EFS efficiency: needle move barely?

The last fiscal year proved to be a phenomenal period for Pakistan’s textile and apparel industry. According to SBP data, export receipts for the sector grew by 28 percent, growing from under $14.5 billion in FY21 to $18.4 billion in FY22. The mammoth rise in textile exports is unmatched in the country’s history. As fears of textile industry entering a recession globally increases, it is probably fair to ask: was the growth in exports during FY22 rooted in sustainable fundamentals?

Whether Pakistan – a country perpetually caught in the throes of balance of payment problems - should continue to subsidize its exports through various interventions, is beyond the scope of any newspaper article. However, industry’s dependence on subsidized inputs, from credit, to energy and duty drawbacks, has attracted criticism from both the academia and policymakers for a very long time.

Thus, it is only natural to wonder if there is any way to measure the efficiency of these subsidies. In the accompanied illustration, BR Research makes an effort to measure the efficiency of subsidized working capital loans availed by the industry, otherwise known as Export Financing Schemes (EFS).

Using credit and export receipts data from SBP, BR Research measures the efficiency of these schemes as a ratio between exports realized during a 6-month period against monthly-average EFS availed during the same semiannual period. Since SBP reports month-end EFS outstanding in Pak Rupee, the same has been converted into US dollar using the matching period month-end exchange rate. As it turns out, the data has not been too kind to textile exporters, despite the massive depreciation in the exchange rate.

Although Pak Rupee EFS outstanding rose by nearly Rs100 billion between June-21 and June-22 – from Rs382 billion to Rs482 billion, the exchange rate impact in fact records a decline in headline EFS to textile by $74 million. The decline in the dollar outstanding was across the board, with spinning and weaving segments witnessing a decline of $95 million in total, followed by $41 million in knitwear and readymade garments. Interestingly, the net impact was lowered by a rise in dollar equivalent outstanding to finishing and other made-up textile goods – short for cloth, towels, bedwears and other non-wearing apparel.

Most significantly, although concessionary lending to fabric exporters (see methodology below) rose by 16 percent in dollar terms, the loan to exports conversion ratio barely moved over the previous year. In fact, compared to other exporting segments such as knitwear, the conversion ratio for cotton cloth segment is abysmally low, even though the segment accounts for as much as one-third of EFS loans to textile industry, collectively. Note that over the past few years, knitwear has emerged as Pakistani textile’s largest exporting segment, with 25 percent share in textile export earnings during last fiscal year.

Which means that at less than 7 percent of total EFS loans to textile, concessionary lending to knitwear is either disproportionately low, or there is something terribly wrong with SBP’s classification of lending by firm type? Although BR Research has raised this particularly possibility repeatedly in the past, continued silence from the central bank indicates that it is at peace with the status quo.

In the interest of full disclosure for readers, however, it is pertinent to note that commercial banks, and not SBP, collect and supply the data for lending by firm type/industry, while the central bank only consolidates and publishes the final number. If commercial banks supply erroneous data, SBP can only penalize them. However, that does not mean the central bank has no means to measure the efficiency of concessionary credit loans that it subsidizes.

Nevertheless, because exports receipts statistics by HS code/commodity type is also submitted to SBP as per goods title documents independently through Form-E – as well as returns of EFS loans availed by every firm semiannually – the central bank could theoretically match products exported by each firm through HS codes, and measure efficiency by at industry or even firm-level. If the exercise appears complicated, just know that the number of EFS availing firms in the country is less than a thousand, which includes non-textile exporters as well.

Methodology: Efficiency is defined as ratio of export performance to concessionary working capital obtained.

Since SBP extends concessionary working capital - commonly known as Export Finance Scheme (EFS) for 6-month tenor on rollover basis, semi-annual exports (Jan - Jun, & Jul - Dec) are used to measure export performance. On the other hand, in the case of EFS, 6-month average of month-end outstanding is used to measure average loan outstanding for the corresponding half-yearly period.

To ensure consistency of classification, monthly SBP Export Receipts by Commodities (proceeds realization) is used; which is more relevant than PBS data since export loans are settled against payments realization, not shipment.

Month-end EFS outstanding (Rs) is converted to US dollar using month-end exchange rates before calculating 6-month averaging out.

Classification: SBP's ISIC-4 classification does not list products manufactured/exported by Textile Weaving/Finishing; therefore EFS to Weaving & Finishing is summed and compared against Cotton Cloth exports (HS code 52 excluding raw cotton & cotton yarn). Similarly, for Made-up Textiles, all salient export headings under HS code 63 tariff line have been summed: including bedwear, towels, canvas, tarpulin, and other textile materials (excluding apparel, readymade garments, knitwear, knitted & crocheted fabric, and woven cotton fabrics.