New policy rate & textile

The latest 50 bps cut in the interest rate was greeted with mixed reactions – some say it’s overkill while others hail it as a business-friendly measure. But what will the impact of the rate cut be on the textile industry?

If history is any indicator, the last time rates were this low was from 2002 to 2007, and the textile industry went on a borrowing spree; the graph illustrates how credit to the textile sector shot up from FY02 and peaked in FY05, after which rates bottomed out and borrowing declined again.

Given the struggles of the textile industry and the high cost of doing business, the easing of interest rates does come as a plus. A lot of spinners and ginners are highly leveraged and so a lower interest rate does give them a bit of a boost, a readymade garments manufacturer told BR Research.

Then there is another contrasting opinion – a leading cotton exporter told BR Research that mill owners are inefficient in cutting costs and lower financing rates won’t help anything but fuel loans for personal interests.

About investments in Pakistan, APTMA General Secretary Saleem Saleh said he is optimistic. He mentioned that the law and order situation has improved and is thus expecting some investment to pour in. However, he said that the real solution to the liquidity crunch of the textile industry is not a lowered long-term finance rate or export loan rate – positives as they may be — but the release of the pending funds of Rs200 billion.

Then again, the interest rate has been lower for a while now and credit to the private sector has remained muted because government borrowing has crowded out the private players. BR Research wrote about loans to the textile industry in an earlier piece titled “Of textiles and borrowing” (Published August 03, 2015) highlighting the fact that credit to textile industry is largely contingent on seasonality; since cotton is harvested in winter, loans peak around December to March.

So, it may well be the case that textile sector’s borrowing skyrockets in the months to come. The lower borrowing rates are definitely not a bad thing for business. However, there are more pressing concerns such as zero-rating on exports, lower gas and electricity tariffs, the release of pending funds, and the devaluation of the Rupee.