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Economic management under Dar is implicitly keeping an overvalued currency for the last eighteen months. The policy has reaped fruits in terms of low inflation and improved economic sentiments. But there is a cost to it and in the absence of relevant fiscal incentives; the potential loss outweighs benefits in exports and overall production.
The numbers are demonstrating it; but the government is naïvely ignoring the implication of losing competitiveness in the medium to long term. Textile exports peaked at $13.8 billion in FY11 and since then, struggling to grow. The GSP Plus status for having concessionary terms on exports to EU; was not enough for textile exports to accelerate.
Overall textile exports were $13.5 billion in FY15; down by 2 percent year-on-year. The fall is higher in low value added with yarn exports down by 8 percent and cotton cloth by 11 percent. Part of the fall is attributed to low commodity prices and rest is owed to less quantum exported. In case of yarn, the quantity export is up by 2 percent which does not imply that production increased as well. The domestic consumption of yarn as an input to weaving has fallen significantly which is evident by 22 percent (yoy) fall in quantity of cotton cloths exported.
This is a worrisome fact as its shows that significant part of both weaving and spinning units are impaired. There is virtually no expansion in the weaving sector while the Indian players are aggressively upgrading their weaving machines – In India, 15 million new weaving machines are added which are of better technology to run at 9000-1000 RMP while Pakistan is stuck with old machines of 4000-5000 RMP. Only 1 million new machines have been added in the last five years which is not enough for meeting the BMR activities, leave alone the capacity expansion.
The way things are proceeding, Pakistan will keep on losing its share in exports to the competitors. The widening gap in productivity is alarming and is not fully reflected in the trade numbers. The question is what are the impediments? The overvaluation of currency and less fiscal incentives are hindering the textile sector expansion.
The movement in currencies cut a sorry figure for exporters. In the last one year, currencies of textile producers (our competitors) and many of importing economies (our consumers) experienced significant fall in while Pakistan is stuck with its ego to not letting the rupee to float freely.
Euro is down by 20 percent against the dollar in last one year and Russian currency by 81 percent which shows that goods landing in their country become very expensive without any change in price in dollars. To counter these, many textile exporters responded with slide in their respective currencies. Indian rupee is down by 8 percent against the greenback in last one year, Turkey by 6 percent, Brazil by 20 percent, Vietnam by 6 percent, Indonesia by 18 percent, Malaysia by 7 percent and the list goes on.
What is Pakistan’s strategy to counter this? Imposing indirect taxes on textile players or holding back refunds? Duty and tax structure in most of the competing economies are zero rated while these are missing in Pakistan. The problem compounded lately as the government imposed indirect taxes through electricity surcharges and imposition of GIDC on captive power plants. Then the refunds stuck with FBR are huge which is creating severe cash flow problems for medium size companies having limited banking credit lines.
This is a recipe for disaster. The export numbers are not fully showing the blood of textile producers. Many are making losses but have not stopped production in hope that the situation may improve. In the last week or so, global currencies have gone through a fresh round of depreciation against USD – Since August 10 Chinese, Indian, Turkish and Vietnam’s currencies are down by 3 percent each against USD. But Pakistani rupee stood firm, yet again.
This is detrimental for exporters and call for quick measures. No wonder, all form of textile associations including APTMA are calling for strikes and pleading to not let them sink. But Dar seems to be not concerned. Why? Is he writing off the textile industry in his unconditional love to stabilize rupee?
A seasoned textile manufacturer has suggested Dar to give 5 percent rebate to textile exports, the cost of which will be 0.2 percent of GDP. The finance minister needs to show guts to the IMF and negotiate on compensating exporters for running overvalued currency. Else, please let the rupee to float freely.
The problem is not limited to exports; but the cheaper imports are slowly and gradually replacing domestic production. This is evident from the fact that LSM is not growing while non-oil imports are swelling. In FY15, non-oil imports are up 15 percent. Had the oil prices not remained low, import bill would have eroded all the foreign exchange reserves. It is time to act before it gets too late.

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