All Pakistan Textile Mills Association (APTMA) Patron-In-Chief Dr. Gohar Ejaz wrote a letter to Prime Minister Shehbaz Sharif, revealing that Pakistan’s textile exports are expected to fall below $ 1 billion per month from January 2023.
Since Pakistan’s economy to a very large extent depends on textile exports for foreign currency and employment, the international economic situation primarily caused by the Ukraine crisis combined with the floods in Pakistan have combined to formulate the perfect storm for the country’s economy.
Under the dire circumstances, APTMA has requested the Prime Minister’s attention to the issues highlighted below to enable the export-oriented sector to continue contributing the maximum possible support for the Balance of Payments as well as employment for the people of Pakistan.
Supply Chain Disruptions
Flood destroyed cotton crop- only 5 Million bales this year while industry requires 14 Million Bales. Forex issues have curtailed the import of cotton and other essential inputs for exports. Increased the cost by 20% due to demurrage /detention and delays. Loss of any failure to book orders due to uncertain and delayed turnaround time for export orders.
Pakistan needs to clear all imports of Export Oriented sectors that have arrived at parts whether against L/Cs or cash against documents. Priority for and exempting Export Oriented sectors from import controls allowing L/Cs for raw material machinery, spare parts, and other items to restore the industry’s supply line is a must. There should be a refund for all Demurrage and Detention Charges incurred by EOU Sector to maintain competitive costs for exports. A 24-hour help desk should also be maintained to monitor and resolve exporters’ issues.
Working Capital /Liquidity Constraints
Currency depreciation of 60 percent in the last year with no corresponding increase in working capital facilities. A much higher quantum of funds is stuck in work in progress as a consequence of a 17% sales tax and devaluation on all inputs. Abandonment of the FASTER system commitment to pay refunds within 72 hours. Foreign buyers extend their payment period against shipments. Accumulation of “Deferred Sales Tax” which has not been refunded for the last 3 years.
SRO 1125, Zero rating for the textile value chain while collecting sales tax on domestic sales at point of sale should be restored. All deferred Sales Tax, Tuff, and other dues should be immediately refunded. The submission date of Duty Drawback claims for FY 21 should be extended. A new Export Sector working capital lending facility should be established catering to EOU sectors at subsidized rates to tide over the current crisis.
Moratorium on Debt
Supply Chain Disruptions have severely curtailed production/operations and therefore cash flow. The liquidity crisis is prevailing due to a 60% devaluation, sales tax, and other pending refunds. New projects and expansions are also non-functioning.
As a result, the Export Oriented Units will be under immense pressure as they cannot generate funds to service debt. This will lead to massive defaults further curtailment of capacity and a possible banking crisis. The moratorium on capital repayment is from July 1st, 2022 to June 30th, 2023.
Problems of energy supply
Gas/RLNG being supplied to Punjab is priced at $9 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. Gas/RLNG supply to the Sindh 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 Punjab-based industry is paying for gas at $9 and electricity at Rs 19.99 /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 down as they are no longer competitive and available orders are shifting or in process of shifting to cheaper alternatives internationally and within Pakistan. New connections for RLNG/Gas are also not being extended to the competitive tariffs from July 1st, 2022.
The government needs to implement Weighted Average Cost of gas while extending RCET across the country to enable new industrial units, expansions, and Punjab-based industries to compete. The first priority to Export Industry on Gas/RLNG supply should be accorded, including competitive tariffs for all new projects and expansions.
Electricity supply to mills is erratic and sub-standard including maintenance shutdowns of 5-6 Days/Month reducing effective capacity by 25% of the mills running on electricity. Punjab-based mills running on electricity pay Rs19.99/Kwh while Sindh/KPK mills are operating at Rs 10/Kwh though captive generation on gas priced at Rs 840/MMBTU ($3.75).
LIEDA, FIEDMC, and Sundar Industrial Estates-based industries are being denied the concessional power tariffs allowed by the ECC and Cabinet over the last 3 years. Despite a multitude of meetings, letters, and commitments, the issue is still pending and the export industries are not able to compete and have become cash-strapped. The matter has been taken up many times with the Ministry of Energy and related stakeholders and it is unfortunate that it has not been resolved. The very concept of industrial estates is also likely to fail as a consequence.
The government should ensure the availability of a concessional Tariff to Export Oriented Industries located in Industrial Estates. All Discos should schedule maintenance shutdowns after consultation with the impacted industry. A task force with industry representatives on improving the supply of grid electricity is needed. There should be a Weighted Average Cost of Gas for maintaining the competitiveness of the Punjab-based industry.
Non- functioning of new projects/expansions
Over the past 2 years, the textile sector has invested $5 billion (Rs. 1 trillion) in setting up new factories, some of these are now complete and the others are in the process however some of the machinery of new plants/expansions is still stuck at ports, L/Cs are being delayed for spare parts, and electricity and gas are not being provided to these new units.
If remedial action is not taken non-functionality of this new investment; instead of increasing exports by $ 5 billion per annum is likely to lead to massive banking defaults, a complete loss of investor confidence in the future for any investment in Pakistan with many other negative consequences.
Machinery that has arrived at ports and is not being cleared delaying projects and incurring capital costs to a level where they have become uncompetitive. Gas /RLNG at competitive rates is not being extended for new connections effectively rendering new projects/expansions uncompetitive.
There should be a moratorium on capital repayment from July 1st, 2022 to June 30th,2023. Shipments of machinery and spare parts which have arrived at ports or are at sea need to be cleared. R.C.E.T to all new projects and expansions should be extended. LTFF should be provided where L/C’s already opened and loans approved by banks.