A raw material shortfall, exorbitant energy prices, liquidity squeeze, high interest rates, and catering global demand. After a dismal performance during fiscal year 2022-23, is there any hope for textile exports in the new fiscal year?
According to SBP private sector credit data, things might finally start turning a corner for Pakistan’s exporting lifeline sector. After a freefall in bank lending to textile and garment industries over the last 18 months, things might finally start looking up for the industry, as credit offtake has finally begun to plateau in dollar terms.
Regular readers of this section would recall that bank borrowing by the exporting industry plunged with the beginning of CY22 when the State Bank began tightening screws on concessional credit programs, especially after the pegging of (previously fixed) refinance markup rates on working capital loans to Kibor. The foundations of the leveraged export exuberance (that began at the height of pandemic during 2020) came down crashing soon after, with monthly export growth trend bleeding red starting July 2022. Since then, monthly export realization by the textile and garments industries has fallen from a peak of $1.84 billion in June 2022, to under $1.19 billion by June 2023. As per SBP, textile exports have now fallen to their lowest level in 30 months, with no end in sight.
But that may no longer hold true. Also per the central bank, foreign bill discounting by textile and garments industries finally reversed course during June 2023, rising by 12 percent in dollar terms over the preceding month. In fact, of the total $71 million rise in foreign bill discounting during June 2023 by all private sector firms, $62 million (or 86 percent) came from textile and garments businesses alone. This is the first time in 72 months that the dollar value of foreign bill discounting has increased by such a significant quantum, on a month-on-month basis, offering hope that the freefall might be over.
For those uninitiated, foreign bill discounting (or purchase – FBP) is a financing facility offered by banks to their export clients, historically on commercial terms (but since February 2022, also under SBP sponsored refinance rates). Under the facility, exporting firms request financing by selling the outstanding invoices for already fulfilled contracts (i.e. already shipped consignments) to a bank. FBP is receivable discounting or factoring by another name, except that the underlying contract is an export/dollar denominated invoice. Because actual proceeds against the exports made have not been realized, these exports do not reflect under SBP’s periodic export data, at least until the final payment is received and the bank knocks off the outstanding loan against the proceeds received.
Although a rise of $62 million in export bill purchases may not seem much against monthly exports of $1.1 billion by the textile and garments industries, consider that the total stock of FBP financing by the sector stands at $600 million as at June 2023, which is more than half of the monthly exports by the industry. Because exporters cannot advance credit to their foreign buyers for more than six months under SBP’s Prudential Regulations, loan outstanding naturally witnesses periodic/regular turnover, especially considering that once the bill is discounted, the export proceeds are no longer owed to the exporting firm but to the bank. This is no small deal of course, as the banks would cease facilities as soon as the grace period is over (in case proceeds were to turn overdue).
More significantly, bill discounting is finally picking pace after crashing from a peak of a billion dollars in February 2022 to under half a billion by January 2023. The decline was precipitated after Pak Rupee lost its bearings following Pakistan’s suspension of IMF’s program 18 months ago. As a rule, exporters are unwilling to sell their outstanding bills to banks if they foresee significant depreciation in currency value, as they must weigh the benefit of receiving immediate payment through bill discounting against the cost of losing out on exchange gain by just holding on to their outstanding bills a little longer.
A rise in bill discounting could in some part indicate that exporters have finally found some faith, and no longer expect the currency to depreciate significantly in the near term (i.e. six months). This is particularly interesting considering that the country had not signed on IMF’s last minute Standby Arrangement as at the close of business in June 2023, and most commentators were unsure about the macroeconomic outlook till the very end of fiscal year. Thus, the fact that July 2023 has begun with jubilation and certainty viz. currency outlook in near term, the demand for bill discounting by exporting firms should only point upwards (all else held constant).
But that’s of course, just a forecast. It may take another month before it can be definitely concluded that the fortune of exporting industries has turned a corner for good. Here is to hoping.
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