Critical importance of competitive energy rates across textile value chain

The textile sector of Pakistan has immense significance for the economy, as evidenced by its contribution to the country's GDP as its largest manufacturing and exporting sector. The sector achieved growth of 27% in the first quarter of FY22 compared to the same period last year, and is undergoing impressive levels of expansion. Following a 13-year period, there has been $5 billion worth of investments across the entire textile value chain including spinning, weaving, finishing, processing and garments. The introduction of pro-export policies by the government in recent times has enabled unprecedented growth in the sector. It is important to note that the energy cost is the sector's leading component in terms of conversion cost, comprising around 35-40%. Moving forward, it is critical to continuing the provision of energy at regionally competitive tariff rates, for the country's long-term economic stability and GDP growth.

As Pakistan's economy progresses towards sustainable growth, it is essential that export-led growth becomes a cornerstone of government policy. An economic growth rate of 7-8 percent has been deemed necessary in the next 30 years to meet the needs of our growing population, and with over 100 new textile units being set up across the country, this goal seems achievable. New investments have a central role in the sector's expansion and will serve as the ladder to economic growth, generating 500,000 fresh employment opportunities along the way. However, this is all contingent upon the future of energy tariffs. Numerous studies have demonstrated that an electricity tariff above 9 cents/kwh is regionally uncompetitive and the industrial demand of providing electricity at 9 cents/kwh and gas/RLNG at $ 6.5/MMBtu is unassailable.

The major factors of production in textiles apart from capital are raw material (i.e., cotton), energy and labor. In terms of cost of conversion (where the cost of raw material is subtracted from the total cost of production), energy cost is the leading component, particularly in spinning and weaving. Due to intense competition among regional countries, a minor cost difference in relative terms brings an exponential impact on the international market.

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Cross-Country Comparison of Conversion Cost
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                                   Pakistan                                       India                                     Bangladesh
                      Power          Wages      Depreciation       Power         Wages &     Depreciation       Power         Wages &      Depreciation
                     & Fuel       & Salaries                      & Fuel        Salaries                       & Fuel        Salaries
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Average
(2017-20)             34.6           29.3           10.3           29.8           28.0           16.0           25.5           33.8                18.0
2017                  36.1           29.9           10.0           26.9           26.6           16.5           26.9           33.0                17.5
2018                  36.4           29.3           10.1           30.6           27.1           14.8           24.4           29.8                15.8
2019                  33.6           29.4            9.6           31.2           30.8           16.4           26.0           35.8                18.4
2020                  32.8           28.7           11.8           30.4           27.6           16.3           25.0           37.1                20.9
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Source: PIDE

The cross-country comparison in the cost of conversion in the table above shows that the textile units in Pakistan are incurring power and energy costs 2.4 percentage points more than India and 7.8 percentage points higher than Bangladesh. This demonstrates that the ideal, regionally competitive electricity tariff would be around 7.4 cents/kWh. The industry is presently demanding that the tariff must not go over 9 cents/kWh, as anything higher would have disastrous consequences for exports.

The textile sector is currently in expansion, where it requires unwavering support to maintain its growth, so the sustained provision of a supportive energy package will have long-term benefits for the entire economy. In the undesirable case of replacing competitive energy tariffs with DLTL, which has been proposed in the past, 80% of the textile industry would end up needing to pay electricity tariffs at 14 cents/kwh, thereby making all exports uncompetitive. The output price will also be uncompetitive; any downstream unit in the value chain will prefer imported inputs instead of expensive domestic inputs. In this case, local units at the higher end of the value chain will be at risk of closing down, losing countless jobs in the process.

As highlighted in the comprehensive study we carried out on RCET via PIDE in March 2021, the upstream industry (spinning and weaving) would be most affected in the event of any changes to the competitive energy tariffs, rendering these two crucial parts of the textile chain regionally uncompetitive. The spinning sector will not only lose international market share but also leave domestic sales in jeopardy.

The State Bank of Pakistan (SBP) declared that out of loan applications under Temporary Economic Relief Facility (TERF) in 2021, around 60% came from the textile sector alone. Moreover, the textile sector experienced approximately $ 1.60 billion investments during the first half of the previous fiscal year. The overwhelming loan demands for investment from the textile sector are largely due to competitive energy tariff rates. Continued investment is thereby predicated on uninterrupted supply of RLNG/gas for power and steam at regionally competitive energy tariffs, with 9 cents/kWh for electricity and $6.5/MMBtu for gas/RLNG across the entire textile value chain.

Any increase in energy tariffs will undermine the entire industry's efforts and offset the economic progress made over the past year, as the textile industry will struggle to remain productive under the pressure of unsustainable high energy tariffs. At this stage where Pakistan's industry is in the midst of impressive expansion and is successfully attracting a healthy level of investments, a rise in costs would directly result in a reduction in market share, once again leaving Pakistan far behind its regional competitors. The promising levels of export growth in the past few months with positive impacts on industrial expansion and job creation are a boon for economic stability in the country, and henceforth must be maintained through the continuation of the critical RCET policy.

Copyright Business Recorder, 2021