ISLAMABAD: If the incumbent regime does not continue providing a regionally competitive energy tariff (RCEF), Pakistan’s exports would drop by $4-5 billion in the current financial year as compared to last year’s exports.
All Pakistan Textile Mills Association (APTMA) in a letter to Prime Minister Shehbaz Sharif pointed out that as many as 1,600 factories have already been closed down in the wake of distortion in the gas tariff between the textile sector of Punjab and Sindh.
It said that if RCET was not extended to all export sectors across the country, industry would have no option but to close down all operations. This would result in 3-5 million direct job losses, and in the given environment, could also lead to social chaos.
The government had committed to provide RCET tariff of 9 cents/unit for FY22-23; however, this was not being honoured. The Power Division has directed DISCOS to discontinue the 9 cents tariff and instead charge 20 cents/unit starting October 1, 2022.
As a result, widespread dismay, panic, and closure of factories across Pakistan has unfolded, the letter written by APTMA patron-in chief Ejaz Gohar said.
The letter was written ahead of the meeting of the representatives of the export industry with Finance Minister Senator Ishaq Dar.
The letter argued that gas/RLNG being supplied to Punjab was priced at $9 for less than 50 percent of average consumption of mills last year. This formula irrationally excludes the new plants/expansion that have been made during the last 2 years. Gas supply in Punjab was less than 1/3 of the required quantity of 200mmcfd.
In Sindh, gas was being supplied at $3.75/mmbtu (Rs840) and at a quantity meeting 80 percent plus requirements. This was contrary to the commitment that differential in gas/RLNG pricing within the country would be less than $2 to keep industry in Punjab competitive, the letter said.
Punjab-based industry was paying $9/mmbtu for gas and 20 cents/unit for electricity, while industry in Sindh was generating their own electricity at 4 cents/unit.
Given this differential, Punjab-based industries were no longer viable, and they had no option but to close down due to lack of competitiveness.
Regionally competitive tariff determined by the Ministry of Commerce as well as an independent study was 7.4 cents/unit for electricity and $7.4/mmbtu for gas/RLNG.
Looking at the financial situation of the country, the industry has accepted the higher tariff of $9/mmbtu and 9 cents/kwh electricity, but it was not possible to sustain any longer.
“RCET is not a ‘subsidy’ under any interpretation as the RCET tariff is below the actual cost of service when cross subsidies are eliminated,” it read.
The cost of providing RCET has been only 2.6 percent of exports value over the last 3 years. Provision of RCET for maintaining and enhancing exports was the cheapest and most efficient means of enhancing forex availability for a sustainable balance of payments, the APTMA letter said.
Textile export has significantly surged by $7 billion to $19.3 from $12 in the last four years’ time and the textile industry has invested Rs1,000 billion under the TERF scheme for expansion and up-gradation. If the government continues RCET, the industry can utilise its investments and increase textile exports by $5 billion.
Gohar admitted that demand from the west was not up to mark due to recession in the international market and inflation; however, he insisted that to retain Pakistan’s share in the global market and to remain competitive, RCET was essential.
Also, he said exporters were unable to clear goods for up to 2-3 months due to hindrances in the import of essential inputs under Chapter 84 and 85, despite central bank assurances.
The letter also mentioned that working capital requirements have increased by more than a 100 percent due to sharp rupee devaluation, yet working capital facilities have not been enhanced. Adding further injury, sales tax refunds have not been made by FBR since September 13, 2022, while a very significant amount has accumulated as “deferred sales tax”.
This has clearly demonstrated that the payables and refund system in Pakistan was unreliable. The export cycle lasts up to 5-6 months wherein the liquidity of the sector remains tied up in the process of sales tax till refund (6 months).
In FY22, the total amount retained by FBR as sales tax on domestic sales was only Rs50 billion out of the Rs249 billion collected. Approximately, Rs250 billion of the industry remains with the FBR at all times as a result of this collection and refund mechanism.
Industry, therefore, requests the government to restore SRO 1125 and release Rs250 billion to meet the enhanced working capital requirement.