TEXT: For the last two years Pakistani exports have been growing at the phenomenal rate of 25%. This after a decade of virtual stagnation during the previous government. It is not that the previous government did not want exports to grow, they stagnated due to the exchange rate policy followed by the then finance minister. This government let the value of the rupee to float and allowed the market to set its value. That did the trick.
If exports grow at 25% per annum they will double every three years. So another year of robust growth will see us close the foreign exchange gap substantially, especially if imports normalize. The current deficit has been caused by the surge in imports due to the doubling of fuel, cotton, edible oils and food prices, as well as the huge import of machinery imported with TERF funds.
The question now is; will exports continue to grow at the same pace?
The positive factors are the huge depreciation of the rupee in the last few weeks. This will give a fillip to exports and make imports very expensive. Price, is the most important determinant for the sale of any item. Expensive imported items will be difficult to sell, whether they be petrol, cars, or air conditioners. Imports will begin to drop in volume July August onwards. Prices of most commodities we import are going down as well. The prices of edible oils, cotton and even fuel are coming down from historic highs. This will all lead to a contraction in the foreign exchange deficit.
The negative factors are that competitors of our textile exports are getting back on to their feet. India, Bangladesh and the Far Eastern countries have shaken off the Covid disruption and will want to regain the market share they have lost to us over the last few years. However, because of the massive depreciation of the Pak rupee we will continue to have a price advantage. At the lower end of the quality spectrum, where we sell ourgoods, prices are important.
What is important is that the Government doesn’t choke off the export industry by holding back or delaying sales tax refunds to exporters. There are some signs of that already and refund applications for the month of April are not being paid. In the last two years the IK Government was refunding sales tax promptly and that helped export growth.
Liquidity is a prime issue for exporters and sales tax at 17 percent mounts to 50 mounts of the monthly costs within three months. If sales tax refunds are not paid promptly, the exporters feel the crunch and are unable to operate at full capacity. On top of it all, the cost of all inputs is going up in Rupee terms dramatically. These higher costs are more than fully compensated by the higher revenue, but cotton and fuel, which are almost 50% of costs in the overall textile exports, have gone up in Dollar terms too, so most exporters are stretched. Price of cotton and fuel, in US Dollars have doubled in the last six months. The biggest blow has been the cost of sea freight, which has gone up almost six fold in dollar terms in the last two years. A 40 ft. container to Europe used to cost around 1500 dollars two years ago, today it is 7500 dollars. There is world-wide disruption caused by Covid and the bust followed by a boom in shipping. There is not enough space available on the ships who do dock at Karachi and, unfortunately, there are no Pakistani shipping lines. Export containers pile up at Karachi port for weeks on end waiting for vessels. Exporters get paid only when they load their goods on to the designated vessel, so the cash flow is further stretched. This is a big factor inhibiting exports. The industry experts say that shipping companies are earning a fortune, and are ordering new ships, but it takes years to deliver the super carriers that are now economical. Hence the shipping space shortage will continue for the next two years.
The State Bank of Pakistan (SBP) has maintained a special low rate of interest for exporters under the ERF (Export Refinance) scheme. Exporters were entitled to ERF working capital limits equal to 50% of their annual exports. This was a big boon as the banks were liberally doling out working capital funds under the scheme; until two years ago. The SBP then stated that six months entitlement is too high and should be reduced to a lower figure. They SBP may be right about six months but the fact is that the “Big Boys” got the full six months entitlement but not the small and medium scale manufacturer exporters. Moreover the total amount drawn under the ERF scheme was never 50% of our exports. SBP has frozen the funds available under the scheme for the last two years. Exports have gone up by 25% per annum in dollar terms and even more dramatically in Pak rupees. The ERF is expressed in rupee terms and so if the devaluation effect is factored in, then exports in rupee terms have doubled. If the SBP does not increase the limits of the exporters they will be badly squeezed to maintain current levels of exports leave alone get growth. Government policy should ensure that liquidity moves to fill the requirements of the export sector rather than setting up bigger car assembly plants. The danger is that exports will get choked off due to lack of liquidity rather than lack of orders or profitability.
However, the high rate of the dollar will continue to give a fillip to agricultural and other exports. The high prices of petroleum will bring yet another boom in the Middle East. More construction and more development will cause larger employment and therefore bigger remittances from our workers there. The exchange rate will change the complexion of our agricultural exports. Our farmers will concentrate on the value added products and their exports will grow. So the high rate of the dollar will also diversify our agricultural base into value added fruits and vegetables.
TAHIR JAHANGIR
Copyright Business Recorder, 2022
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