Trade credit financing is encouraged globally by regulators as it expands businesses and creates opportunities for new financial technology solutions, up-gradation and value addition. The Pakistani textile industry’s shift to value addition in FY21 was monumental, playing a significant role in the 25% growth in exports for FY21 vs. FY20.
Serving as the best performer among all of Pakistan’s business sectors, the textile sector’s growth trajectory highlights the multiplier results of government support. Pakistan’s economy is on the right path and GDP is expected to grow by 5% this year, largely supported by our export growth to $36 billion of which a 66 percent share is expected to be textiles, at $21 billion dollars.
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Exports of value-added textile items increased in both quantity and value in December 2021, contrary to a slew of misleading allegations. In the first 6 months of FY22, textile exports increased by 26% as compared to last year. However, this performance has by no means been at par with regional competitors, which benefit greatly from government support packages that consistently prioritize textile exports.
Let us take a look at our Export Refinance Scheme
Only 16% of the total amount of $15.4 billion given to the textile sector is outstanding in ERF, which amounts to about $2.5 billion. The proposed reduction in export proceeds from 180 to 120 days is bound to hamper Pakistan’s exports, as the extended time for payment is an integral part of exports contracts. A substantial number of exports currently fall under a 180 days’ payment cycle, and reducing the time allowed will severely limit export orders. It would be difficult to assess the actual number of orders lost as a result of this change, but it is likely to be significant.
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Concessionary finance is available in all countries. These countries allow concessionary finance of up to 180 days with even higher outstanding amounts in ERF, e.g. India. Our regional competitors have much higher credit and longer repayment schedules, outlined below:
- The Reserve Bank of India offers export refinancing both before and after shipping. Banks also provide loans of up to 15% of the outstanding export credit eligible for refinancing at the end of the subsequent fortnight. Export refinances must be repaid within 180 days and do not require security. These are concessionary finance schemes at well below lending rates.
- Bangladesh Bank customers can acquire pre-shipment credit refinancing for three years, and banks will be refinanced within 180 days of the shipment date, making them eligible for a one-time payback with interest at the end of the period. ATK 5,000 crores pre-shipment credit refinancing scheme with a maximum interest rate of 6% was introduced in 2020 for a three-year period. This scheme is available to all export-oriented industries in any sector.
It is expected that there will be further increases in Pakistan’s textile export quantity starting from February 2022, as many projects are being funded through the Temporary Economic Refinance Facility (TERF) and Long Term Financing Facility (LTFF) are to bear results. According to the SBP, $3 billion in loans and $2 billion in equity will come on stream. Under these TERF provisions, there was a financing facility of 60 percent, and the textile units were asked to finance a further 40 percent. The expected investment of approximately $5 billion has been successfully poured into the value-added sector of the textile industry.
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It is important to note the multiplier effects of this value addition
If one textile unit generated 5,000 jobs, then a hundred units would certainly create 500,000 new jobs. The value-added in textile sectors starting from spinning to stitching is bound to enhance productivity. Furthermore, the capacity utilization and price increase in international markets would help increase textile exports.
When it comes to concessionary finance for the textile sector, the greatest scheme utilized by the sector has been Long Term Financing Facility, and this scheme is not even available to indirect exporters – which make up nearly 70% of the textile industry. A scheme that only facilitates about 30% of the industry is hardly a major concession. Furthermore, the only benefit of LTFF to direct exporters who avail it is that of financing new machinery and attracting fresh investment – factors which are part and parcel of export packages bestowed upon our regional competitors.
Given the sheer volume of export orders coming into Pakistan’s textile industry, there is a need for capacity enhancement, so extending LTFF to indirect exporters is highly necessary. Since the textile sector comprises a complete value chain: cotton is a raw material to yarn manufacturing, yarn is inputted to weaving, weaving to finishing and so on – it is vital to support each of these entities.
Similar to LTFF, the SBP introduced Temporary Economic Refinance Facility (TERF) to sustain economic growth in a post-pandemic scenario. While the textile sector fetched Rs. 327 billion through TERF, it was a proactive approach by the sector for a boost in textile exports. The TERF scheme is available to all sectors, not just exporters, so it can hardly be referred to as a “squeezed” concession by the textile sector. TERF has so far resulted in an investment of $5 billion, and more capacity is being added, giving rise to additional production and exports. It is pertinent to mention that if those plants are not provided with competitive energy, all the benefits of the TERF initiative will be for naught.
Despite the textile sector’s performance and evident benefits to the economy, the sector has been subjected to persistent attacks over the past couple of months. These attacks started with the publication of a misleading Planning Commission Report which provided inaccurate figures of exports to the Prime Minister and were subsequently used to reach misleading conclusions. Even after acknowledging these errors and making a commitment to correct them, the Planning Commission has yet to issue the correction.
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Another erroneous argument was provided by the Economic Advisory Group, stating that increases in exports are a result of a favorable exchange rate policy. However, this analysis was based on several fallacies and failed to take into account the large extent of dollarization of the textile economy which has made it immune to exchange rate fluctuations. All inputs of Pakistan’s exporting sectors are dollar-based, and it has been ensured that they are measured in dollars in order to reduce risks posed by currency volatility. This alone refutes the concept of debilitating exchange rates affecting the trade of the country. A detailed response to these claims can be found in the article Exports and Currency Devaluation: Any Link?
Most recently, an article has falsely attributed the textile sector’s utilization of Export Refinance schemes to “squeezing concessions.”With the onslaught against textile exporters and their use of concessionary finance, it is important to refute the claims on the basis of which these criticisms are being leveled.
The article claims that the supply of ERF to many exporters is in excess of what they need
This fails to acknowledge the export growth enabled by ERF as well as the fact that only 16% remains to be repaid. Furthermore, in FY21, Pakistan’s goods and services export growth were aided by three factors: lower interest rate, regionally competitive energy prices, and a lower cost of doing business. While there have been, to a certain degree, supportive policies for the export industry over the past 3 years, this support has given back to the economy manifold, due to the multiplier effect of export growth.
The allegation of arbitrage is baseless; even if it were true, then by that logic textile exports should not have increased by the staggering numbers that they have charted over the last 1.5 years. Furthermore, most exporters actually require working capital and utilize it accordingly. Most exporters are not even large enough to be able to carry out the alleged arbitrage.
The industry is running at full capacity as PTI government has in its 3 years taken measures to rationalize the cost of doing business and enable regional competitiveness, evident from record export growth posted in FY21 and 1HFY22. The most impactful measures have been the strategy and macro vision adopted at the start of the regime in order to grow textile exports. It is owed to the initiative taken by the textile sector to steer positive growth, and this remains predicated on the government’s provision of consistent policy and protection from domestic policy rate changes and energy issues.
Critics refer to the support given to exporters as if it is a zero-sum game leading to opportunity costs for other industries. On the contrary, textile export growth momentum has multiplier effects for the economy at large, allowing for huge reductions in trade deficit and nullifying the need to seek IMF loans.
Rather than obtaining “excess incentives” which are “counterproductive,” all the industry demands are regionally competitive support packages in energy as well as concessionary finance, and even with these the government often backtracks and changes policy, the results of which are immediately evident from losses in exports. This was recently observed in December 2021 when gas supply to textile sector was cut off and fluctuations in electricity supply were observed, as a result of which about $250 million of textiles exports were lost and can never be regained.
Government support schemes to keep Pakistan’s exporters competitive are often incorrectly referred to as subsidies. On the contrary, these are the minimum requirement for the industry to remain at par with regional competitors. Supportive policies that included competitive energy enabled the industry to attract sufficient investment to begin expansion in capacity and technological upgradation. Without this support, Pakistan’s export-based industry is far from achieving the necessary up-gradation and innovation. Systemic inefficiencies, administrative delays, and the ever-increasing cost of doing business all have contributed to an unsustainable business environment. If textile exports are not supported and new investments are halted, there will be no job creation and an additional $6 billion may need to be borrowed from IMF under strict conditions.
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In order to sustain the economic and political sovereignty of Pakistan, we need to remain focused on export-led growth. Keeping in view the sector’s outstanding performance, any moves to hinder its operations give rise to the idea of a fifth column working in the country, attempting to bring Pakistan down to its knees. Continued attacks on the textile industry seem to be motivated towards adversely affecting its operations, thereby encouraging a decline in investments, low FDI, unemployment and eventually a failing economy. Moreover, giving credence to such attacks and fallacious arguments is likely to have a catastrophic effect on economic and political sovereignty, serving as a major blow to the PTI government.
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