Criticality of higher exports

Pakistan’s Balance of Payments crisis is spiraling out of control, with the country heading towards a historically high deficit mark. Pakistan Bureau of Statistics (PBS) shared data last week, showing the trade deficit reaching $35.393 billion during July-March FY2022, compared to $20.802 billion during the same period of 2020-21.

This issue is only likely to be exacerbated if we do not put an end to borrowing. Instead, turning towards policies that will propel exports can serve as an effective strategy, creating valuable foreign exchange and countering the country’s deficit problem. To this effect, exports and industrial competitiveness are largely dependent on continuous supply at regionally competitive tariffs.

Policymakers in Pakistan must strive to maintain the export growth momentum that has built up over the past few years, particularly steered by textiles which are the country’s top export. This growth was the result of concerted efforts and investments, which must remain a top priority for the government, and policy continuity must be ensured at all costs.

It is unfortunate that gas/RLNG supply issues continue to plague the export sector/captive plants. The gas/RLNG supply was reduced to 50 percent by SNGPL of the average consumption of September, October and November 2021 on 31st March 2022 with the assurance that the full supply be restored within a few days.

At present, the mills are effectively operating at 75% capacity. While the industry awaits restoration, the trade deficit of the country continues to spiral without the support of valuable foreign exchange brought by a stable stream of exports.

Meanwhile, gas/RLNG continues to be supplied to non-export sector without curtailment, exhibiting a grave misallocation of resources which requires immediate rectification. The cost of consistent and competitive energy is equivalent to 2.5% of export value and exponential economic growth can be achieved once industry is provided with a stable and secure energy environment. At present, RCET is applicable till June ’22, while the industry requires a 5-year predictable supply and competitive tariffs across the entire value chain to sustain growth and investment.

The recent export growth in Pakistan has occurred despite a wide array of issues in energy. Power supply, reliability, quality, pricing and gas availability remain a bane for the country’s economic development.

This brings us to the countless pending cases of extension of load and new connections. A major obstacle that has pushed industries away from the national grid and toward captive units is the lack of grid reliability, with a non-standard supply to the industrial sector that has resulted in huge losses.

Furthermore, unwarranted interruptions in supply are endemic, along with constant, inordinate breakdowns, fluctuating voltage and flicker which result in huge financial and performance losses, and consequently lower production. Issues of shutdowns, breakdowns and tripping may be mitigated through up-to-date maintenance etc., but the issue of non-standard supply requires concerted technical efforts that can only be made at the Discos’ level.

An export target of $20 billion has been set for the textiles and apparel industry for FY 2021-22 – a downward revision from the previous target of $21 billion due to the issues outlined above. The textile sector’s expansion and opening of new factories was expected to propel exports further, but unfortunately these new units did not receive gas or electricity supply and were consequently unable to launch successfully. This coupled with the ongoing curtailment of gas is making the revised lower target look like a distant dream – a loss that the economy can hardly sustain.

If policymakers are unable to propel exports towards their maximum potential, the economy is at risk of sinking deeper into the debt trap. For decades, we have sought loans to achieve economic stability, which come with countless conditions. We must not neglect the local business community — particularly the export-oriented industry — which surely has the potential to steer sustainable economic growth as long as it is provided with basic policy support, and in particular, competitively priced energy. Furthermore, the government must fast-track the implementation of the Textile Policy of Pakistan, so that a holistic plan to propel textile exports is set in motion and all issues are addressed.

Orders to Sri Lanka, Bangladesh, India, and China have been moving to Pakistan and it is crucial to fulfill these orders with competitive pricing and high quality products. However, this necessitates that our energy rates remain low and the government remains onboard with the required policy environment for exports to thrive. Furthermore, DLTL is an ineffective mechanism unless it is automated. Consistent policy and competitive rates are required across the textile value chain, as exporters prefer to source their inputs from wherever they can be found cheapest — we cannot afford to lose customers due to uncompetitive pricing at any tier of production.

Pakistan needs a paradigm shift in the array of textile exports, with diversification into higher value sports and performance apparel. It needs to advance in synthetics (a capital and technology-intensive market) to increase its market share, as the cotton sector is becoming increasingly redundant. For successful restructuring, the government of Pakistan must reduce customs duties on imported machinery. Distortions in sales tax must also be removed, along with ensuring rationalization of the anti-dumping policies applied on polyester staple fiber.

The importance of supportive leadership from a government that envisions the potential of the textile sector is absolutely crucial. The country already faces immense competition from its regional competitors in terms of competitive energy rates and GSP+. Policymakers in Pakistan must also remain cognizant of new and emerging textile exporting countries, such as Uzbekistan which has full market access to the Eastern bloc and has now been granted GSP+ status by the EU. With energy costs lower than ours — RLNG at $2.1/MMBtu and electricity at 4.5 cents/kWh — and better cotton quality, Uzbekistan is a promising new entrant, set to capture high market shares.

A reliable and supportive energy environment paired with more efficient use of monetary policy and customs tariff can largely improve industrial competitiveness and reverse what appears to be the beginning of Pakistan’s premature deindustrialization. In Pakistan’s case, there is laggard advancement in the tertiary sector, as technological up-gradation or advancement have not accompanied our LSM contraction. Instead, poor policies, mismanaged resources, a growing trade deficit and borrowing without planning for sustainable growth in complementary sectors has given rise to deindustrialization.

In order to prevent premature deindustrialization, Pakistan’s government must provide adequate support to the manufacturing and exporting sectors, thereby enabling them to steer economic growth and counter the rising trade deficit while also creating new economic and industrial zones for innovation and entrepreneurial opportunities. An uninterrupted supply of regionally competitive energy, redressal of issues of captive power and product diversification framework require a holistic framework embedded in industrial policy. To this effect, it is hoped that the government will implement the Textile Policy of Pakistan expeditiously, keeping in mind that a strengthened, supported textile industry has consistently proven to be the vanguard for of economic growth in Pakistan.

Copyright Business Recorder, 2022