The plight of exporters

Most textile and apparel exporters operate on razor-thin margins, where pricing differentials are in US cents and each faction of a cent matters. In that sellers’ market, any cost point out of line, no matter how fine, makes a lot of difference.

With almost static exports, of manufactured goods, the government is requested to attend to a minimum agenda for giving some breathing space to the export sector. Gas and electricity prices need urgent attention and resolution. High interest rates and stuck-up receivables with the government are the other questions which need plausible answers at the earliest.

A look at the profit and loss statement of a textile exporter would reveal that there are a few items which are directly impacted by the government through administered prices whereas, practically all raw material costs are at market prices, or nearly so. Exporters manage these market challenges. They roll with the punches. Administered prices are a different problem.

As owner and operator of energy utilities, gas and power, the job by the government needs improvement. Actually they need to exit this space. It is not the government’s business to be in these businesses. Just like raw materials, accessories, freight, etc., exporters are ready and willing to pay the market prices for all, including gas and electricity. They can live with the market prices, but not with administered prices laden with explicit and implicit taxes.

Our competitors are not subject to these hidden taxes, cross-subsidies. Some utilities’ prices are almost at twice the prices, in USD, paid by some of our competitors, not to talk of the royal treatment our competing exporters enjoy in their ecosystems. This is something that we cannot even begin to imagine here in Pakistan. Anyway, nobody is asking for that.

In the government’s hand, these twin energy businesses, their inefficiencies and loading of social costs onto their administered prices, have distorted these direct inputs’ costs which in turn have wreaked havoc on the exporters’ cost structure.

For gas, the solution is easy. One rate for the entire nation. No subsidy to the exporters and no cross-subsidy/tax on them. They can live with this regionally competitive market price and the risk. What the government wants to subsidise otherwise or not, it has other ways and means available to achieve those goals. Exporters cannot bear these hidden taxes and still compete internationally.

This gas pricing regime could form the basis of meritocratic gas allocation ensuring gas supply to efficient users like most efficient IPPs. However, the lack of progress in this regard continues to hinder the industry’s competitiveness.

Solution to the draconian electricity prices is a bit more complicated, but it is logical and market based. A blueprint of such a plan - no subsidy, no cross-subsidy, no expropriation, no enhancement in taxpayers’ liabilities - has already been shared with the government.

A demand and supply framework dictates that we must increase sale of electricity to spread the fixed cost, the capacity payment, over a larger base. Besides we must reduce the current capacity cost by having it rescheduled over a longer period. More units sold, bigger denominator and lower post-rescheduled capacity payment will break the back of the fixed cost which is currently at about 66% or so of the total electricity price per Kwh. Finer details are available in the plan. Banks reschedule loans all the time.

SBP’s Policy Rate (PR) at 22% is a big concern for exporters and actually for public finances as well. It is high time that the PR be reduced on forward looking basis and in line with the recent CPI, 11.8% for May, 2024 and the KIBOR which has consistently been trending lower than the PR. it is also time to start normalising and let the market forces govern capital allocation.

Rationalisation of energy prices and aligning of the PR with macroeconomic fundamentals will help recover some lost advantage to the beleaguered exporters whose competitors do not face such abnormal and unjust energy and borrowing costs and are actually facilitated in ways unheard of in Pakistan.

There is more to the exporters’ plight. In addition to prohibitive energy prices and highest-ever interest rates, the government has been sitting on certified Duty Drawback of Local Taxes and Levies (DLTL) etc., payables of PKR 37.7 billion. Some of these amounts go back seven or eight years or more! These are acknowledged amounts.

Additionally, every month, some percentage of the GST and income tax refunds are held back by the FBR, now accumulated into tens of billions more into an ever growing pyramid with the exporters groaning under. The exporters are funding the current expenses of the government. Our Vietnamese competitors do not.

Exporters are sold unreliable power and unreliable gas at prices unheard of in our competing markets. Exporters have to pay for a history of fiscal irresponsibility in terms of highest ever interest rates. Our competitors do not. Their bona fide refunds are denied for years on end. The government then uses other subterfuges to deny exporters their moneys under deferred GST and what not.

We must realise that the world, our competitors and our buyers are not bound by our domestic agendas, price and cost distortions, turmoils and tantrums. We must learn to differentiate between the domestic economics and a free-for-all death match in the international marketplace and must insulate the former from the latter.

Copyright Business Recorder, 2024