Imran Khan government’s recent reversal on its regionally competitive gas tariffs for exporters reduces government’s credibility, adversely affects textile exporters’ capacity to invest in innovation and has created a disturbing energy cost disparity between two federating units of Sindh and Punjab.
It is evident from Pakistan’s recent export growth trajectory that the government’s provision of regionally competitive energy tariffs (RCET) over the last 3 years is bearing fruit. The confidence and support of the textile industry enabled expansion in capacity, technological upgradation, and new investments, leading to over 100 new textile units and creating millions of jobs. When it comes to keeping this momentum going, energy security is the most critical component; a case in point being the 27% growth in textile exports in the first four months of FY22.
Criticism has been levelled that the increase in exports is entirely due to an increase in commodity values. This is certainly not the case. The table depicts the substantial increase in quantities of higher value items exported from Pakistan while lower value and intermediate products like yarn and grey cloth are progressively been converted into higher value products. Further increase in quantity is expected starting from February 2022, as many projects being funded through TERF (Temporary Economic Refinance Facility) and LTFF (Long Term Finance Facility) ($3 billion loan and $2 billion equity according to SBP) come onstream.
========================================================================================== Commodities Unit 2018 2021 Change July-October ========================================================================================== Raw Cotton 000 Kgs 7,257 - -100% Cotton Yarn 000 Kgs 140,286 123,044 -12% Cotton Cloth 000 Sqmtrs 732,426 156,461 -79% Knitwear 000 Doz 39,880 43,982 +10% Bed Wear 000 Kgs 133,370 185,126 +39% Towel 000 Kgs 63,623 71,701 +13% Tents, Canvas & Tarpulins 000 Kgs 8,456 10,320 +22% Readymade Garments 000 Doz 14,303 13,809 -3% ========================================================================================== Textile Exports-Quantity Source: PBS
The textile sector requires support to maintain this growth, and it has been proven that sustained provision of a supportive energy package will have long-term benefits for the entire economy. Yet whenever any sector, in Pakistan, is poised to steer the economy in a positive direction, there is suddenly an abrupt policy change which reverses advancement.
Disturbing provincial pricing disparity
Provincial pricing disparity, that is further growing in the wake of recent government reversals, is a development of far-reaching consequences that has been ignored. The price of gas must be equalized between Sindh and Punjab along with ensuring an uninterrupted supply of gas to all consumers. A wholesale gas pricing formula, known as WACOG (Weighted Average Cost of Gas), is the only workable solution as it allows the creation of a combined and logical gas market.
It is sad that the logic of regionally competitive energy pricing (RCET) and its importance for exports and economic growth needs to be emphasized once again. It is unfortunate that the results, now becoming evident, of consistent and supportive energy policy from the government are being taken for granted. Government ministers that never fail to take credit for rising exports are behaving as if these rising exports are just happening because of their inspirational statements on television. With this mental disconnect significance of textile-led export growth for Pakistan’s economy is being undermined. We have all played snake and ladders at some point in our lives and are familiar with the game – where progress is made and suddenly derailed by an ill-timed and unexpected bite.
Industry experts believe that Pakistan’s abrupt policy reversals have been playing the same game with country’ economic fortunes. As previously emphasized in the 2019 articles by Shahid Sattar, “Ladder and the Snake” and “The Snake Has Truly Bitten” exports have often reached and then hovered between the $20 billion and $23 billion marks. Each time an economic takeoff has been anticipated in the past, and achieved by competing countries, Pakistan gets left behind due to a combination of factors; chief among which are the lack of a long-term vision, an unfavorable environment for investment and industry, and energy unavailability/inconsistency. Then and now, the government alluded to withdrawing regionally competitive energy rates. This gives the impression that the government continues to take for granted the only sustainable solution of managing the balance of payment (BoP) and exchange rates.
This time, the “bite” in question, as mentioned at the outset, is the government’s recent plan to end the supply of competitively priced gas to exporters – a move which will undoubtedly reverse our progress towards new investments, job creation and export growth. Looking at the pricing and supply of gas/RLNG, one can see an already distorted system with provincial disparities both on account of pricing and the supply mix.
=========================================== Region $/mmbtu =========================================== Pakistan Sindh 4.87 Pakistan General 9 Bangladesh 4.05 India 4.06 =========================================== Source: PIDE
The government had 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 push 70 percent of the textile industry, Pakistan’s largest manufacturing sector, towards unfulfilled booked export orders and possibly industry shutdown. It is not possible for the industry in Punjab to remain competitive while getting 9 cents/unit electricity and 9 dollars’ gas/MMBTU when other provinces are being provided gas at US $ 4.5 dollars/MMBTU. What makes the whole policy look like a tragic comedy is that 70% of the industry is in Punjab. With overpriced energy, the output price will be uncompetitive as any downstream unit in the value chain, even within the country, will prefer imported inputs instead of expensive domestic inputs. In this situation, local units at the high end of the value chain are at risk of closing, leading to the loss of countless jobs, especially across Punjab.
Furthermore, the provision of 9 cents/kWh in lieu of a competitive electricity tariff is not feasible when the accurate figure for a regionally competitive electricity tariff (RCET) is 7.4 cents/kWh. It is important to note that due to the unviable energy environment of the country, textile units even at $6.5/MMBtu gas and 7.5 cents/kWh, were incurring power and energy costs 2.4% more than India and 7.8% higher than Bangladesh.
The industry is therefore demanding that the tariff should be reverted back to 7.5 cents/kWh, as rates above the regional average would have negative consequences for exports in the long run. This is simple logic and should not be difficult to understand by the babus in Islamabad. The table below shows the detrimental position of Pakistan’s textile sector in terms of competitiveness after the withdrawal of the RCET policy, making it obvious that the average electricity price in the region is 7.4 cents/kWh.
=========================================== Regional Comparison of Electricity Tariffs =========================================== Region Cents/kWh =========================================== Pakistan 9 Vietnam 7.3 Bangladesh 9 India Maharashtra 7.8 India Punjab 7.1 =========================================== Source: PIDE
Government sources have claimed that the reasoning for this policy reversal has to do with easing the “financial burden” on the government and countering circular debt build-up. However, it is not possible to achieve financial stability without providing the minimum level of support to the industry that has been steering economic growth for the past three years. A long-term and consistent policy for exporters is critical as, any reduction in exports would have to be met by the government through loans, thereby hurting the economy significantly. The cost of regionally competitive energy tariffs is less than 2% of the value of exports, and the foreign exchange earned in this way does not have to be repaid or serviced at high interest rates.
According to an industry source, at this rate, consistent provision of competitive energy has the potential to take textile exports to $50 billion by 2026. But keeping in view the sector’s history with snakes and ladders, it would be detrimental to the economy if the government fails to restore the promised RCET, which has played a vital role in the current year’s export growth, employment, and new investment. Pakistan cannot afford to have an uncompetitive export-oriented sector, particularly at this pivotal stage where the economy has begun to revive.
(The writer has 20 years of experience working in international organizations; economic advisory and financial institutions to running a policy consulting group and currently managing an online news portal)
Copyright Business Recorder, 2021