of saving. The channelization of saving through the financial sector for efficient allocation of investment is important. A study reveals that less than 50 percent of the national savings and their way into the financial sector whereas the rest is used in other sectors by informal channels. This is problem for Pakistan given the new anti-money laundering and FATF regulations.
Investment remains constricted due to unfavourable investment and business climates coupled with rigorous regulations and taxation. The access to Finance is not only constrained by high-interest rates but also by the weak financial system, high processing costs, high collateral terms and conditions and illogical regulation. This vast gap between lending and deposit rates is a clear indicator of rivalry between commercial banks to attract additional depositors/borrowers. To protect the lenders and borrowers, the implementation of a bankruptcy law is fundamental. There should be a bankruptcy law put into practice which promotes protection to the lenders as well as the borrowers.
To increase saving and investment levels; the vide a favourable business environment which is only possible by providing consistent policies, smooth and competitive energy availability with better governance.
The role of the tor is crucial in domestic resource mobilization. Commercial banks must focus on extracting stagnant household savings and channelizing them into productive investment. The dependence of the government over commercial banks for exhaust the ability of commercial banks rendering them incapable of offering saving schemes to the public.
Due to weak investment levels, our exports lack modernization of technology resulting in lower quality and resultant decline of export to GDP ratio. The severity of this decline in export to GDP ratio can be derived from the fact that Pakistan’s ratio is 8.2 percent while our regional competitors India and Bangladesh stand at 19 and 15 percent, respectively.
Long-term investment is vital for the export-oriented sector to enhance productivity through latest technology. Apart from increasing investment for capacity building and technology, there is need to improve the local design capacity by developing new clusters for training, design, testing and adaption of modernizing technology in the textile sector of Pakistan.
Only a comprehensive and long term industrial policy coupled with a marked increase in savings rates can improve the investment climate, reduce the cost of doing business, increasing proy of the industry and encourage the expansion of business. The Industrial policy must focus on the improvement of productivity by increasing competitiveness in the market and resolving the obstructions faced by the business community. In short, the policy should be aimed to increase investment while making it more productive and proocus on the population, especially on youth who are suffering from mass unemployment. Over the formulation of consistent industrial policy, the government should provide incentives to encourage the manufacturers towards high value-added products as well as attracting investment in technology which would allow a shift from low value-added products to high value-added products. In the same way, the focus on expanding technical and vocational education institutions and establishing industry-academia linkages can yield fruitful and much needed positive economic results.

Country’s current cotton woes
Shahid Sattar and Asad Abbas
“”
October 15, 2019
The current cotton arrival estimates fall far short of fulling domestic requirement of the textile industry. The share of cotton crop in agricultural GDP is 4.5 percent while its share in national GDP is 1 percent. Cotton being the basic raw material for the Pakistan’s textile industry accounts for almost 70% of the basic cost and therefore any movement in price or quantity of cotton has Signiant impacts on production and the farmer’s revenue. According to a PCCC report, the cotton production has witnessed a decrease of 32 percent for the year 2019-20 which has caused a loss of more than 2 percent of the GDP to the economy for this year alone. The importance of the textile industry can be assessed from the fact that it is contributing $ 13.3 billion in exports (60 percent of total exports), 8.5 percent in GDP and employs over 10 million people with many more dependents in 2018-19.
Imprudent policies by successive governments have taken a heavy toll on cotton production and resulted in progressive decrease of cotton acreage and yield per hectare. Cotton production target set for this year by the Ministry of Food Security/PCCC was 15 million bales but necessary measures were not taken to achieve the target and as a result only 9-10 million bales are expected this year.
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Crop Crop water Average CWR
Requirement (CWR) (mm)
range (mm)
North (temperate)
South (arid)
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In a recent meeting on crop assessment, Sindh reported a drop of 30% in the expected cotton crop while Punjab reported a drop of 15% over last year’s production. The cotton crop has witnessed a decrease of 29 percent in its yield since FY12. The principal reason of low yield this year is the low number of plants per acre (need to increase 50 percent more plants per acre). A recent study reveals that the yield in Punjab will record a historic low this season.
The expected requirement of cotton bales by industry is more than 15 million and hence 5 million are short. The production shortage forces the entire value chain to rely on imported cotton to meet the shortfall substantially increasing the import bill and negatively impacting the competitiveness of our exports. One of the many things that is likely to reduce our net exports this year.
Other reasons behind reduction in cotton output include unavailability of quality seed, pest resistant seed, outdated technology, water shortage, low portability and lack of awareness of farmers regarding cotton production as well as competing crops and government policies or the lack thereof.
One major reason behind diminishing cotton crop is sugarcane which has cropped up in the best cotton sowing area. From FY10 to FY18, the area of sugarcane crop has increased from 0.94 million hectares to 1.34 million hectares up by 42 percent. Similarly, the increase in area of Punjab and Sindh is 42 percent and 43 percent respectively. This encroachment is primarily due to the protection provided by the government for sugar as well as illegal extensions in capacity of mills already existing in the areas.
Moreover, sugarcane crop is subsidized through protective prices as a 40% customs duty on the import of sugar has been imposed. This crop has assumed the status of a “political good” like wheat in the last decade, regardless of its economic comparative disadvantage.
The target of 15 million bales of cotton could easily be achieved if strict prohibition of sugarcane crop cultivation in cotton growing area is imposed (Zoning has to be implemented and regulated). This will not only provide the raw material for country’s largest manufacturing sector but will also lead to higher economic output, higher employment and increased foreign exchange earnings. The area with cotton cultivation will add an additional 0.25 percent to GDP along with minimum 1.27 percent of additional wheat contribution to GDP if half of the sugarcane production area reverted. This in short means that 1.523 percent (0.25%+1.273%) to GDP per annum can be added while letting go of 0.35 percent (half of sugarcane contribution with current area under cultivation) of sugarcane production contribution.
Another reason is the failure of cotton seed which is unproven, substandard and not resistant to pests and diseases (old generation BT cotton). The world shifted to genetically modi ed seeds and improved their cotton production and yield per acre but Pakistan still has inferior quality seed. Our cotton needs GMO transformation against pink bollworm and White y which is available with private sector and can be seen at their research farm and labs. Pink bollworm can only be controlled by GMO varieties, Pesticides cannot control it. It is a very deceptive pest at the time when it appears on the surface of crop it has already caused the damage on the crop. Every year, nearly four million bales are damaged by pink bollworm and white y. The currently available pesticides have failed to yield results on the major cotton pest i.e., White y, contrary to the claims made by various companies. This has caused White y to go beyond ETL (Economic Threshold Level) and has resulted in a complete disaster.
The average farm gate price of “Phutti” this season has been Rs 3600 per 40 kg and ginning cost is approximately Rs 700 per bale plus 7% wastage. Whereas the sale price of cotton is almost Rs 9200 per 40 kg. This huge difference in marketing and risk margin is kept by ginners and market protectors and resultantly farmers suffer huge losses. Pakistani ginned cotton bales are underweight and contain sand, dust, threads of nylon, moisture and leaves of the cotton plant as well as up to 10% trash (2 to 3 times above world average. In short, the real sufferers are the farmers and industry in this whole game.
Pakistan is a net cotton importer for many years and textile industry has to meet the shortage by importing cotton from other countries. Afghanistan and the CAS countries are best suited to full this shortfall. The ECC of the Cabinet had decided to allow import of cotton for one year from the Torkham border in its meeting held on November 2018. This import had been a big relief for the textile industry because it not only reduced the cost of imported raw material, but the quality of this cotton was superior (containing less trash and impurities) to Pakistani cotton and could be used to produce net count yarn.
In the meeting of ECC, it was also decided that the Plant Protection Department (PPD) would construct fumigation area shed at the Torkham border and send teams to inspect the land and soil of Afghanistan and adjoining areas. Moreover, APTMA offered to arrange such visits and a committee was formed to
oversee the matter. The committee has only met once during the year and the team has to verify the pest control has only just left for Afghanistan.
The government has decided to pair PCCC with the Chinese counterpart to faster development of new seed varieties. This agreement is highly unlikely to succeed as the PCCC is not properly staffed and has a legacy of unwilling and low-level workers with hardly any scientists. The PCCC not only lacks basic infrastructure but hasn’t been able to appoint a permanent professional as CEO to streamline the matters.
The failure of the cotton crop calls for urgent and immediate action by the government in restructuring of PCCC with the help of private sector stakeholders. The need for a long-term stable and progressive textile and cotton policy has been underscored by this disaster, inescapable if Pakistan is to progress and achieve economic stability and aggressive growth. This is a national security paradigm and should not and cannot be ignored.

Economic issues: enhanced competitiveness only solution
Shahid Sattar and Hira Tanveer
“Business Recorder”
September 25, 2019
Pakistan has been trapped in a stagnant growth dilemma for decades. We have not been able to achieve adequate GDP growth rates for any extended period of time. During the early 2000s, growth rate did increase to 7 percent but it wasn’t sustainable as the basic fundamentals of the economy had not been focused. Economic growth is the result of increase in the capacity of an economy to produce goods and services, which cannot be achieved without improving economic productivity which depend on policy adequacy.
The concept of economic productivity essentiality for economic growth has been expounded multiple times by the eminent Economist Dr Nadeem Haque especially in “The framework for economic growth1.
According to the framework, country’s productive capacity is significantly based on two factors that are education and level of economic collaboration. Firstly, education determines the magnitude of the ability of population to benefit from global advancement and knowledge. Globally, technical development is increasing the rate of marginal productivity, making it easier to produce more goods and services of superior quality at a faster pace. Acquiring these modern skills is a pre-requisite for producing internationally competitive goods and services. Secondly, economic collaboration determines the ability of people to do things together in an organized manner and excelling to achieve international competitiveness in order to earn profits all over the world.
Unfortunately, Pakistan is lagging behind on both these counts. Our education system is not according to the contemporary needs of the era as well as poor economic organisation and collaboration both at the government and the private sector level hinder growth.
Long-term economic crisis in the form of stagnant economic growth, declining exports, worsening Balance of Payments (BoP), increasing unemployment rate and limited GDP growth rate, all require long-term policy framework focused on sustainable economic recovery. The aim should be to graduate from low-income country to a middle-income country and actualizing the potential of our economy which we has not achieved yet. Short-sighted economic policies have only exacerbated the problem rather than providing a solution.
Performing below our economic potential has led us to a situation where we are not producing enough to meet our needs and hence importing a huge volume of products, additionally, we are also unable to manufacture internationally competitive goods for export and therefore earning adequate foreign exchange for our financial needs. As a result of outflow of money for imports and not enough earnings from exports, we have been forced to largely rely on foreign borrowings creating a massive burden of foreign debt accumulation. The major portion of our fiscal space goes into making foreign debt payments and interests, leaving little for national development spending.
Policymaking in Pakistan is weak and its implementation is even weaker with no mechanism of policy outcome evaluation. Furthermore, economically unessential and irrelevant mega projects are initiated by the successive governments skipping simply comprehended and basic analytical tools like cost-benefit analysis and choosing the best alternative on that basis. These projects come with little economic returns rather they need to be subsidized for their functioning. For example, popular projects
1 https://www.theigc.org/wp-content/uploads/2016/08/Planning-Commission-2011-Final-Report.pdf)
like metro bus and orange line train bear no economic return and carry a huge infrastructure expenditure and a continuing unaffordable subsidy.
Additionally, the energy crisis after 2007, caused a major economic slowdown with industrial sector suffering the most, creating unemployment, fall in exports and lower aggregate supply. Now that electricity shortfall has been bridged with additional capacity added to the system. Pakistan is set for gas crisis, 10 years ago there were 22 gas exploration companies working in Pakistan, now they there are only 3 left. International companies are not ready to enter Pakistan due to bureaucratic hurdles and red tape. Government rather than promoting domestic energy resources exploration is establishing 5 additional RLNG terminals. The question is: are there enough RLNG buyers? RLNG is supplied at subsidised rates to major industries and fertiliser sector who are biggest consumers of this imported gas. Government is all set to further increase its financial burden through short-sighted quick fix policy.
Deep structural changes are required for long-term economic recovery that will take us from average GDP growth rate of 4 to 5 percent to a sustained growth rate of 7 to 8% extended over two decades. We need to modernize our governance system, including bureaucracy and judiciary to bring efficiency and justice in the system. These institutions still represent colonial mindsets of 19th century. Streamlining our working ethics with how modern economies operate their business in the time of globalization and technical innovation is crucial for any kind of economic development.
A shift from government regulated markets to free markets mechanism is vital to achieve competitiveness where sole market forces define prices. Our successive governments have largely interfered in free markets and they still believe in regulating markets through setting price floors and ceilings, subsidising group of large industries, directly buying agricultural produce from farmers and building infrastructures at government level. Such operational capacity of government is not likely to deliver in 2019. For instance, long government intervention in energy market has resulted in extremely high and unnecessary IPP tariffs and a cycle of circular debts in the energy sector, which has now necessitated government to offer lower tariffs to exporting sector in a bid to maintain their competitiveness. Another example is the uncompetitive sugar industry that requires subsidies to export the excess and ill-advised surplus.
There is a need to leave markets to operate on their own to promote competition, develop sustainable businesses and corporate firms that can survive on their own without any privileged compensations from the government. Only these CSR compliant firms will be able to produce economically viable and technically advanced products with foreign demand necessary to increase our export volume.
In the last past, whenever viability of exporting sector was restored and it started to take off, inconsistent economic policies dragged them down, not letting exporting industry rise in the country (Ladder and the snake, https://fp.brecorder.com/2019/05/20190522477836/). Lack of an appropriate enabling environment for domestic industry, inappropriate exchange rate policy and the rising debt repayment obligations precipitated falling exports, sustainable Balance of Payments and pressure on the exchange rate.
In this day and age, the recent Kashmir crisis with India is enough to illustrate the importance of linkage between national integrity and economic security. Economic prosperity and stability determine national security and voice of a nation in the world community. Pakistan’s genuine concerns on Kashmir have been muted in the International media due to low standing of Pakistan owing to economic predicaments, political instability and other issues of national security that the country is facing.
In an effort to come out of economic instability, debt trap and BoP crisis, Pakistan urgently requires long-term economic policy for the exporting sector and import substitution that is strictly implemented ensuring continuity of regionally competitive cost structure especially energy rates and adequate
financial facilities. Interest rates should be in line with world market to promote private investment. Pakistan needs consistent policies focusing on increased productivity that fosters sustainable and long-lasting economic growth, imperative to become a middle- income country and fulfilling Pakistan’s potential.
(https://fp.brecorder.com/2019/09/20190925520433/)

Grim industrial slowdown
Shahid Sattar and Hira Tanveer
“Business Recorder”
September 18, 2019
Pakistan has been trapped in a stagnant growth dilemma for decades. We have not been able to achieve adequate GDP growth rates for any extended period of time. During the early 2000s, growth rate did increase to 7 percent but it wasn’t sustainable as the basic fundamentals of the economy had not been focused. Economic growth is the result of increase in the capacity of an economy to produce goods and services, which cannot be achieved without improving economic productivity which depend on policy adequacy. The concept of economic productivity essentiality for economic growth has been expounded multiple times by the eminent Economist Dr Nadeem Haque especially in “The framework for economic growth (https://www.theigc.org/wp-content/uploads/2016/08/Planning-Commission-2011-Final-Report.pdf)”.
According to the framework, country’s productive capacity is significantly based on two factors that are education and level of economic collaboration. Firstly, education determines the magnitude of the ability of population to benefit from global advancement and knowledge. Globally, technical development is increasing the rate of marginal productivity, making it easier to produce more goods and services of superior quality at a faster pace. Acquiring these modern skills is a pre-requisite for producing internationally competitive goods and services. Secondly, economic collaboration determines the ability of people to do things together in an organized manner and excelling to achieve international competitiveness in order to earn profits all over the world.
Unfortunately, Pakistan is lagging behind on both these counts. Our education system is not according to the contemporary needs of the era as well as poor economic organisation and collaboration both at the government and the private sector level hinder growth.
Long-term economic crisis in the form of stagnant economic growth, declining exports, worsening Balance of Payments (BoP), increasing unemployment rate and limited GDP growth rate, all require long-term policy framework focused on sustainable economic recovery. The aim should be to graduate from low-income country to a middle-income country and actualizing the potential of our economy which we has not achieved yet. Shortsighted economic policies have only exacerbated the problem rather than providing a solution. Performing below our economic potential has led us to a situation where we are not producing enough to meet our needs and hence importing a huge volume of products, additionally, we are also unable to manufacture internationally competitive goods for export and therefore earning adequate foreign exchange for our financial needs. As a result of outflow of money for imports and not enough earnings from exports, we have been forced to largely rely on foreign borrowings creating a massive burden of foreign debt accumulation. The major portion of our fiscal space goes into making foreign debt payments and interests, leaving little for national development spending.
Policymaking in Pakistan is weak and its implementation is even weaker with no mechanism of policy outcome evaluation. Furthermore, economically unessential and irrelevant mega projects are initiated by the successive governments skipping simply comprehended and basic analytical tools like cost-benefit analysis and choosing the best alternative on that basis. These projects come with little economic returns rather they need to be subsidized for their functioning. For example, popular projects
like metro bus and orange line train bear no economic return and carry a huge infrastructure expenditure and a continuing unaffordable subsidy.
Additionally, the energy crisis after 2007, caused a major economic slowdown with industrial sector suffering the most, creating unemployment, fall in exports and lower aggregate supply. Now that electricity shortfall has been bridged with additional capacity added to the system. Pakistan is set for gas crisis, 10 years ago there were 22 gas exploration companies working in Pakistan, now they there are only 3 left. International companies are not ready to enter Pakistan due to bureaucratic hurdles and red tape. Government rather than promoting domestic energy resources exploration is establishing 5 additional RLNG terminals. The question is: are there enough RLNG buyers? RLNG is supplied at subsidised rates to major industries and fertiliser sector who are biggest consumers of this imported gas. Government is all set to further increase its financial burden through short-sighted quick fix policy.
Deep structural changes are required for long-term economic recovery that will take us from average GDP growth rate of 4 to 5 percent to a sustained growth rate of 7 to 8% extended over two decades. We need to modernize our governance system, including bureaucracy and judiciary to bring efficiency and justice in the system. These institutions still represent colonial mindsets of 19th century. Streamlining our working ethics with how modern economies operate their business in the time of globalization and technical innovation is crucial for any kind of economic development.
A shift from government regulated markets to free markets mechanism is vital to achieve competitiveness where sole market forces define prices. Our successive governments have largely interfered in free markets and they still believe in regulating markets through setting price floors and ceilings, subsidising group of large industries, directly buying agricultural produce from farmers and building infrastructures at government level. Such operational capacity of government is not likely to deliver in 2019. For instance, long government intervention in energy market has resulted in extremely high and unnecessary IPP tariffs and a cycle of circular debts in the energy sector, which has now necessitated government to offer lower tariffs to exporting sector in a bid to maintain their competitiveness. Another example is the uncompetitive sugar industry that requires subsidies to export the excess and ill-advised surplus.
There is a need to leave markets to operate on their own to promote competition, develop sustainable businesses and corporate firms that can survive on their own without any privileged compensations from the government. Only these CSR compliant firms will be able to produce economically viable and technically advanced products with foreign demand necessary to increase our export volume.
In the last past, whenever viability of exporting sector was restored and it started to take off, inconsistent economic policies dragged them down, not letting exporting industry rise in the country (Ladder and the snake, https://fp.brecorder.com/2019/05/20190522477836/). Lack of an appropriate enabling environment for domestic industry, inappropriate exchange rate policy and the rising debt repayment obligations precipitated falling exports, sustainable Balance of Payments and pressure on the exchange rate.
In this day and age, the recent Kashmir crisis with India is enough to illustrate the importance of linkage between national integrity and economic security. Economic prosperity and stability determine national security and voice of a nation in the world community. Pakistan’s genuine concerns on Kashmir have been muted in the International media due to low standing of Pakistan owing to economic predicaments, political instability and other issues of national security that the country is facing.
In an effort to come out of economic instability, debt trap and BoP crisis, Pakistan urgently requires long-term economic policy for the exporting sector and import substitution that is strictly implemented ensuring continuity of regionally competitive cost structure especially energy rates and adequate
financial facilities. Interest rates should be in line with world market to promote private investment. Pakistan needs consistent policies focusing on increased productivity that fosters sustainable and long-lasting economic growth, imperative to become a middle- income country and fulfilling Pakistan’s potential.
(https://fp.brecorder.com/2019/09/20190925520433/)

Textile sector on the verge of collapse?

Shahid Sattar “Business Recorder” August 28, 2019
With the imposition of 17% GST on the previously zero rated textile sector, FBR is looking at collecting Rs 600 billion from the sector and giving a refund of approximately Rs 480 billion on exports. This is only part of the story, there are many other misguided ways in which FBR is planning to increase revenue collection as a figure to symbolically meet the completely unrealistic target of collection of Rs 5.5 Trillion in 2019-20. Withdrawal of zero rating has impacted the system extremely negatively but there are equally if not more anti-business and illogical measures that are surely going to induce a complete shutdown of industry. For starters:
The additional cost of borrowing Rs 600 billion for the sales tax prior to refund is likely to be Rs 72 billion. This apart from being a cash drain is an unnecessary increase in the cost of production on which we already score dismally.
This is directly the consequence of the fact that approximately 70% of all the textile production of Pakistan is exported. This is further complicated by the structure of the industry which is fragmented with very few vertically integrated companies leading to multiple taxation of the same goods. Bulk of the textile output is from indirect exporters such as spinners, weavers, finishers etc whose products after finishing are finally exported.
A 4 percent withholding tax on every transaction within the sector will result in Rs 115 billion being permanently transferred to the Government from industry.
Should the collection of 4% withholding tax continue, despite the clear interpretation in law, that it should not, in commercial terms this would mean a reduction of liquidity/working capital of the sector by further Rs 115 Billion. These are funds that sector does not have.
Being more than the profitability/margins of the great majority of the units in the textile chain this would directly cause these units closure leading to unemployment, lower GDP, and substantial reduction in Exports. In this connection FBR is invited to check and ascertain that the average profitability in this sector which under no circumstances can be 14% of turnover as a 4% withholding Tax translates to approximately a 14% profit on turnover.
Only 90 percent of input tax will be allowed to be set off against output and 10 percent to be refunded 14 months later. This will also permanently transfer Rs 60 billion from industry to the government. In commercial terms this means that 10% of all GST collected (1.7% of sale value) would remain permanently blocked with FBR as the refund provision kicks in only after a period of 1 year and two months. This translates into a permanent transfer of a float of Rs 60 billion from Industry to the coffers of government. This would directly cause further pressure on these units leading to closure, unemployment, lower GDP, and substantial reduction in exports. Coupled with the 4% withholding tax and the additional funds required to pay the 17% GST in the first place, there appears to be no chance of the Industry surviving the additional working capital requirement or the wiping out of the slim margins and the already low profitability. This will necessarily turn into a loss for the great majority of the registered and compliant units in the sector leading to their imminent closure.
Increase in Turnover tax to 1.5%
There are now over 60 withholding taxes and about 70% of revenue comes from them. These are extremely regressive in nature as they are applied to turnover and not on margins or profitability of the company and act as accelerators to hasten the demise of companies that could have survived a downturn turn in the market but cannot do so because of turnover taxes.
The fiscal measures taken in the budget are likely to hit the industry with an additional cash requirement of approximately Rs 800 billion plus. These are funds that the FBR is looking to collect additionally from the textile sector as part of their requirement to collect an additional Rs 1.5 Trillion this financial year to fulfill their completely unrealistic target of Rs 5.5 trillion this year.
The very interesting conclusion that can be derived from these measures is that the government must surely think that the industry is operating on net profitability of at least 20% Plus. This surely is not the case.
Given that such liquidity nor profitability exists in the sector, the current FBR strategy is a sure shot recipe to a monumental disaster. We are heading towards massive de-industrialization, a precipitous fall in exports and extremely unmanageable levels of unemployment.
To complicate matters further, the government’s well-intentioned but misguided documentation drive of seeking CNIC of all sales through registered, law abiding, taxpaying industries has not been accepted by the unregistered dealers and as a consequence all sales in the domestic sector have come to a standstill since 1st of August 2019. As a consequence there is no cash flow to pay wages salaries, utility bills, taxes etc and according to all estimates will lead to a shutdown of 50% of the currently operating mills by the second week of September with the rest following soon.
This misguided ill-planned thrust for taxation and documentation has driven the economy to the ground and economic activity is now gasping for air.
Surely, the government’s and FBR’s intent is not to induce a forced closure of the sector. Taxing transactions beyond a simple GST is inefficient and counter-productive. The above measures are designed to kill transactions. There is a clear need to review and assess the lacunae in these measures and weed out those that are impeding transactions.
We now fail to gauge the economic direction of the government, i.e., whether they want to promote industry, exports and employment or discourage it. The 17% S.T + 4% with I/T + 5% on utilities, 1.5% Turnover Tax and 15% mark up on the Rs 600 billion sales tax is far too great a liquidity drain and way beyond the profitability of the sector.
(https://fp.brecorder.com/2019/08/20190828512564/)

The snake has truly bitten
Shahid Sattar
“”
July 02, 2019
There have recently been a spate of ill-informed articles on the stagnation of textile exports, subsidies to the textiles sector, under-taxed domestic sales, rationale for removing zero rating and APTMA’s lack of professionalism. It is time that the record was set straight.
First of all, increasing exports through devaluation is highly contentious as the bulk of inputs into the textile chain are directly or indirectly linked to the dollar and international markets. This point is very well illustrated by the direct linkage of cotton prices to the New York cotton exchange and the dollar based energy pricing covering 80 percent of the cost base of the sector.
The other fallacy that is being expounded is that exports can be increased or decreased within a short time period just through manipulation of incentives and short term reduction in cost of doing business. For exports to increase meaningfully it requires an exportable surplus which requires modernization, upgradation and expansion of industry. For these to be achieved you need long term stable policy and an internationally competitive cost of doing business.
Alas policy stability was not to be, as each successive governments has disowned policies of the previous governments, even to the extent of disowning the Technology Up-gradation Scheme of 2009-14 for which none of the payments due have been made so far. Payment of Sales Tax Refunds or Duty Drawbacks despite sovereign guarantees, has been an even sorrier story and as a consequence trust in government pronouncements is currently at the lowest ebb ever. Under these circumstances, the government’s claim of honoring any refund commitments can hardly be relied upon. Given the current scenario, substantial immediate increase in exports, large scale investments for the upgradation, expansion or modernization are highly unlikely to be fulfilled.
Furthermore, it is incorrect to state that the textile sector in Pakistan is getting subsidies especially on the energy rates. It is a matter of fact that the cost of inefficiencies and corruption cannot be exported in inflated tariffs and that the true cost of energy has to be charged for exports to remain competitive.
Recognising this, the PTI government provided a level playing field to the sector on a regional basis. Energy is the largest component of the conversion cost in textiles and necessarily has to be competitive if Pakistani exports are to compete in a highly price sensitive market.
The following graph depicts the regional disparities that existed prior to the government’s intervention. The fall in yarn exports is not because of any fall in production levels but a very positive signal that more of the yarn was consumed for value addition leading to the higher export of finished goods. Point to note is that yarn production has increased over the same time period. This has always been a long standing goal of policy makers and yet when it has been achieved, there is unjustified criticism.
Regarding the quantum of domestic sales it is highlighted that the total quantity of fibre availability to the sector is known last right down to the last gram. An analysis of the fibre availability reveals that the total value of the output of domestic industries is $ 18 Billion out of which $ 13.5 Billion is exported. The $ 4.5 billion domestic sale of industry underpays sales tax, at only Rs 9 billion which at 6% (the old GST rate) which should have been Rs 41 billion.
The fundamental reason for the under collection of sales tax on domestic production is the prevalence of the unregistered dealers and the cottage industry in the textile sector. The known brands selling in
the domestic market are all members of APTMA such as Nishat, Gul Ahmed, Bareeze, Sapphire, Khaadi and Chenone, etc., are all fully sales tax-compliant. The manner in which these can be brought into the tax net is through enforcement of sales tax at the retail stage and by denying industrial power and gas connections to unregistered industries. It is strange that the entire focus remains on the few industries that are fully compliant rather than tackling the unregistered industries while the compliant industries are now being forced out of business due to the belligerent attitude of FBR.
A cursory glance at the table below will reveal that the domestic sale from local industry is only 40% of the retail sale in quantum terms. The balance 60% in quantity and 80% in value is either under-invoiced imports or smuggled or new clothing in the guise of used clothing.
The value at the retail stage of all textile and clothing can be conservatively estimated to be US $ 40 Billion and if brought into the tax net at a GST rate of 17% can generate revenues of $ 6.8 billion or Rs 1 trillion. This is the real value of domestic sales tax if taxed at the retail stage. A word of caution however as the 17% GST rate is extremely high for a developing economy like ours, this would lead to very strong incentive to smuggling and staying out of the tax net.
It is very strange that in order to collect the anticipated Rs 100 billion sales tax from sale of domestic production the entire industry is being subjected to a Rs 600 billion plus collection of Sales tax, when the better and much higher yielding mechanism would have been to tax all sales at the retail stage and could have been worked out in collaboration with the industry.
It is all very well to state that refunds will be made on time however reality is that the production cycle will take nearly nine months prior to exports so the sales taxes would have been collected and in FBR coffers, for at least that time period, even in the best case scenario. The sales tax collection would therefore entail an interest cost of nearly Rs. 100 Billion, assuming that the industry could come up with that sort of liquidity in the first place. In the current scenario, this liquidity is unlikely and as a consequence we anticipate closure of a large proportion of the sector leading to a precipitous fall in exports and large scale unemployment. In an industry where the end product price is dictated by international competition the profit margins are extremely low (3-4%) generating the additional funds for GST would be impossible. So it would have been prudent to start with a smaller rate and gradually increase the rate. Furthermore, the world over baby clothing are exempt from GST and in India clothing for the poor attracts a much lower sales tax rate. This begs the question as to why FBR is focusing on taxing registered and compliant industry rather than the retailers, where as they say the real “Moolah” is.
Blaming APTMA for a non-professional approach is highly irresponsible as APTMA was the only trade organisation which agreed to work with the government to formulate a system to collect tax on domestic sales in line with national priorities, while balancing the liquidity requirements of the sector. Furthermore, APTMA has repeatedly informed the government of the menace of smuggling, used clothing and the propriety of taxation at the retail level. Just to set the record APTMA has published more than 40 technical papers in leading journals and newspapers on all aspects of the business in just the last one year. APTMA has more than 8 highly qualified research staff and is engaged with the government at all levels co-operating and supplementing the government’s effects to modernize and expand the sector. In a recent article “Ladder and the snake” carried by this newspaper in May 2019, we had written that whenever the sector is on the verge of take-off something or the other strikes and pushes the sector back by quite a few years. “The snake has truly bitten this time”.
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DOMESTIC COMMERCE
=======================================================================================
Fiber Consumption in Pakistan M. KGs Per Capita (kg)
=======================================================================================
@207 Million Population
Pakistan Total Fiber Used (including imported cotton & MMF 3,550 –
Less-Total Fibers used in Textile products for Exports 2,441 –
Fibers Available for Domestic Consumption 1,109 5.4
Official Imports of Textile & clothing 340 1.6
Worn Clothing Imports 443 2.1
Informal Textile & Clothing trade i.e. smuggling and ATT 326 1.6
Sub Total 5.3
Global Average Per Capita Fiber Consumption 12.5 kg
Imports/smuggled/informal trade of textile & clothing
is equal to the size of domestic industry but far less in value.
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Ladder and the snake
Shahid Sattar
“”
May 22, 2019
The story of our why Pakistan has not been able to maintain or increase its market share in the rapidly growing textile market has been very much like the game of Ludo. Each time industry has been poised to take off we land on the proverbial snake and have to restart from a much lower base.
Exports touched the $25.05 billion mark in 2013, but have hovered between $20 Billion and $23 Billion ever since. The economic/export takeoff that was anticipated (and achieved by our competing countries)was never realized through a combination of factors; lack of a long term vision, enabling environment for investment and industry, energy availability, subsequently affordability, liquidity squeeze through nonpayment of industry dues, non-implementation of policy initiatives, consistently overvalued and a poor country perception due to geo political circumstances leading to foreign brand buyers leaving Pakistan. Except for the poor country perception all other factors have been self-inflicted wounds which could have been avoided through appropriate economic management.
For our economy and exports to prosper, Pakistan needs reliable and competitive policies that are continued without any breaks for an extended period of time.
To revive exports and the economy, very rightly the PTI government, taking stock of the situation, took some extraordinary measures to rationalize cost of doing business such as providing electricity at a regionally competitive US cents 7.5/KWH, and regionally competitive Gas/RLNG at $6.5/MMBTU to the Zero rated industry. Along with rationalization of energy prices, a few other market enablers are also in place like Long Term Financing Facility (LTFF) and Export Refinance Scheme (ERS) but both are only available to direct exports which should be extended to indirect exporters to enhance the scope of facilitation and hence providing a multiplier effect to exports. Drawback of Local Taxes and Levies (DLTL) scheme is also in place that allows refunds against exports on local taxes to minimize tax burden on exporters but the hindrance is that refund payments for DLTL against 2017-18 claims are still pending straining liquidity of the industry.
These steps area prerequisite to making exports including textiles (60% of national exports) competitive in the international market and facilitate in realizing the sector’s great potential. A little over five months have passed since this decision was implemented, all sectors have started increasing their production capacity, restarting units that had shut down, finding ways to modernize their manufacturing units and setting up new units to take advantage of the lower cost of doing business.
In line with our history of snakes and ladders and according to the press, it is likely that government may withdraw its decision to provide Zero- Rated exporting sectors regionally competitive energy rates which were designed in an effort to pull country out of the clutches of twin deficits through export led growth. This is troubling because it creates the impression that the government has given up on the only sustainable solution of managing Balance of Payment (BoP) and exchange rates.
It is being a repeated ad-nauseum that the devaluation was implemented to boost exports, but nothing can be further from the truth as the fundamental reason was to curb unnecessary imports. This strategy has worked to a limited extent as the official import figures show a decrease but not to the extent that was desired as a cursory look at the retail markets show that they are flooded with imported luxury goods and foodstuffs. Apples, bananas, grapes oranges, pears, melons, you name it are
available in different varieties imported from all over the world. Try buying breakfast cereal from your local grocery store and chances are you will be handed a foreign brand.
On the other hand prices of a great majority of the inputs for the textile sector which has almost 60% share in our export basket are directly linked to international prices, whereby, devaluation by definition cannot increase exports.
In reality, due to currency devaluation of Pakistani rupee, the working capital requirement for the same amount of exports, has gone by 40 percent due to currency devaluation. This coupled with lack of payment of refunds has created an extreme money squeeze in the sector. Now if the energy rates are also increased beyond the level of our competitors, this will further increase cost of production significantly, implying that sustaining production and meeting export orders will become impossible. No sector or business has the liquidity or accumulated profits to put money from their own reserves to sell products at a price lower than the product cost.
The electricity prices for the zero-rated industry were brought down at the regionally competitive rate of 7.5 cents/KWH by the PTI government and in line with the true cost of supply, if we remove mismanagement, corruption and cross subsidy costs from its price makeup. This tariff of 7.5 cents/KWH for industry does not contain any subsidy and increasing it would only make industry uncompetitive. In this context, the role of the IPPs making dollar-based returns of over 50%, have been a major contributor to the unsustainable power tariffs.
Looking at the gas/RLNG supply and its pricing, we see an already distorted system with provincial disparities both on account of pricing and the supply mix. The government fixed the price of system gas at Rs 600/MMBTU and RLNG at $6.5/MMBTU. Withdrawing the weighted average rate of $6.5/MMBTU for gas in Punjab will render the 70 percent of textile industry (largest manufacturing sector) uncompetitive translating into industry shutdown, unemployment and unfulfilled booked export orders.
Many argue that exporting sector has not shown desired growth even after reduced cost of doing business, these decision makers and detractors need to realize that there is a time lag of almost 6 months between implementation of incentives (reduced cost of doing business) and realization of enhanced exports from reduced cost of doing business. This season textile sector has its export orders booked at full capacity and some major buyers are also returning to Pakistan after a long time. At this time, reversing key policy decisions will not only break the confidence of investors and business community but will also shake the whole economy. Pakistan’s economy along with the employment of masses is at stake of the government’s decision to continue its vision of reduced cost of doing business and export led growth policy or withdraw from the dream of self-sustaining economy.
This also brings into question the government’s commitment to reform the economy through substantial and sustainable means, any U-turn suggests that this government is again getting into short-sighted quick fixes to secure foreign loans rather than giving its own countrymen a chance to build up manufacturing sector, increase exports, create employment through enhancement of production capacity, substitute imports by local products and hence strengthen economy through endogenous resources.
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TEXTILE & CLOTHING EXPORTS GROWTH Value $ “Billion”
===============================================================================
Countries 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 % Change
2011-18
India 27.7 32.9 32.3 35.4 37.6 36.3 36.4 39 41%
Bangladesh 19 21.4 24.6 28.4 30.7 31.8 31 33 84%
Vietnam 15.2 16.7 18.1 21.5 25.2 28.4 31.5 38 150%
Sri Lanka 4.1 4.2 4 4.5 4.93 4.82 4.9 5.3 29%
Pakistan 13.8 12.4 13.1 13.7 13.5 12.5 12.5 13.53 -2%
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