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Monday, April 15, 2024

Pakistan need exports not loans

Pakistan's dependence on exports for foreign exchange has always been a challenging task, and with the withdrawal of RCET, this reliance has become even more tenuous. The current situation implies that replacing exports with mere remittances and loans is an impossible feat, which could permanently damage the Pakistani economy.

Textile exports for April, 23 clocked in at $1.24 billion, a staggering $500 million less than the previous year’s exports for April, 22 and a colossal $1 billion per month short of the capability due to enhanced capacity. It is disheartening to see that over the same time period, our competing countries such as Bangladesh, Sri Lanka and Vietnam posted impressive growth ranging from 10-30% in textile exports over the last year, while we struggle to keep up with our previous years’ exports. Exogenous factors i.e., demand and external market forces, cannot be blamed for our downfall as the decline is entirely the consequence of our shortsighted decisions and failure to follow through on proven policies such as providing a level playing field on energy tariffs.

The impressive surge in Pakistan’s textile exports, a remarkable 56%, $19.5 billion in 2022 from $12.5 billion in 2020 is largely attributed to the strong policy support through regionally competitive energy tariffs (RCET). The industry’s enhanced competitiveness empowered it to invest a further $5 billion in expansion and new projects, effectively boosting export capacity by $5-6 billion per annum. These milestones placed Pakistan firmly on track to achieving its target of $25 billion in textile exports in 2023. However, the import restrictions and unfortunate withdrawal of RCET have left the industry reeling. The momentum is lost and investments are at risk of going to waste. The ramifications of such a decision are far-reaching and disastrous, with severe economic costs, loss of confidence, and social unrest stemming from the surge in unemployment.

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In accordance with our nation’s historical metaphor of the timeless game of snakes and ladders, it appears that the predicted event outlined in the article THE SNAKE BITES ONCE AGAIN – ENERGY, has indeed come true. The government has rescinded their prior commitment to provide competitive energy tariffs to our country’s export sectors, which were to extricate us from the grip of twin deficits through export-driven expansion. This decision is distressing as it may suggest that the government has relinquished its resolve to pursue the sole viable strategy for managing our Balance of Payment (BoP). This has sent shockwaves throughout the economy, leaving essential export sectors precariously vulnerable and driving the country toward rapid deindustrialization.

Pakistan’s economic growth was on the rise and was climbing the ladder with the implementation of the Regional Competitive Energy Tariff (RCET). The promising tariff structure offered the country’s vital export sectors competitive energy rates, serving as a beacon of hope for a brighter future. The initial tariff rates of 7 cents/kWh for electricity and $6/MMBtu for gas were highly competitive and proved to be instrumental in driving the country’s export-led growth.

As the tariff climbed to Rs.19.99/kWh and $9/MMBtu for electricity and RLNG/gas, respectively, it still remained marginally competitive. However, the sudden complete withdrawal of RCET has dealt a fatal blow to Pakistan’s economy, leaving its export industry in shambles with the recent hike in electricity and RLNG/gas prices, from Rs.19.99/kWh to over Rs.40/kWh and $9/MMBtu to over $13/MMBtu, respectively. This has made the industry uncompetitive in both local and international markets. Punjab industry in particular, with energy costs four times that of Sindh, seems to have been sacrificed at the altar of short-sightedness and expediency. As a result, the available orders are now being shifted to cheaper alternatives, both domestically and internationally.

The withdrawal of this tariff will undoubtedly lead to further economic deterioration, including unemployment, lower exports, and bankruptcy. Due to closure or partial operation of the total installed capacity which has already resulted in significant unemployment of more than 10 million. The rise in unemployment has had a profound impact on the nation’s youth, who account for 65% of the overall population. They have become the ultimate collateral damage, with their aspirations and dreams dashed by the dismal wasteland of high joblessness and uncertain prospects.

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Pakistan’s dependence on exports for foreign exchange has always been a challenging task, and with the withdrawal of RCET, this reliance has become even more tenuous. The current situation implies that replacing exports with mere remittances and loans is an impossible feat, which could permanently damage the Pakistani economy. The government must realize that growth-led export policies such as RCET can lead to increased exports and higher revenues for the industry against foreign loans with high-interest rates of 7% – 8%. It’s worth noting that the total cost of a regionally competitive energy tariff (RCET), if the differential is treated as the subsidy/cost is 2.67%, making it the most efficient and sustainable way of funding foreign exchange requirements.

The issue of Pakistan’s economy teetering on the brink of a severe financial crisis is not new. The question at hand is how to execute policies effectively to ameliorate long-standing disadvantages and secure the future of the nation. The reintroduction of RCET will undoubtedly be a game-changer, providing an immediate boost to the struggling economy by lowering energy tariffs and keeping foreign investors engaged. However, a sustainable long-term solution is also required to secure the future of the country.

In order to find a sustainable, long-term solution, the structural issues and inefficiencies within Pakistan’s energy sector must be addressed. These issues and inefficiencies greatly impact affordability, and it is crucial that the state relinquish control of business operations to private investors and innovators. CTBCM is one step in the right direction, however, it is being hampered by bureaucratic interference and unnecessary restrictions. Government has to loosen its grip on business, instead, what the nation needs are B2B deals that are free from government intervention and meddling.

The way forward

This will aid in restoring competitiveness, benefiting both the industry and the state in breaking the vicious cycle of circular debt, which currently stands at Rs. 4 trillion for electricity, as per the Power Division’s statement to the standing committee of the national assembly and Rs. 2 trillion for gas/RLNG. It is imperative for the state to acknowledge that running businesses, particularly in the energy sector, is beyond its realm of expertise. Therefore, it is high time that the state relinquishes control and grants the private sector the opportunity to take the reins for a long-term and sustainable solution. Only then can we hope to see the innovative and efficient practices of the private sector take hold and bring about financial stability and affordability in the sector?

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The crux of the matter does not solely lie in policy formulation, but rather in the effective execution of policies. The Textile Policy 2025 serves as an example of this, as it was developed after rigorous deliberation and consultations but has yet to be implemented. The non-implementation of the Textile Policy 2025 implies that the business environment in Pakistan is not conducive to the growth of both existing and new investors. Emphasizing the implementation of policies can have a tangible impact on driving sustainable development and spurring economic growth, leading to significant improvements in Pakistan’s textile sector and exports within the next four years.

It is an undeniable fact that Pakistan has consistently fallen behind when competing countries have experienced economic take-offs. The reasons for this disparity are numerous, including a lack of long-term vision and implementation of policies, compounded by erratic energy prices and availability. Additionally, policies have been abruptly withdrawn time and again, causing the industry to veer off its path of export-led growth. To achieve sustained progress, it is imperative that Pakistan focuses on augmenting export earnings by implementing long-term policies while simultaneously reducing state intervention in the business arena. This approach represents the most sustainable and pragmatic means of overcoming Pakistan’s current account deficit and economic stagnation.

We hope that the decision-makers take heed and reverse the decline through decisive measures in support of creating a focused export culture in the country.

 

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.