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Analyzing Competitive Energy Tariffs in Pakistan

Each time an economic takeoff has been anticipated in the past and achieved by competing countries, Pakistan gets lef 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.

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Strong policy support in the form of regionally competitive energy tariffs (RCET) enabled textile exports to increase by 56% to reach $19.5 billion in 2022, and they are projected to reach at least $24 billion by the end of FY23. This growth trajectory is indicative of the tremendous impact created by applying the right policy of viable input pricing, thereby allowing exporters to price their products competitively. The impact is particularly significant when compared with other kinds of incentives, which are subject to delays and tend to have little or no effect on export volume or competitiveness as they are not priced in the exporters’ bids.

While RCET provides an excellent base for export-led economic growth, policy discontinuity restricts Pakistan’s ability to maintain or increase its market share in the fast-expanding global textile sector. As previously emphasized in our 2019 articles “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.

Read more: Effective Energy Allocation for Export Growth

Understanding the matter better

Policies have been abruptly withdrawn time and again, thereby diverting the industry away from its path of export-led growth. Policy continuity is crucial for any economy, and in this connection, the recent government decision to continue the provision of regionally competitive energy tariffs (RCET) is welcomed and appreciated.

A robust export base serves as the foundation for a strong economy without the requirement for external forces such as foreign aid. In Pakistan’s context, the textile sector provides a sustainable path to offset the debt acquired from repeated loans and so-called relief packages. Earnings from increased exports are a key inflow to the economy that can help Pakistan overcome its current account deficit and economic stagnation. In this regard, RCET is the most efficient way of funding foreign exchange as is evidence by the fact that it is only 2.67% of total export value.

 

COST OF RCET TO TEXTILE SECTOR
Year Gas/ RLNG Power Total Cost Textile Exports Average Exchange Rate Textile Exports Cost of RCET as % of Textile Exports
Rs Bln $ Bln Rs Bln
FY19 33.59 13.34 46.93 13.33 136.09 1,814.08 2.59%
FY20 41.92 21.24 63.16 12.53 158.64 1,987.76 3.18%
FY21 34.29 9.21 43.50 15.40 159.48 2,455.99 1.77%
 FY22* 81.00 26.00 107.00 20.50 178.00 3,649.00 2.93%
Total Cost of RCET 190.8 69.79 260.59 61.76 158.05 9,761.32 2.67%
*Actual obtained from budget documents

 

However, the structural issues in Pakistan’s energy sector have yet to be resolved, as they have a great bearing on affordability. Cross subsidies, high capacity costs and an inefficient generation mix result in a structurally weak energy environment. One of the best long-term solutions to this conundrum is to dedicate a full power plant, similar to the Haveli Bahadur Shah combined cycle gas power plant, to the Punjab export industry. The total output of the plant should be delivered directly to the exporting industry. The inclusion of wheeling charges in tariffs should be rational, and not include cross subsidy and standard asset costs. If this plant is supplied with domestic gas, calculations show that it will generate electricity at a rate of Rs 13.205 per kwh. If this plant operated on RLNG, the total delivered power cost to the export industry would be Rs 21.37/kwh. This is the optimal solution for affordable power supply to the textile industry.

Read more: Pakistan’s textile sector – A reliable pathway to counter debt!

One of the largest emerging sectors in small scale manufacturing is the garment industry, which has substantial local and global demand. Improvements in equipment and e-manufacturing can boost our exports and enable us to access the high-performance apparel and MMF markets. This will also help the sector to achieve its needs in terms of value addition and export bundle diversification. According to the World Bank, a 1% increase in garment manufacturing is connected with an increase in employment of 0.3% to 0.4% for both men and women.

According to trade data, there has been a significant growth in the quantity of higher value items (bedsheet, knitwear, and woven garment) exported from Pakistan, while lower value and intermediate products such as yarn and greige fabric are gradually being turned into higher value products – a very positive sign that the economy is poised to grow. 70% of textile exports were of items that underwent extensive processing to make value-added products. Keeping up with this trend will largely rely on a continuous & uninterrupted supply of gas and electricity to the entire value chain at regionally competitive energy tariffs.

Value-added textile exports

Pakistan remains underrepresented in the high-end garment and apparel sectors. Current yarn and greige fabric output that is not transformed into higher value items might contribute $12 billion per year if turned into apparel. The industry has set up a detailed plan to use surplus yarn and greige fabric exported to turn it into garments for export through the establishment of 1000 garment facilities, each with 500 stitching machines and a $7 million investment. Each plant would be able to create garments for $20 million in exports while employing 700 workers. The overall investment would be $7 billion, generating $20 billion in yearly incremental exports and employing 700,000 people.

These efforts remain contingent upon strong and consistent policy support. If this initiative is supported by the government in letter and spirit, the industry is confident in its ability to achieve its target of $50 billion textile exports in the next 4 years provided consistent and affordable energy supply, additional working capital, new entrepreneurs, and new finance facilities. The new plants that have been installed or are being installed are not energy intensive, but are fully dependent on the total textile chain operating at affordable and competitive energy rates so that intermediate products can be supplied to these plants at reasonable prices.

Pakistan’s youth, which accounts for 65% of the overall population, signifies a very large window to capitalize on in terms of opportunities to develop the economy and evolve society. Pakistan’s population is estimated to be around 230 million (235,877,803) as of July 1, 2022, according to the latest United Nations data. Job creation is a critical measure for growth in any economy, and even more so when there is a youth bulge to cater for, as yearly spikes in unemployment must be managed. Job creation is only possible if the industry expands, and the industry will only expand if investments are made in the labor-intensive market.

The issue has not been a lack of policy formulation, but rather the reliable execution of policies to ameliorate long-standing disadvantages. With a stronger emphasis on policy implementation, there can be a tangible impact in terms of sustainable development and economic growth, significantly improving the position of Pakistan’s textile sector and exports over the next four years. The expansion and growth of the textile sector over the years have been enabled by the consistent provision of RCET policy, and the facts and figures given in this article further cement this statement. The continuation of this policy alongside other means of supporting exporters is therefore essential to remain competitive and achieve sectoral expansion targets. Earnings through enhanced exports remain the most sustainable mechanism to pull Pakistan out of its current account deficit and economic stagnation.

 

 

Mr. Gohar Ejaz has served as Chairman of the All Pakistan Textile Mills Association (APTMA), elected unopposed in the year 2010-2011, the premier textile industry association of the country. He is the Chief Executive of “Ejaz Group Of Companies” comprising Ejaz Spinning Mills and Ejaz Textile Mills Limited. Mr. Gohar Ejaz was awarded Hilal-e-Imtiaz, in the year 2011, the highest civilian award. Moreover, he was recently conferred with an Honourary Doctorate from the University of Punjab.

The views expressed in the article are the author’s own and they do not reflect the editorial policy of Global Village Space.