If full-pager ads by textile trade associations in leading newspapers are any guide, Pakistan’s export lifeline is at the brink of collapse. The abrupt disruption of concessions committed under the Textile Policy 2020 – 2025 has resulted in a 10 percent decline in industry’s exports, which declined from $18.5 billion during FY2021-22 to a little over $16.6 billion during the just ended FY2022-23.
Only a year ago, industry representative organizations had set themselves an export target of $25 billion for the FY23. However, they now claim that export performance was severely set back by the drastic turn in macroeconomic conditions during 2022-23, of which the historic rise in bank lending rates; raw material (cotton availability); and, retraction of concessional gas and electricity tariffs during the H2 of the last fiscal year damaged prospects of export growth irreparably.
Now that the outgoing federal government has finally inked an agreement with the IMF, the macroeconomic headwinds are expected to subside in the ongoing fiscal year 2023-24. It is little surprise then that the industry trade associations have now come out in full force, demanding resumption of Textile Policy 2025 and the concessions committed therein. But will it happen?
Short of an industry guru being nominated as the head of interim setup, there is very little likelihood that the concessions demanded by the industry will make a return during the current fiscal year. First, Pakistan’s Letter of Intent under the latest Standby Arrangement disclosed earlier this week indicates commitment of harsh fiscal and monetary discipline to the IMF, chief among which is the rationalization of energy sector losses. Thus, whether industry’s demand for regionally competitive energy tariffs holds water or not shall prove immaterial in an election year, as shielding lifeline domestic consumers from rise in tariffs shall take precedence over eliminating cross subsidies.
Two, the Fund has explicitly stated that SBP’s monetary policy rate is very well in the negative territory. Thus, if Pakistan is to bring runaway inflation under control, IMF believes that the controversy over headline versus core inflation must be parked for now, and that the policy rate must be raised several more notches to yield positive real rateson a forward-looking basis.
Moreover, during the last two reviews of the previous Extended Fund Facility (EFF), IMF had come down hard on concessional refinancing programs by the central bank, demanding that the markup rate on refinance rates be pegged with the policy rate, and that further expansion of refinance loans be capped permanently. It has now been three years since SBP last expanded credit limits of concessional working capital loans – Export Refinance (EFS) –to Rs 500 billion, with the borrowing under the scheme maxed out since June 2022. If Pakistan wishes to complete future reviews under the fresh Stand-by Arrangement, there is little chance that the scope of export refinance schemes shall be expanded or the markup rate declining in the short term.
So, in absence of a resumption of this concession, are textile exports set to suffer in the ongoing fiscal year too? There may be room for some hope. But first some background. The industry’s export performance during FY23 proved beyond doubt that the export boom witnessed over the preceding fiscal two years – 2020 to 2022 - was an outcome of a happy confluence of several factors, many of which have now receded.
First off, the industry was flush with liquidity between 2020-21 as a result of monetary stimulus offered by the central bank at the height of the pandemic. This included not just the expansion of traditional refinance schemes such as EFS and LTFF, but also the suspension of debt repayments, the over-discussed (and defended) TERF scheme, and, single-digit policy rate. Second, the PTI government went to lengths to appease the industry, reiterating its commitment to concessional energy tariffs many times. Third, the unexpected cotton crop performance during FY21 provided the industry access to cheap fiber, just as global commodity price spiral was going into full swing following reopening of major economies post-pandemic. Fourth, world cotton prices climbed up to 11-year high following the Russian invasion of Ukraine and crop failure in major producing countries during 2021, which helped boost unit price of low-value add products exported by Pakistan. Fifth, the one-time knock-on impact from dismantling of the fixed exchange rate regime in 2019 helped boost profitability, until production costs also caught up.
Many of these enabling factors are now a thing of the past, at least for the foreseeable future. The extraordinary era of cheap debt bonanza is now over, especially since interest rates have climbed up to decade-high levels globally. Domestic supply of raw material cotton continues to reel under the effects of extreme weather events, from the monsoon super floods of 2022 to high production costs in the current year. The shocking depreciation of currency over the past year also continues to make imported cotton more expensive, with import volume declining despite shortage. Concessional energy tariffs could only make a comeback if an industry friendly government comes to power at the center post-elections – indicated by the overtures made by Pakistan People’s Party’s co-chairman to industry’s trade associations in recent weeks.
Does this mean textile export growth are doomed? A detailed analysis of industry’s performance over the last decade and half shows this not to be the case. Despite the freefall in world cotton prices since July 2022, Pakistani export performance has proved remarkably resilient in certain pockets and categories. Although unit prices fell during FY22, quantity exported increased in two high-value adding segments – namely, knitwear and readymade garments. In fact, both segments have recorded annual compounded growth rate in export volume of 20 percent over the last three years, even as low- and medium- value add categories such as home textile, linen, and denim fabric etc have shown flat performance.
In fact, high value add segments of knitwear and readymade garments have truly come into their own over the last five years, proving resilience in export performance irrespective of suspension of concessional energy tariffs or concessional refinance loans. These segments also show very high and growing efficiency in utilization of working capital, nearly 5 times higher than that of cloth or home textile segments.
Meanwhile, the low value add industry shall remain beset with trouble in times to come. Especially considering the continued absence of reliable and affordable supply of raw materials – both cotton fiber and energy.
But that only begs the question: if the raw material for low-value add segments such as spinning continues to remain both unavailable and unreliable, why does the advocacy footprint in Islamabad remain so lopsided toward industry leader from these segments? Like Bangladesh and Vietnam, high-value add segments such as knitwear and readymade garments may hold the key to Pakistan’s textile and garments exports’ future growth, even without demanding concessional facilities. The policymaking circle just needs to think beyond yarn and cloth.
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