Trade credit: a basic building block for industry—I

Trade credit financing is encouraged globally by regulators as it expands businesses and creates opportunities for new financial technology solutions, upgradation 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 of textiles, at $21 billion dollars.

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-day 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.

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 crore 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 industry 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 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.

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 in to 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.

(To be continued tomorrow)

Copyright Business Recorder, 2022