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Maintaining Exports Through Winter

If we target the doubling of Pakistan’s trade value by 2030, there is a need for aggressive export facilitation by the government by incentivizing exports and reducing tariffs for the most productive and high-potential exporting industries, and by reviewing non-tariff barriers to trade and ensuring international standard compliance.

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The textile sector is the central pillar of our industry, contributing nearly a quarter of Pakistan’s manufacturing value-addition and providing employment to about 40 percent of the country’s industrial labor force. Textiles comprise over 60 percent of national exports.

To increase exports, the GoP announced its Textile and Apparel Policy, 2020-25, under which adequate energy (electricity and RLNG) is to be provided to export-oriented textiles and apparel industrial units at ‘regionally competitive energy tariffs’ (RCET).  The Textile sector contributed $ 19.4 as export proceeds last FY. The sector has added further production capacity through new projects and enhancements vide TERF, and now has the potential to generate more than $24 billion in exports in FY23, provided the energy supply – especially gas/rlng- is adequate.

Read more: Effective Energy Allocation for Export Growth

Understanding the matter better

The industry in Punjab is already being supplied with only 70 MMcfd of gas against a requirement of approximately 200 MMcfd. This is severely curtailing its production and it is feared that the gas/RLNG supply will be further reduced during the coming winter months. The export sector’s total requirement for gas/RLNG is 350 MMcfd which is approximately 9% of the total supply of approximately 3800 MMcfd expected this winter. The restriction of gas supply to the domestic or power sectors to prioritize the export sectors needs to be planned in order to prevent further deterioration in the country’s trade balance.

Gas/RLNG allocation follows a merit order basis which places domestic and power generation use at a higher priority than the export sector. Given the extremely sensitive and urgent forex requirements of Pakistan’s export sector’s gas allocation priority must be revised to No 1, ahead of the domestic sector. Pakistan can survive without hot water or space heating but will be in severe difficulty if exports decline.

The argument that electricity supply can provide the energy needed is patently wrong as grid supply cannot substitute for the steam and hot water use of the industry apart from the quality issues which are already reducing the industry output by about 25%. Power load enhancements and new connections are delayed and at present over 126 applications are pending with the Discos. The power division is fully briefed on this but little if any progress is visible on new enhancement of loads, new connections, or quality of supply.

Another aspect that requires serious attention is that gas/RLNG curtailment has been consistently applied to the units located in Punjab. This has placed them at a severe disadvantage both in terms of pricing and availability as supplies to Sindh-based plants have not been curtailed in the past. A fair and just system would ensure that gas supply to Punjab-based exporters is also not curtailed and adjustments made in the supply of other sectors to accommodate. Gas/RLNG being supplied to Punjab is priced at $9 for less than 50% of the average consumption of mills last year. This formula irrationally excludes the new plants/expansion that has been made during the last 2 years.

Read more: Pakistan single window: A digital revolution

The Gas/RLNG being supplied to mills in Punjab is less than 1/3 of the required quantity of 200 MMCFD. At present gas supply to Sindh, the export industry is supplied at $ 3.75/ MMBTU (Rs 840) and at a quantity meeting 80% plus requirements. This is contrary to the commitment that the differential in gas / RLNG pricing within the country will be less than $2 to keep the Punjab industry competitive. This huge differential means that the Punjab-based industry is paying for gas at $9 and electricity at 9 cents/kwh while the bulk of the Sindh industry is generating their own electricity at 4 cents / kWh.

Given this differential Punjab-based industries are no longer viable and have no option but to close as they are no longer competitive and available orders are shifting or in process of shifting to cheaper alternatives internationally and within Pakistan.

A further issue is that due to a misinterpretation of the gas priorities, supply to non-export processing units such as glass, ceramics and steel continues unabated despite this being completely unjustifiable from an economic viewpoint. A decision was taken by Federal Cabinet on Gas Supply Priority Order, notified on December 16, 2021, wherein fertilizer and power sectors were given upward revision till March 2022 to facilitate augmented production of urea and generation of electricity. On the expiry of this SRO, Zero-rated industry is now at the second priority at par with power generation.

Amidst increasing domestic demand and a dwindling supply of gas – including imports of RLNG – circular debt is continuing to mount. It is a fact that the power sector bureaucracy is deeply entrenched in existing systems that have been beneficial for their vested interests. Pakistan’s energy crisis has persisted for decades, and power shortages are estimated to have cost the equivalent of at least 3-4% of GDP each year since 2008, in direct output losses alone. In addition, the impact on jobs has been severe, especially in the industrial sector.

Furthermore, we must remain cognizant of the fact that electricity is perceived as a fundamental “right” and consumers are not willing to pay for it (Burgess et al., 2020). This notion coupled with our unreliable supply, poor service, and weak infrastructure translates into Pakistan’s energy sector is stuck in a “bad equilibrium.”

Amid elevated levels of inflation, the war in Ukraine, and rising interest rates, global economic growth is expected to be weak in 2022 and 2023. The war has resulted in elevated prices of food and energy, and the situation is increasingly dire. Being an oil-importing country, Pakistan heavily relies on hard currency to finance imports and is thus faced with mounting food and energy prices and deteriorating external balances.

Moreover, industries in Pakistan are energy intensive and will therefore see rising input costs of energy, other commodities and borrowing. With interest rates being synchronized with the US Fed policy interest rates, borrowing and servicing debt costs are expected to rise. Furthermore, the strengthening value of the US dollar has been constricting the textile industry’s liquidity and eroding competitiveness.

Read more: Economic growth amid political instability

An export-led economic growth model is central to strengthening developing economies like Pakistan’s, but this also requires a more diversified product basket and diversified markets. The major exports of textiles need to be supported for value addition while simultaneously tapping into other products and services.

This is more sustainable than acquiring more foreign aid

Higher value addition through technology, IT investment and renewable energy generation are the most impactful and symbiotic means to improve the economy while simultaneously enhancing worker capabilities and enabling integration into Global Value Chains. Enhancing internal capacity in these industries will allow us to reduce imports. Pakistan’s import bill has historically been weighed down the most by petroleum imports; therefore, drives for domestic exploration of renewable energy sources must be introduced, and the transition to solar and wind capacity must be pursued aggressively, which will have positive impacts on job creation and skill enhancement for the population.

If we target the doubling of Pakistan’s trade value by 2030, there is a need for aggressive export facilitation by the government by incentivizing exports and reducing tariffs for the most productive and high-potential exporting industries, and by reviewing non-tariff barriers to trade and ensuring international standard compliance. The country should engage professional consultants to lobby for GSP+ status for Pakistan. With our competitive advantage in textiles, Pakistan should be able to target 10-15 leading brands and retail chains in the USA and Europe for sourcing Textile & Clothing from Pakistan.

It is often argued that giving priority and subsidies to exporters will lead to the neglect of other industries and businesses such as local startups. However, this is the most effective geo-economic strategy for a country like Pakistan that struggles to in forex through other sustainable means, so these measures are critical for the long-term stability of the economy. Another strategic implication to bear in mind is that reducing oil imports may result in energy shortages if domestic production is not able to keep pace.

Since exports are to be supported on a priority basis, this may lead to power cuts for domestic consumers and industries that are less productive, resulting in energy insecurity in the short term. However, the strategy of prioritizing domestic energy is not geo-economically prudent and is more often applied for political gain over the economic prosperity of the country. If Pakistan’s economy is to survive this winter of discontent, it is crucial to prioritize gas supply to the export sector – thereby preventing Pakistan’s premature deindustrialization.

 

Written by Shahid Sattar and Eman Ahmed

Mr. Shahid Sattar, now Executive Director & Secretary General of All Pakistan Textile Mills Association (APTMA), has previously served as Member Planning Commission of Pakistan and an advisor to the Ministry of Finance, Ministry of Petroleum, Ministry of Water & Power.

The views expressed by the writers do not necessarily represent Global Village Space’s editorial policy