An amalgam of economic distortions, inefficiencies and illogically inflated tariffs is resulting in immense pressure for the export-oriented sectors in Pakistan to remain competitive, and this by default will have grave consequences for our future. It should come as no surprise that livelihood, economic wellbeing, growth and sustainability have a direct link to productive capacity and export potential. Particularly for Pakistan, a vision of export-led growth has recently served as a central agenda point for Prime Minister Imran Khan, and for good reasons. The country's only hope to a sustainable economic future is to harness enhanced exports and investment in the real sectors of the economy, and in the depth of real economic development. The exporting sector must essentially not only be export competitive but also provide import competitive substitution. Textile sector is a perfect example of such a sector which contributes 60 percent to exports and is import competitive. Sadly, sudden shifts in policy continue to hamper expansion and growth of this sector despite the proven capabilities (The snake has truly bitten https://fp.brecorder.com/2019/07/20190702493518/).
One of the root causes of the problems/ issues is that of high energy tariffs. This has an immense bearing on the country's industrial units and mills, and may well take them in either direction rapidly, be it an increase in number, size, modernization or rapid closures across the board with massive unemployment. The latter is what has been predicted of late because of the inconsistent application of policies especially electricity tariffs. This seriously places reservations on the PM's vision for bringing Pakistan out of its long drawn-out economic dilemma. The Prime Minister must appoint a neutral body to investigate and report the factual truth.
Adding fuel to the fire that is a lack of cooperation with the export-led vision, a recent decision by the Ministry of Energy negated the crucial concept of a regionally competitive tariff, when it instructed Discos to charge all add-ons to 7.5 cents, thus increasing the electricity price from Rs 11.70/kwh to Rs 20/Kwh (13 cents) an increase of 71%.As energy constitutes 35% of the conversion cost of products, this has resulted in an increase of 24% in the operating cost of the textile sector, rendering its products uncompetitive in the international markets. Comparative electricity prices from authentic sources puts the industrial electricity tariff at 7 to 8 cents/kwh in India, China and Vietnam, and essentially leaves us far behind in the highly competitive game.
Withdrawal or reinterpretation of already granted and notified regionally competitive energy pricing is disastrous not only in terms of operational costs, but also in terms of the impact it will have on the confidence of businessmen and investors. The textile sector is already investing in new plants and upgradation, with current order books at near full capacity. The need for expansion and modernization is being acutely felt, but with these conditions it seems impossible.
In a phenomenon dangerously similar to what is known as premature deindustrialization, Pakistan will be doomed if it continues along this path will not only reduce the economic growth potential, but will begin to uproot its most dynamic sector, textiles, as well as the other export-oriented sectors, upon which growth is dependent.
In the first half of FY20, the overall increase in Pakistan's exports was limited to 3.1 percent while increase in textile exports has been 4%. Although this might not mean much, a deeper look into the sector's growth by volume shows that high value-added exports such as apparel growing the most rapidly. Even the unit prices, in some cases have shown resurgence, which is impressive and should be seen in terms of its potential.
Textile performance should also be viewed with the perspective of the global economic slowdown which currently prevails. A shift in demand from high-priced apparel to mid-range apparel in the developed countries provides Pakistan with numerous opportunities. During the relevant period in 2019, energy prices for the textile industry were in line with regional prices and this is what allowed impressive gains.
The following figures show a breakdown of recent textile sector growth by volume.
======================================
Product Increase
in Quantity
======================================
Ready Made Garment 32%
Art, Silk & Synthetic Textiles 29%
Yarn other than cotton 19%
Bed wear 12%
Cotton yarn 7%
Knitwear 6%
======================================
A few past policies which aptly prioritized export-led growth produced impressive results, which proved that even a slight degree of facilitation takes the export-oriented sectors forward rapidly. With this in mind, future developments should aim to take exports even higher - not to stop them in their tracks. The commendable work done by the Government and the Commerce Ministry over the last 18 months, which has resulted in a substantial quantitative increase in exports, is likely to be nullified if the Ministry of Energy implements decisions such as the nullification of the all in 7.5 cents/kwh tariff.
Further causing strain on exporting sectors is the decision that charges will also be levied on closed and past transactions. These transactions are over one year old, wherein goods have been made, shipped, sold and accounts have been closed. It should be clear that the industry will not be able to bear these 'illegal' backdated charges, as it is already difficult to grasp the consequences of the 'illegally' imposed tariff hike. The only logical result will be closures, bankruptcies and widespread unemployment.
When studied at a microeconomic level, Pakistan's economy is largely based on an agrarian system, and this factor can be harnessed positively if measures are taken to assist the exporting industries. There is a need for supply chain development which will ensure the quality raw material required for exports. An impediment at any stage of the process disrupts the chain and sullies the vision of export-led growth. If agricultural issues are not attended, it hampers growth of the industry. Likewise, if energy tariffs continue to inflate, it puts pressure on both farmers and mills.
On a macroeconomic level, Pakistan has often seen politicians overloading the economy with substantial debt, and financing shortcomings through external loans as a mechanism to "improve growth and GDP numbers." Alternatively, a reliance on "hot money" has also been seen as a short-term fix which leaves the successive government to combat the delayed and often hazardous outcome.
Nassim Nicholas Taleeb, a contemporary author who spent 2 decades as a risk taker before becoming a full-time essayist, illustrates his concept of success in his book "Skin in the Game." The logic behind this concept is that when decision makers have their skin in the game, they should share the costs and benefits of their ideas with relevant stakeholders in order to make more prudent decisions, as opposed to scenarios whereby one imposes costs on others and escapes retribution, causing more harm in the long-term.
Likewise, the incumbent government is often heard lamenting past decisions and the present risks that have stemmed from them. The current economic conundrum is easily attributed to a person living in dream world, unwilling to take responsibility for past loans, pegging the dollar to Rs 100 to boost national ego, not increasing gas prices for last five years to keep their voters happy, and announcing industrial growth policies with little implementation. As relevant as all these anecdotes may be for Pakistan, how long can we continue to lament the past and search for quick fixes before we actually make any progress in the present? Hot money, foreign loan injections, and IMF bailouts: these are not solutions; rather they are mechanisms to delay an impending crisis.
History and economics dictate that enhancing industrial manufacturing base and increasing exports are the only sustainable economic solution to Pakistan or any other country within an environment like ours. Tackling the persistent BoP problem requires a long-term economic growth strategy that is both sustainable and self-reliant. Prime Minister Imran Khan came into power with an enlightened vision of making Pakistan a progressive nation in its own right.
If no incentive had been granted to the exporting industries, the country may have ended up losing between 20 or 30 per cent of its exports, translating into a further deficit of around $4 to $5 billion to the national exchequer. For the future, this was averted through the energy package given to exporters which now stands withdrawn. In order to avoid increased borrowing, we need to boost exports until the economy becomes stable. These increased exports will not only help to reduce trade deficits, unemployment and the BoP crisis but will also raise living standards. The only road to Pakistan's economic growth and socio-economic upsurge is through fast and all-encompassing industrialization, generating substantial employment opportunities, promoting a conducive business environment through prudent long-term policies, facilitated by conducive business environment.
It is about time we became cognizant of the economic trap that can result from shortsighted policies, one of which would be to the extent of increasing tariffs levied on productive sectors to recover costs of system inefficiencies. The crucial importance of enhanced livelihood and job creation cannot be undermined for a developing country like Pakistan. There needs to be progress - we cannot fall under the umbrella of "developing' countries perpetually. An economically secure Pakistan will lead to a Pakistan having a say in regional & world affairs and innate strength to withstand undue pressures on its principled stances such as Kashmir.
(The views expressed in this article are not necessarily those of the newspaper)
Comments
Comments are closed.