RCET indispensable for export-led growth?

Textile exports reached $ 11.35 billion in the 9MFY21 from $ 10.41 billion over the corresponding months of last year, showing a growth of 9.06 percent. This year, a record textile exports of $ 16 billion plus is expected due to unprecedented Regionally Competitive Energy Tariffs (RCET) policy.

A report “Are Energy Subsidies Boosting Exports” based on some hypothetical assumptions was conducted by International Growth Centre (IGC). The report was factually incorrect and was based on simple regression of the dollar value of exports compared with energy prices. This report has misled the policymakers.

An economic analysis is only as good as the model it is based upon. Focus of the model is to optimize the multiple variables that are always present in real economic situations. The model must cater for multiple other variables impacting exports such as relative energy price in competing countries, other comparative incentives, cost structure, and long-term stability of policies etc.

For this purpose, a report by Pakistan Institute of Development Economics (PIDE) which is government institute working under Planning Commission of Pakistan. The report has been compiled and peer reviewed by noted economists Dr Hafiz A. Pasha, Shahid Hafeez Kardar and Dr Nadeem ul Haque. The key findings of the study “Regionally Competitive Energy Tariffs Textile Sector’s Competitiveness” (https://www.pide.org.pk/Research/Regionally-Competitive-Energy-Tariffs.pdf) are;

• Leading component in textiles is energy which accounts for 35-40 percent in conversion cost.

• As a consequence of RCET both spinning and weaving subsectors recorded higher growth in exports than growth in local sales.

• Spinning and Weaving sector will become uncompetitive due to withdrawal of RCET.

• Downstream industry will lose international competitiveness and price rankings without RCET.

• Energy tariffs in Pakistan are high due to governance issues, operational and commercial inefficiencies, lack of effective planning, flawed policies, distorted pricing strategy, irrational cross-subsidization, and most importantly sub-optimal energy mix.

Moreover, the study finds that an electricity tariff above 7.5 cents/kwh is regionally uncompetitive. Industrial demand of providing electricity at 7.5 cents/kwh and gas/RLNG at $ 6.5/mmbtu is unassailable. For Pakistan’s economy to progress sustainably it is essential that export-led growth becomes the corner stone of Government Policy and for this to happen competitive energy costs are critical.

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Regional Comparison of Electricity Tariffs
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                Region           Cents/kwh
------------------------------------------
Pakistan                                 9
Vietnam                                7.3
Bangladesh                               9
India           Maharashtra            7.8
                Punjab                 7.1
China           General                9.8
                Xinjiang               6.1
==========================================

The table authenticate the detrimental position of Pakistan’s textile sector in terms of competitiveness in case of withdrawing the RCET policy. The table indicates that average electricity price in region is 7.4 cents/kwh.

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Regional Comparison of Gas/RLNG
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Region                                                          $/mmbtu
-----------------------------------------------------------------------
Pakistan     Sindh                                                  5.9
             General                                                6.5
India                                                              4.06
Bangladesh                                                         4.05
-----------------------------------------------------------------------
Vietnam      Tariffs vary on project basis; the PM has the authority to
             decide which project charged what tariff rates
=======================================================================

Similarly, the gas pricing showed the regionally disadvantageous position of Pakistan. The average regional tariff for gas/RLNG is around $ 4/mmbtu. Textile sector in Pakistan is paying 2.4 percent in total cost more than India and 7.8 percent in total cost than Bangladesh. The major difference in share among Bangladesh and Pakistan could be due to dynamics of the sector. Bangladesh operates at higher nodes of value chain and mostly engaged in garmenting which need less energy as a rule.

The RCET is essential for the textile sector of Pakistan, every time when sector has poised to take off, we land on the proverbial snake and have to start from a much lower base (https://fp.brecorder.com/2019/05/20190522477836). In line with our history of snake and ladders, it would be disastrous if government withdraw the RCET which played a key role in country’s export growth in the current year besides creating new job opportunities and fetching new investment. This would be troubling because it will create the impression that the government has given up on the only sustainable solution of managing Balance of Payment (BoP) and exchange rates. To keep textile products competitive in the international market, availability of energy at regionally competitive tariff rates is unescapable.

The unit cost of service of power to B3 and B4 consumers is approximately Rs 13.7/kwh and this include energy purchase price, capacity purchase price and allowed T&D losses.

However, the current Nepra noticed unit price for industry is roughly Rs 21.9/kwh. This is set to increase by a further Rs 6/kwh as reported in the press. The difference of unit cost of service and unit price shows the cross subsidisation across sectors. Nevertheless, the unit price set by regulators tries to cover all the inefficiencies of system and much higher than service cost for industrial users.

The first rule to export is to provide level-playing field at domestic level as inefficiencies as a rule cannot be exported. Any change in energy tariffs impacts the competitiveness of products in international market through cost of power and fuel in conversion cost and change in input price at spinning and weaving units across the TVC.

Similarly, State Bank of Pakistan’s (SBP’s) Temporarily Economic Refinance Facility (TERF) which has shown significant growth over the last 12 months and approved financing has reached to Rs 436 billion out of which 60 percent alone came from the textile industry. This SBP’s introduced scheme to boost the economic activities and exports leading to new employment opportunities and a sustainable balance of payment situation have played a significant role in overall economic situation of Pakistan. This scheme has encouraged investment in the export-oriented textile sector that made huge investments under this scheme. Textile machinery imports showed an 8 percent growth in first nine months of current fiscal year indicates that industry has started importing textile machinery as part of expansion and upgradation in the sector. These all achievements are direct result of Regionally Competitive Energy Tariffs (RCET).

Another proposal is being considered, i.e., to offer RCET is with a DLTL package, but this is not a sustainable or implementable solution. Only direct exporters will benefit from it whereas 80 percent of the sector is highly fragmented with spinning, weaving, dyeing, finishing and garmenting. DLTL scheme will only edge the direct exporters and distort the market which contributes 80 percent by value and 90 percent by employment.

Given the high energy tariffs, a domestic producer will not purchase from local market while they can import duty-free through duty and tax remission for exporters (DTRE) schemes with far less amount. This DLTL policy, if implemented will lead to deindustrialization and mass unemployment in the country.

Vertically integrated (big textile units) have systematic marked advantages. These textile units have access to credit, bonds and DTRE schemes and exemption from turnover tax at multiple stages which usually SME sector cannot avail. Overall, these units have an 8 percent advantage over the disaggregated SME sector and by restricting the energy subsidy to exporters will further exacerbate this market distortion.

Should the regionally competitive energy tariff be limited to these few companies the rest of the textile sector will cease to be competitive. Within a very short time, this will lead to closure of upwards of a substantial number of companies with anticipated loss of over 2 million jobs. Under these circumstances, should the export energy tariff be restricted to direct exporters only?

The expansion and growth of the textile sector over the years has been a direct result of the RCET policy. Unswerving execution of RCET policy is therefore essential to remain competitive, attain sectoral expansion and modernization targets and export led economic growth. The only sustainable solution to Pakistan economic woes is export-led growth and that is only possible with continuation of RCET!

Copyright Business Recorder, 2021