Textile refunds — another circular debt?

The textile sector in Pakistan is riddled with problems which include a high cost of production, unreliable supply of utilities and raw material procurement issues. But industry stakeholders put the pending refunds as priority number one.

In a recent interview with Business Recorder, Shahzad Saleem, Chairman of the renowned Nishat Chunian Group highlighted the severity of the problem which has left textile companies in a liquidity crunch. Other industry stakeholders echo this sentiment and give the shut-down of over 100 textile companies as evidence of the liquidity issues due to a failure by successive governments to address these issues.

To give some background context, the previous government gave a host of incentives including duty drawbacks, mark-up support and custom rebates to increase textile exports. Yet, while they looked good on paper, the refunds were never processed in a timely manner and kept on piling- similar to the power sector circular debt.

According to figures obtained by industry resources the pending refunds range from Rs180 billion to Rs260 billion depending on who which industry association one asks. However, out of these Rs100 billion are ready for payment after getting the necessary approvals and these are without any controversy. This figure was also confirmed by the textile ministry officials to this column on condition of anonymity.

So even going by the confirmed number the quantum is huge. The majority are stuck as duty drawbacks which amount to over 30 billion, mark-up support of almost Rs10 billion and custom rebates amounting to roughly Rs10 billion. Some of this amount has been stuck for more than one and a half years now.

In some cases such as the technology up-gradation fund for the textile industry announced in the 2010-14 textile policy and continued in 2014-19, the government owes the industry at least Rs5 billion. These have been pending for several years now.

The other issue is that commercial borrowing has become a lot more expensive given the rising interest rate environment. The State Bank of Pakistan recently raised interest rates by 1.5 percent and the central bank’s policy rate is now 10 percent- the highest in recent memory. This leaves little room for alternative financing when refunds are not processed in a timely manner forcing the smaller textile companies to shut down due to a liquidity crisis.

However, the government has a host of priorities to finance and the twin deficits- fiscal and current have put it in a bind. Be that as it may, the textile sector was assured full support to enable it to increase exports. So if it is a matter of priorities, then where does textile really rank? Not the most urgent one as the delay in processing of refunds shows.

The worrying thing is that these outstanding refunds are only set to increase with the rise in exports. Another circular debt in the making?