The upcoming budget should have some treats for the textile sector to further spur the growth momentum in textile exports – or at least continue with the existing incentives. Continuation of “Drawback of Local Taxes and Levies” (DLTL); concessional financing under Long Term Financing Facility (LTFF) and Export Finance Scheme (EFS); and duty-free cotton import are likely to be extended in the upcoming federal budget. On the other hand, demand for a restoration to zero-rating sales tax regime or abolishing the turnover tax are unlikely in budget FY22.
However, what has caught little attention of the analyst world is the Regionally Competitive Energy Tariff (RCET) policy that has been withdrawn in late 2020. A key challenge for any sector including the textile sector has been the uncompetitive energy prices in Pakistan. Sectors have been riddled with high energy cost for way too long, which has had significant adverse impact on sector growth, exports and investment. Other hurdles that the textile sector faces include policy and reform inconsistencies, and availability and quality of raw material including cotton.
To address some of the energy pricing concerns, energy support package for competitive energy prices was introduced back in 2018 where the governemnt offered tariffs at par with the regional players and textile competitors. The policy offered RLNG tariff at $6.5/MMBtu, and electricity tariffs at 7.5 cents/kwh. However, the electricity tariff of 7.5 cents was raised to 9 cents in September 2020.
Is RCET regime back on the cards in the upcoming budget? There are reports that the government has decided to extend the subsidy in FY22 –after first revising the tariffs and deciding against the policy for which it has received criticism from not only the textile sector but also think tanks and sector experts. And rightly so, as the competitive energy tariffs have played a key role in textile sector’s growth in the last 1.5 years because energy is a critical factor of productivity in the industry.
A study by PIDE recently published shows how RCET has played a crucial role in the sectors growth. It argues that the recent growth trajectory and expansion in the textile sector has partially been driven by these competitive energy prices as energy cost is the leading component in terms of conversion cost and makes up around 35-40 percent of conversion cost in textile.
It also highlights a rise in investment initiatives by the textile industry versus almost stagnant investment growth before the RCET policy and its spillover effect of 1.1 percent decrease in investment from a 10 percent increase in the energy tariff. This is also evidence by the fact that around 60 percent of the loan applications under Temporary Economic Relief Facility (TERF) recently came from the textile sector. The study also points out the employment repercussions of increasing energy cost for the sector: a 10 percent increase in the energy tariff results in 62 employee layoffs by a firm.
However, such policy measures are only temporary and what is needed is long term consistent policy for the sector that forges competition, innovation, R&D, product development and value addition. It is critical at a time when all hopes are pinned to the growth of the textile sector and textile exports Here’s hoping that the new draft textile policy overcomes the deadlock and hurdles post the budget announcement once the dust settles for the energy tariff debate.
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