Home Business Textile Industry: 100 mills to open as Govt allows subsidy

Textile Industry: 100 mills to open as Govt allows subsidy

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All Pakistan Textile Mills Association (APTMA) announced a decision to reopen a hundred former mills in Punjab. The decision was borne out of the promised Rs.44 billion subsidy for exporters mentioned by Finance Minister Asad Umar in his supplementary budget speech.

The subsidy itself will be derived from a massive regulatory hike in gas prices which has raised the price by 40% from Rs.600 per million British thermal unit (mmBtu) to Rs.780 mmBtu for commercial consumers. The plan to create a new category for those industrial consumers who are registered manufacturers or exporters of one of five zero-rated sectors is to charge them the unchanged rate of Rs.600 per unit.

Although the Economic Coordination Committee of the cabinet has been taking steps to reinvigorate the Rupee, a global surge in oil prices is posing significant challenges to a country industrially dependent on gas.

These five export sectors would be textiles (including jute), leather goods, carpets, surgical tools, and sports goods business which the Government of Pakistan intends to capitalize on by offering them internationally competitive gas rates.

In a statement made at a ceremony for the Export Excellence Awards organized by the Pakistan Textile Exporters Association (PTEA), Asad Umar called the textile industry the ‘backbone of the economy’. “The government has a strong belief that economic revolution can only be possible through trade promotion and all possible support is being extended to the export sector to achieve optimum growth,” he remarked.

Read more: Non-Textile exports: Pakistani industry coming back to life?

Pakistan’s domestic gas production ranges between 3.8 to 4 billion cubic feet per day (bcfd) while importing 1.1 bcfd LNG. At a total of 5.1 bcfd, the country still runs short when its demand stands around 6 bcfd and the shortage is most acutely felt in the cold season.

The combination of increased gas prices, devalued Rupee, plummeting stock, decreased exports and increased inflation has already landed the new government into its first crisis. While the PTI government attained power with ambitious plans to turn around the economy, create more jobs and deliver on its promise, it has set off to quite an unlucky start.

The hike in interest rates, depreciation of the Rupee, and the 143% rise in gas tariffs are all measures taken in the ‘right direction’.

Not only have external factors caused the Rupee to fall against the dollar for the 6th time since December 2017, but a culmination of a debt crisis, water crisis and now an energy crisis have caused divisions in the new cabinet.

Although the Economic Coordination Committee of the cabinet has been taking steps to reinvigorate the Rupee, a global surge in oil prices is posing significant challenges to a country industrially dependent on gas. During the previous government, over 100 textile mills were shut down in Punjab once the provincial government gained greater autonomy and reduced the commercial availability of gas to only 2 days a week.

Read more: Government policies failing cotton industry

The impact of poor fiscal policies without long-term planning led to the crossroads of today. Thus while the leadership is currently driven on not worsening the debt crisis and keeping the currency afloat, economic advisers are trying to keep the long-term benefits in mind and recommended going for another – and hopefully the last – IMF bailout package.

Thus, after much deliberation, the cabinet went against its electoral promises and officially approached the International Monetary Fund (IMF) for a bailout but not without putting the entire economy into freefall against the supply and demand metrics of the competitive global.

The PTI government had promised jobs and homes for the populace but will be tasked with taking more ‘decisive action’ by the time talks with the IMF would have ended.

Of course, going to the Fund not only means letting the Rupee free float but also allowing inflation adjustment and bringing in the heavy blow of rising oil prices before a bailout package is decided. This would mean doing away with the loose fiscal and monetary policies that have been institutionalized in the previous governments who had adopted a culture of borrowing.

The corrective steps taken since December of 2017 have been appreciated by the IMF but are apparently not enough to fix the high fiscal and current account deficits, as well as low foreign currency reserves. The hike in interest rates, depreciation of the Rupee, and the 143% rise in gas tariffs are all measures taken in the ‘right direction’.

Read more: Bad news for Punjab: Textile industry will not get gas from…

Much more is obviously required, with even further Rupee depreciation as the stock market falls further (already closed by less than 1,328 points on Monday) and privatization of public-sector enterprises such as Pakistan International Airlines (PIA).

While the dollars Pakistan will receive in loans might help prevent it defaulting on foreign payments, the structural adjustment, macroeconomic reforms and other conditions that come with them will hit even harder. Higher inflation (currently 8% and climbing), higher interest rates (projected upwards of 10%), the decrease in growth rate (down to 4.2% by 2019) and increased gas prices will hurt PTI’s agenda, especially in the next elections.

The new government may mean well by sticking to their policy of emancipating domestic exporters and overcoming the reliance on foreign debt.

The PTI government had promised jobs and homes for the populace but will be tasked with taking more ‘decisive action’ by the time talks with the IMF would have ended. Such policies would include more exchange rate flexibility and stricter monetary regulation, further fiscal adjustment notwithstanding costs incurred from having to revive a struggling economy such as providing subsidies to exporters.

PTI’s plans to construct 5 million houses have already been deterred by a 30 percent increase in gas rates for the cement industry, which will make it even more difficult to meet large-scale welfare requirements. Efforts to control gas theft and supply losses will have to be revamped to coordinate federal and economic action.

Read more: “Anti-industry” policies of the government: Textile Association to protest

Recovery from gas defaulters may add to the Rs.112 billion rupees being generated out of the gas price hike. More than half of the Rs.44 billion subsidy for Punjab’s industries will most likely come from that. However, the problem lies with the fact that this figure was decided before an IMF bailout was an option.

Although the figures have all moved up and down the charts by now, the amount remains the same. The government will be trying to maneuver uphill if it intends to prioritize revenue generation and public welfare at the same time that a 3-year IMF structural reform program is in place.

A senior Petroleum Ministry official explained that the government will be abiding by the principle of providing 100 % gas at a fixed rate by paying the difference in subsidies.

Weak economic scenario coupled with widening budget deficits has forced the government to take undesirable decisions knowing well that economic activities will only flourish if domestic industries receive competitive costs of production. By keeping the gas price unchanged at Rs.600 the government is trying to do just that.

Most of these industries are textile mills located in the Faisalabad locality of Punjab where the PTI won seven out nine available seats. However, only 28 % of their gas arrives at subsidized rates from Sui Northern Gas Pipeline Ltd (SNGPL) while 72 % is imported Liquefied Natural Gas (LNG); the latter which costs around Rs.1,300 per MMBtu.

Read more: LNG Accord: Are Pak-Qatar ties in danger?

More importantly, by reopening all the closed mills, the PTI government would be overcoming a major industrial challenge in Punjab by providing over 500,000 new jobs. A senior Petroleum Ministry official explained that the government will be abiding by the principle of providing 100 % gas at a fixed rate by paying the difference in subsidies.

The new government may mean well by sticking to their policy of emancipating domestic exporters and overcoming the reliance on foreign debt. But there is still a lot of deliberation, calculation, and decisions to be made until the mini-budget is decided once the by-elections take place on October 14 and the IMF responds favorably.


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