EDITORIAL: All Pakistan Textile Mills Association (APTMA) has raised a very loud, very serious red flag, warning the Special Investment Facilitation Council (SIFC) of further declines in exports due to the “absence of a financially viable energy source for the industry”.
This is textbook economics, and this crisis was bound to erupt sooner rather than later as a falling rupee and incrementally expensive energy finally jacked up input costs too far to sustain manufacturing and compete internationally.
The backdrop is important. The export sector enjoyed regionally competitive energy tariffs (RCET) of 9 cents/kWh in 2021-22, which led to a record 54 percent growth in textile and apparel exports, from $12.5 billion in FY20 to $19.3 billion in FY22. But then power tariffs for export firms rose to 14 cents/kWh and squeezed those textile and apparel exports to $16.5 billion in FY23.
Now tariffs for industrial consumers have jumped to 17.5 cents/kWh due to quarterly tariff adjustments (QTA) driven by falling power consumption, fuel price adjustment (FPA) of Rs7.056/kWh for Jan 2024, and expectation of higher QTAs for coming quarters because power consumption is still on the decline.
These tariffs are more than twice the average faced by the same industry in competing regional economies like Bangladesh (8.6 cents/kWh), India (average 10.3 cents/kWh) and Vietnam (7.2 cents/kWh), so it’s only natural for production to become financially unfeasible at these rates.
But there’s still more. Gas prices for industrial consumers have increased an enormous 223 percent since January 2023 to Rs2,750/MMBtu, eliminating the financial viability of captive generation, which apparently a large part of the industry relied upon “in the absence of competitively priced grid electricity”. That’s why textile and apparel exports are stuck at around $1.4 billion per month, a good $600 million below their “installed capacity of $2 billion per month”.
It turns out that APTMA went well prepared to SIFC, suggesting removing cross-subsidies on non-productive sectors of the economy. It’s also asked for the “operationalisation of the Competitive Trading Bilateral Contracts Market (CTBCM) to enable business-to-business (B2B) power contracts with a Use of System/Power Charge of 1-1.5 cents/kWh, excluding cross-subsidies and stranded costs”.
The aim is to enable the industry to procure green energy at competitive end-use prices through captive generation from geothermal plants in depleted oilfields, hybrid solar/wind plants, or other green power producers.
It remains for the SIFC and finance ministry to work out the details, especially considering the lack of space when it comes to toggling subsidies – because of the IMF (International Monetary Fund) programme – but this is one problem that cannot be brushed under the carpet any longer.
This is precisely what APTMA and other outfits were warning about all along, as the rupee dropped in the currency market and IMF’s demands priced input energy out of everybody’s reach. Now, on the one hand we need to engage the Fund to avoid default and stay solvent, yet on the other its structural reform conditions are rendering the flagship export earner uncompetitive in the international market.
No doubt all this will be part of upcoming discussions with the “lender of last resort” because compromising textiles will rule out any chance of increasing export revenue and unravel the reform process itself. This is one of those grave, complicated crises that need urgent solutions. So the coming weeks and months will tell a lot.
Copyright Business Recorder, 2024
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