Trade credit: a basic building block for industry—II

Similar to LTFF, the SBP introduced Temporary Economic Refinance Facility (TERF) to sustain economic growth in a post-pandemic scenario. While the textile sector fetched Rs 327 billion through TERF, it was a proactive approach by the sector for a boost in textile exports.

The TERF scheme is available to all sectors, not just exporters, so it can hardly be referred to as a “squeezed” concession by the textile sector. TERF has so far resulted in investment of $5 billion, and more capacity is being added, giving rise to additional production and exports. It is pertinent to mention here that if those plants are not provided with competitive energy, all the benefits of the TERF initiative will be for naught.

Despite the textile sector’s performance and evident benefits to the economy, the sector has been subjected to persistent attacks over the past couple of months. These attacks started with the publication of a misleading Planning Commission Report which provided inaccurate figures of exports to the Prime Minister and were subsequently used to reach misleading conclusions. Even after acknowledging these errors and making a commitment to correct them, the Planning Commission has yet to issue the correction.

Another erroneous argument was provided by the Economic Advisory Group, stating that increases in exports are a result of a favorable exchange rate policy. However, this analysis was based on several fallacies and failed to take into account the large extent of dollarization of the textile economy, which has made it immune to exchange rate fluctuations.

All inputs of Pakistan’s exporting sectors are dollar based, and it has been ensured that they are measured in dollars in order to reduce risks posed by currency volatility. This alone refutes the concept of debilitating exchange rates affecting the trade of the country. A detailed response to these claims can be found in the article Exports and Currency Devaluation: Any Link?

Most recently, an article has falsely attributed the textile sector’s utilization of Export Refinance schemes to “squeezing concessions.” With the onslaught against textile exporters and their use of concessionary finance, it is important to refute the claims on the basis of which these criticisms are being levelled.

Trade credit: a basic building block for industry—I

The article claims that the supply of ERF to many exporters is in excess of what they need. This fails to acknowledge the export growth enabled by ERF as well as the fact that only 16% remains to be repaid. Furthermore, in FY21, Pakistan’s goods and services export growth were aided by three factors: lower interest rate, regionally competitive energy prices, and a lower cost of doing business. While there have been, to a certain degree, supportive policies for the export industry over the past 3 years, this support has given back to the economy manifold, due to the multiplier effect of export growth.

The allegation of arbitrage is baseless; even if it were true, then by that logic textile exports should not have increased by the staggering numbers that they have charted over the last 1.5 years. Furthermore, most exporters actually require working capital and utilize it accordingly. Most exporters are not even large enough to be able to carry out the alleged arbitrage.

The industry is running at full capacity as PTI government has in its 3 years taken measures to rationalize the cost of doing business and enable regional competitiveness, evident from record export growth posted in FY21 and 1HFY22. The most impactful measures have been the strategy and macro vision adopted at the start of the regime in order to grow textile exports. It is owed to the initiative taken by the textile sector to steer positive growth, and this remains predicated on the government’s provision of consistent policy and protection from domestic policy rate changes and energy issues.

Critics refer to the support given to exporters as if it is a zero-sum game leading to opportunity costs for other industries. To the contrary, textile export growth momentum has multiplier effects for the economy at large, allowing for huge reductions in trade deficit and nullifying the need to seek IMF loans.

Rather than obtaining “excess incentives” which are “counterproductive,” all the industry demands are regionally competitive support packages in energy as well as concessionary finance, and even with these the government often backtracks and changes policy, the results of which are immediately evident from losses in exports.

This was recently observed in December 2021 when gas supply to textile sector was cut off and fluctuations in electricity supply were observed, as a result of which about $250 million of textiles exports were lost and can never be regained.

The government’s support schemes to keep Pakistan’s exporters competitive are often incorrectly referred to as subsidies. To the contrary, these are the minimum requirement for the industry to remain at par with regional competitors. Supportive policies that included competitive energy enabled the industry to attract sufficient investment to begin expansion in capacity and technological upgradation.

Without this support, Pakistan’s export-based industry is far from achieving the necessary upgradation and innovation. Systemic inefficiencies, administrative delays, and ever increasing cost of doing business all have contributed to an unsustainable business environment. If textile exports are not supported and new investments are halted, there will be no job creation and an additional $6 billion may need to be borrowed from the IMF at strict conditions.

In order to sustain the economic and political sovereignty of Pakistan, we need to remain focused on export-led growth. Continued attacks on the textile industry seem to be motivated towards adversely affecting its operations, thereby encouraging a decline in investments, low FDI, unemployment and eventually a failing economy.

Moreover, giving credence to such attacks and fallacious arguments is likely to have a catastrophic effect on economic and political sovereignty, serving as a major blow to the PTI government.

(Concluded)

Copyright Business Recorder, 2022