INDUSTRY
Huge devaluation of rupee is a blessing for the textile mills using domestic gas for power generation and a disaster for the mills consuming imported liquefied natural gas (LNG) as energy prices account for 35 percent cost of basic textiles.
The textile industry was under pressure for the last five years mainly because of its inability to upgrade technology. The mills in Punjab had the added disadvantage of having access to expensive imported gas. Under the 18th amendment the provinces producing gas reserve the first right to its use. Punjab’s natural gas production is not significant.
The structure of the textile industry is also skewed as 70 percent of the textiles are located in Punjab and the rest in other three provinces. This means 30 percent of the textile industry has access to cheap energy, while 70 percent has to use highly expensive imported energy. Normally the exports tend to increase for a while after devaluation. This time around the industries based in Sindh, Khyber Pakhtunkhwa (KPK) and Balochistan are likely to register high sales both at home as well as overseas. The devaluation has adequately addressed their inefficiencies. They are now in a position to remain competitive even with obsolete technology.
The 70 percent industry located in Punjab has lost almost all the advantage provided by massive devaluation. The price of imported gas is based on the global rates of crude oil. As the crude oil prices surged so did the price of imported gas. Devaluation is an added and almost unbearable factor that has increased the imported gas prices. The industries in Punjab would be out-bidden by the industries based in other provinces in the domestic market. They may be able to retain some export markets after the devaluation but if Pakistani exporters from other provinces challenged them in prices they would have to quit the foreign market for them.
It is now interesting to see how the textile entrepreneurs react to the new situation that is to their advantage both in local and export markets. If they go all-out for exports then there would be nothing left for the domestic market. But if they preferred domestic market the Punjab based industries would be left with foreign markets only. It is pertinent to note that Pakistan exports only 25 percent of its yarn and fabric. So even if the mills based in Punjab got access to export markets they may not survive without substantial access to domestic market.
The scenario at the value-added level is also very interesting. This sector either buys yarn from spinners to convert it into fabric of its choice through registered or unregistered weavers, or they import yarn or fabric under duty tax remission for exporters (DTRE) scheme. After prolonged crisis in the basic textile sector many apparel exporters took advantage of the DTRE scheme. However after massive devaluation of rupee the import of these inputs has become too expensive. They would now prefer to buy from the local market. The domestic basic textile players outside Pakistan would now be able to recapture the markets they lost to imports. But the spinners and weavers would get orders only after the mills from other provinces exhaust their capacities. In other words the textile industry has been truncated after massive devaluation creating clear winners and losers.
The situation created by devaluation will prove to be a short-lived honeymoon for the mills outside Punjab unless they improve their efficiencies up to global level. For Punjab mills that have upgraded technology may barely survive, while rest would be forced to go out of business unless the state comes out with a prudent plan.
One solution to this problem is to come out with the average weighted price of imported and domestic gas as has been done in the case of electricity.
This move would be strongly opposed by the entrepreneurs outside Punjab. This step may reduce gas prices for Punjab substantially but the increase in gas rates outside would also be very taxing. This measure after the huge devaluation may in fact also make mills in other three provinces uncompetitive.
There is another alternative that is easier and does not hurt the rights of other provinces. For this the government will have to revisit the priorities under which the system gas is distributed in Punjab. Punjab still gets about 1100mmcfd system gas from other provinces. The first priority is the domestic consumers, while the industry is the third priority. There is less gas available in the system and the third-priority consumers hardly get any gas. The exporting industry fulfills its gas needs from expensive imported re-gasified liquefied natural gas (RLNG).
A study of system gas supplies in Punjab reveals that 60mmcfd gas is supplied daily to commercial users out of which high gas consumers consume 30mmcfd. Moreover, 65mmcfd is provided to general industry in the province. The state should take a bold decision and divert this 95mmcfd gas to the five exporting sectors. The availability of system gas would restore the viability of the exporting industries both in domestic and export markets. Some vested interests would oppose it strongly but the alternative is to close down 70 percent textile industry of the country.
This diversion of cheap domestic gas would provide level-playing field to entire textile chain of Pakistan. However, as already pointed out, this relief would not last long as efficient productivity is linked to the upgrade of technology. The modern spindles for instance consume 60 percent less energy, produce more yarn/hour and need 2-3 times less manpower than obsolete spindles operating in Pakistan. The textile sector would then be able market its products at most competitive rates both in the domestic and global markets. The government should warn the entrepreneurs that after temporary restoration of their viability they would have to upgrade their machines.
The authorities should set a deadline after which the system gas supplies to inefficient industries would be suspended. With upgraded technology the industries would be able to fulfill their needs with only 40 percent of the gas that they are getting now. Pakistan’s textile exports would multiply only from efficient technologies. The industry size could double without increasing the power supplies.
The writer is a staff member