Textile millers warn of reversal in export progress

ISLAMABAD: The country’s textile exports have dipped by 16.3 percent in October to $1.34 from $1.60 billion in the same month of the last fiscal year 2021-22.

A host of issues caused this decline, including 100 percent surge in working capital, non-availability of cotton, non-functioning units, stuck cotton consignments at ports on account of dollar shortages, high-interest rates, and non-implementation of the WACOG (weighted average cost of gas).

All Pakistan Textile Mills Association Executive Director Shahid Sattar said currently the industry was in doldrums and the progress in exports made in the last fiscal was under threat of being reversed.

“The industry is facing numerous issues and the mills are already closing. Five million employees will lose their jobs and 30 million people will be affected due to the closure of textile industries,” he said.

Working capital requirements of the export industry have increased by more than a 100 percent due to sharp rupee devaluation yet working capital facilities have not been enhanced. Sales tax refunds have not been made by the Federal Board of Revenue (FBR) since September 13, 2022, while a very significant amount has accumulated as “deferred sales tax”.

“This has clearly demonstrated that the payment and refund system of sales tax in Pakistan cannot be relied upon,” he lamented. 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. “We, therefore, request the government to restore SRO 1125 and release the Rs250 billion of the industry to meet the enhanced working capital requirement,” he demanded.

Over the past 2 years the textile sector, he mentioned, has invested $5 billion (Rs1 trillion) in setting up new factories, some of these were now complete and the others in the process; however, some of the machinery of new plants/expansions was still stuck at ports, as letters of credit were being delayed for spare parts. Also, electricity and gas was not being provided to these new units.

“If remedial action is not taken on non-functionality of this new investment; instead of increasing exports by $5 billion per annum, it will likely to lead to massive banking defaults, and complete loss of investor confidence in future for

any investment in Pakistan with many other negative consequences,” Sattar said.

“We have been writing and holding meetings with Ministry of Commerce and State Bank of Pakistan regarding pending cases of a large number of critical imports of machinery and raw materials.”

SBP has now stated that imports under Chapter 84-85 would be released, but only to direct exporters, while indirect exporters were neglected. This, he said was a matter of grave concern as indirect exporters provide intermediate goods to exporters. “Without these intermediate goods exports are now suffering and will drop significantly over time as this will result in shutting down of mills due to lack of maintenance.”

Sattar said Pakistan's cotton production has dropped by 50 percent from 14 million bales to 6 million bales, inflicting $2 billion/year losses on the textile industry and at least $10 billion to the GDP. Pakistan purchased 3 million cotton bales last year and needs to import at least 5 million bales this fiscal as well due to recent flood damages to the cotton crop. Flood-related losses to the cotton crop are currently estimated at 3.5 million bales, or 36 percent of the anticipated harvest this year. Sattar said that as per the value-added pricing of cotton, total loss were estimated at over $1 billion.

Talking of the high interest rates, he said Pakistan does not have enterprise lending/consumer lending as a major component of its lending profile. Pakistan does not have a mortgage or credit card culture and our consumer product demand was certainly not a derivative of borrowing.

Eighty percent of bank borrowing is done by the government and associated agencies, and the increase in debt servicing from Rs3 trillion to Rs4.8 trillion as a consequence of the increase in interest rates from 7 percent to more than 15 percent has a direct impact on the budget deficit. “This negates any possible impact on curtailment of demand, and consequently a policy of raised interest rates is not suitable for Pakistan,” he opined.

About the significance in the gas pricing mechanism, Sattar said the export sector in Punjab was being provided gas at $9/MMBtu even under the RCET, while households’ basic tariff was $1 and about $2 on average per MMBtu. Similarly, gas prices for fertiliser start from $1/MMBtu, signaling a nontransparent and inefficient subsidy to the agriculture sector.

Gas/RLNG being supplied to Punjab was priced at $9 for less than 50 percent of the average consumption of mills last year.

This formula irrationally excludes the new plants/expansion that have been made during the last 2 years.

Gas/RLNG being supplied to mills in Punjab was less than 1/3 of the required quantity of 200MMCFD. At present gas supply to Sindh export industry was 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

Punjab industry competitive. This huge differential means that Punjab-based industry was paying for gas at $9/MMbtu and electricity at Rs20/unit, while bulk of Sindh industry was generating their own electricity at 4 cents per unit.

“Given this differential, Punjab-based industries are no longer viable and have no option but to close down as they are no longer competitive and available orders are shifting or in process of shifting to the cheaper alternatives internationally and within Pakistan,” the APTMA executive director concluded.