It was long due; finally, the PM's focus is on dwindling exports. The move is welcomed by the industry players as what could be better for them than to pocketing cash on overall exports proceeds. But the question is how swift will be the rebate payments by SBP, and continuation of the package for its full duration of 18 months. The other more important element here is how to enhance the export base in employment generating industries.
Pakistan has long lost its competitive edge in exports; especially in textile. In terms of GDP the exports peaked in FY13 at 13.4 percent, which has nosedived since then to stand at multi decade low of 7.8 percent in FY16 (see graph). It was not only energy shortage and bleak security that hurt the country's export; the support offered in other economies also took away the potential share.
For example, $3.5 billion were allocated as textile outlay in India during its 11th five-year plan (2007-12), and its implementation was higher than the promised amount. On the contrary, only 15 percent was implemented out of announced $2.3 billion during 2009-14 textile policy at home. Fiscal support by India was 11 times that of Pakistan in that period!
In 12th five-year plan (2012-17), India offered $5 billion to textile players; and there was nothing to match here. That partially explains the increase in Indian textile exports by 76 percent, or $16 billion since 2007 with its market share in global exports increasing from 3.5 to 5 percent. On the flip, there has been zero growth in Pakistan in the last five years, and our market share has shrunk from 2.2 percent to 1.6 percent. 14 million spindles were added in India versus only one million in Pakistan.
It's no brainer to gauge the benefits of fiscal support on textile sector. Therefore, competitive countries keep spending to support the industry. In 2012-17 plan, India has allocated $5 billion for textile sector. Bangladesh has its own ways to support the industry, which includes duty free market access, cash incentives, duty drawbacks and tax holidays for industrial units.
In Pakistan to date; there are more talks and less in numbers to show government support for the industry. The artificially currency appreciation is one disadvantage Pakistan exporters have. Nonetheless, lately energy and security situation has improved for our players to regain some of the lost share.
But we have to be current with other economies; India today is offering 2-5 percent rebate on FOB value, while for Bangladesh rebate on apparel goods is at 4 percent on FOB. In Pakistan, 1-4 percent rebate was announced earlier on incremental basis, which was simply meaningless.
Finally, some air is provided to the industry. In the export package announced by PM earlier this week, the government has given rebate ranging from 4-7 percent for various textile and other exporting manufacturers for 18 months - rate is higher for value added products; and it's on FOB value, not on incremental basis. It is warmly welcomed by both down and upstream industry players across the country.
Today the textile industry is almost producing at 50 percent of the installed capacity; and there is ample room for the players to regain the lost share. The catch can be in liquidity as how quickly SBP would provide the rebate amount to exporters. With SBP being the provider, chances are that it would be swift.
But for how long? The skeptics are of the view that if there is no growth in exports during coming few months; government may stop the rebate scheme. And it would take a few months before the benefit tis translated into export numbers as orders are usually pre-booked for 3-6 months. The government has its fiscal constraints as the deficit was 1.3 percent in the first quarter, and meeting 3.8 percent full year target is simply impossible.
The issue now is to what length the fiscal support will continue. For example, there was a fertilizer package for full year that was surprisingly halted just a day before textile package was announced. Is it a coincidence? or realignment of fiscal resources?
Anyways, the timings of the package are good as right now Heimtextil, an annual textile fair, is happening in Germany. The exporters participating there have better negotiating powers to get incremental orders. The market is efficient today, the buyers would have full information of package offered in Pakistan; and will get some discount. This is fair as it will increase the quantum of exports, and hence the dollar value.
The rebate mechanism is giving some respite to ailing exporting sectors, which may halt the steep fall in exports for the time being. But is it enough? Not really, especially when the other non-debt based foreign inflows are not increasing (such as home remittances and FDI).
The need is to expand the overall export base; and within existing exporting avenues, the country requires to build labour intensive industries. The choice in hand is to expand the base of garments. According to an Indian study, one crore Indian rupee investment generates 70 jobs in garment sector, as compared to 10 in steel; and 25 in automobile. The dynamics of Pakistan's industries are not much different.
It is utmost important to have the focus of policy makers on garment sector. It has gotten the highest rebate of 7 percent but is paying 2 percent on packaging. Hence, the net benefit is 5 percent as against 4 percent for yarn producers. That is not fair; PM and commerce minister need to revisit the rebate and let the garment sector have the full benefit.
The sector is primarily SME and needs serious expansion. Pakistan is exporting cloth in bulk to Bangladesh where the value addition takes place, and from there re-exported to the final destination. The objective should be to have that kind of value addition in Pakistan. The garment industry works on just-in-time philosophy. Pakistan cloth takes 30 days to reach Bangladesh and once we have production here that time can be saved; and it will work as an advantage to Pakistan.
The rebate is for 18 months for all the sectors; the column suggests that it should be expanded to 5 years for the garment sector. The non-garment players making extra money from rebate in 18 months should invest to come in garment; and those already in the business should expand.
And players should come up with more lines apart from traditional cotton based products. 80 percent of world market today is based on manmade fibers; and Pakistan should excel in the sector for not only generating foreign surplus but also in creating employment.
The government has announced duty free machinery import, and has abolished duty on cotton and fibers other than PSF. But there is a gap in processing the fabric - best technologies in the sector are in Korea and China. The government should facilitate, maybe under CPEC, to have joint ventures of local players with foreign experts to open the conduit. Eventually the spillover will create domestic industry in dyeing and other processing. Till that time the imports of processed fabric should be abolished for local garments player to expand.
Nevertheless, the recent packaged announced is a right step in the right direction. The need is to go beyond the cash rebates and provide long term incentives for the industry to expand. And in the process, currency adjustment is also required as artificial equilibrium cannot sustain for long.