EFS rate hike can threaten exports

For export oriented manufactures, April didn start on a positive note. It is not because someone fooled them but instead the 50 basis point increase in markup rate of Export Finance Scheme has increased their grievances.
Not surprisingly, producers have come to the conclusion that the benefits of the incentives given under the budget and subsequent trade policies are not going to fully materialize any time soon.
The gradual reduction in subsidies on borrowing costs, along with the removal of other subsidies, under the IMF programme is going to hit the manufacturers hard.
For textile makers, who fetch nearly 65 percent of the countrys foreign earnings and employ more than one-third of total industrial labour, the rate hike is even more painful.
Many are suffering from negative externalities, such as power shortages, poor law and order situation, rising electricity charges and all time high cotton prices which have already taken their toll on value added textile manufacturing sector. Electricity charges alone have increased by 60 percent on a compounded basis since 2008.
Then of course, there are inconsistent policies which are responsible for damaging manufacturing sector. In the last budget, an export investment fund to the tune of Rs40 billion was set up to help exporters, out of which Rs27 billion was set aside for cotton and textile. But industry sources say that just Rs5billion has been released during the nine months ending March.
Even the Adviser to the Ministry of Textile, Mirza Ikhtiar Baig is critical of the increase in EFS and LTFF rates. Terming the increase in financing rate "a disaster for exports", Baig said it will make Pakistani products uncompetitive in international market.
Woefully, if under the instructions of the IMF, these subsidies continue to go away, it can force the textile industry to shift towards raw material exports from value added sales, hurting both manufacturing industry and employment. This is because value added producers tend to have more working capital requirements than raw material sellers.
To what extent would these fears turn out right, its too early to say. But in the wake of persistent crowding out of private sector credit, if the supply of subsidized financing is removed, the whole growth story would surely remain fragile.