Scarcity of funds, economic still waters in Pakistan

Pakistan’s economic performance over the past several decades has been episodic and the prospects for strong, sustainable, and inclusive growth still seem distant. Economic growth has been characterized by boom-and-bust cycles, and the country has not been successful in sustaining its episodes of high growth. The average annual rate of Gross Domestic Product (GDP) growth since 1970 has been 4.7%, but the trend of growth rate has been declining since the mid-1980s. The deceleration in GDP growth has been accompanied by a slowdown in fixed investment, especially public investment, which has borne the brunt of expenditure cuts in attempts to meet fiscal deficit targets. This has negative implications for the productive capacity of the economy.

The country’s last high-growth period was during the 2003–2008 fiscal years (FY), when growth averaged 6.2%. This was followed by a period of low growth, averaging 3.3%, during FY2009–FY2016. After a brief recovery, the economy was under pressure again in FY2019, amid low and declining reserves. One of Pakistan’s most pressing economic issues is the chronic shortage of foreign exchange underscored by an import-based-consumption-driven economy with an abysmal industrial base that cannot compete on the international stage and is shrinking with every passing day. Export growth is the only solution to overcome the economic challenges!

Lowering exports is considered as one of the paramount reasons of widening trade deficit of Pakistan, which has become a long-standing challenge that country is facing since the beginning of the century. During the last two decades, the contribution of exports in GDP has declined from 16 to 10%. If we look at Pakistan’s share in global trade, it has dropped from 0.15% in 2005 to 0.12% in 2021.

Export competitiveness of Pakistan is shrinking, while the competitors like Bangladesh, India, and Vietnam are experiencing expansion in export competitiveness. The stagnancy in Pakistan’s exports brings about a number of challenges like increasing current account deficit, burden of foreign debt, exchange rate, and other macroeconomic problems. Low productivity, weak export competitiveness, lack of value addition & innovation, complex & inefficient incentive mechanism, limited export destinations, and low R&D are the key causes for stagnant exports. During the ongoing economic crisis, quick and rigorous strategies are required to find out the potential markets considering a match with exportable products.

The primary reason, hindering country’s exports, is the scarcity of funds. Factors such as high energy costs, inadequate infrastructure, and complex regulatory procedures has significantly increased the working capital requirements for exporters. This shortage of financial resources is hindering the growth and competitiveness of the export sector, ultimately impacting the country’s overall economic performance. Further, a significant portion of the industry’s working capital is also stuck in refund regime inflicting a severe strain on the industry. Exporters are paying 24% per annum interest on pending refunds and on the other hand working capital requirements have increased substantially because of exchange rate adjustment.

Pakistan is now placed 108th out of 190 economies in the World Bank’s yearly evaluations for ease of doing business.

In FY2022, average exchange rate was Rs.204/$, inflation 12.5%, minimum wage rate Rs25,000, mark-up on financial facilitation schemes 15%, gas tariff $6.50/mmbtu, power tariff was 7.5cents/kWh. At 7.5cents/kWh, energy cost was 12-18% of the total cost. With all these values, textile exports was standing on $19.3bn, because production cost was low.

The depreciation of the Pakistani rupee against other major currencies, such as the US dollar, increases the cost of imported raw materials and machinery for the industry. This directly affects the overall production cost, as the industry heavily relies on imported inputs. Additionally, a higher exchange rate makes it more expensive for local manufacturers to import technology and equipment, hindering the industry’s ability to modernize and remain competitive. The increase in production costs ultimately reduces the industry’s profitability and its ability to compete in the global market.

In FY24, average exchange rate is Rs279, which increases production cost for industries resulting decline in exports. Increase in minimum wages from Rs25,000/- to Rs32,000/-, gas tariff from $6.50/mmbtu to $11.05/mmBtu, power tariff from 7.5cents/kWh to 17 cent/kWh, inflation rate from 12.15% to 27.96% and mark-up rates from 15% in FY22 to 22% in FY24 respectively. Moreover 4-10% Super Tax has further added fuel to the fire.

The lending to the private sector has considerably reduced, creating a challenge for the textile exporters to meet their working capital requirements. In order to provide financing at concessional rates to exporters, Export Finance Scheme (ESF) was launched to enhance exporters’ competitiveness in the global market. This scheme is a far more liberal and facilitative regulatory framework for exports than all other such schemes.

However, certain rules of this scheme are unrealistic, causing problem for the users. EFS scheme should be re-designed expanding its ambit to further support the textile exports. The EFS scheme does not entitle a licensee to procure zero-rated electricity, furnace oil and diesel despite of the fact that the scheme allows import and purchase of coal, furnace oil and diesel for generation of electricity. The supply of electricity needs to be allowed zero-rating under the scheme.

Access to alternate capital avenues is imperative for Pakistani exporters, especially considering the current constraints. With IPOs in Pakistan drying up due to low PE multiples and limited participation from the general public, exporters are left with limited options, primarily relying on commercial banks for working capital. However, even this avenue is constrained due to maximum lending to the public sector. To address this challenge, encouraging the exploration of other avenues for raising capital, particularly in foreign currency is the best option. Financing against future export cash flows through Global Depository Receipts (GDRs) or bonds should be facilitated, providing exporters with additional sources of funding.

Moreover, enabling financing in Chinese Yuan (CNY) would open up new avenues for exporters, leveraging the natural hedge provided by exports. By diversifying capital-raising options, exporters cannot only achieve substantial growth but also contribute to mitigating the current account deficit.

High interest rate has severely impaired the economic activity and have a detrimental effect on industries focused on exports, which ultimately results in the closure of export industries.

Bangladesh is having interest rate 6.5%, India 6.5%, Vietnam 4.5% Maldives 7%, Sri Lanka 11%, while Pakistan has 22% interest rate. As a result, competitors in the textile export industry are able to obtain export refinance facilities at extremely low rates, and Pakistan textile exporters are unable to compete in the global market because their costs are, on average, three times lower than those of Pakistan, which lowers their operating expenses.

Many exporters, especially small and medium-sized enterprises (SMEs), have limited access to credit facilities. Banks and financial institutions may be reluctant to lend to exporters due to perceived risks associated with exporting, such as fluctuating exchange rates or political instability in export destinations.

The existing export financing mechanisms in Pakistan may not be efficient or accessible enough for exporters. Delays in processing loan applications or disbursements can hinder exporters’ ability to take advantage of market opportunities. Some exporters may not be aware of the financing options available to them or how to access them. This lack of awareness can result in missed opportunities for funding.

In conclusion, the limited availability of funds is a significant challenge for textile exporters in Pakistan, hindering their ability to compete globally and realize their full potential. Addressing this issue requires a coordinated effort from the government, financial institutions, and industry stakeholders to develop and implement solutions that enhance more conducive environment for exporters to thrive. To address the issue of limited availability of funds, the government of Pakistan and relevant stakeholders need to take proactive measures. This includes streamlining regulatory procedures, reducing energy costs, and improving access to finance for exporters. The government should increase limit of EFS. Increasing the limits of the EFS can indeed be beneficial for easing the challenges faced by textile exporters. Higher limits would provide exporters with more financial flexibility and support to expand their operations, fulfill larger orders, and navigate economic fluctuations more effectively. This could ultimately contribute to the growth and competitiveness of the textile export industry in Pakistan.