Incentive package for exporting sectors widely welcomed

LAHORE: The delayed announcement of incentive package for five exporting sectors, covering 70 percent of the total exports, has been widely welcomed; however, the remaining 30 percent exporters have been left high and dry on the assumption that the cost of doing business has not impacted them.

The package, promised “in days” by the Prime Minister in September 2015, was unveiled 450 days later and covers textiles, leather, footwear, sports goods and carpets.

The sectors ignored included rice, halal meat and engineering, including auto parts, light engineering products and home appliances. Extreme care has been taken to make the package fully compliant with the WTO rules.

The rebates announced relate to the average federal and provincial duties paid on exports goods during manufacturing and packing of exports goods that were not refunded to make exports zero-rated.

This measure would restore, to some extent, the competitiveness of exports. In some cases, the incentives are lucrative enough to encourage both domestic and foreign investment.

The Rs180 billion package worth $1.72 billion is expected not only to arrest decline in exports, but also boost exports in sectors benefitting from this measure.

Implementation of the package as announced is crucial for its success. The past experience has been discouraging. This time; however, there is more transparency as no bureaucracy is involved in the rebate process. The rebate would be automatically created on realisation of export proceeds by the State Bank of Pakistan electronically. The amount would be transferred in the account of beneficiary without interaction with bureaucracy.

There are some concerns, as well. Categories where rebates are six to seven percent may lure exporters to over-invoice their consignments to get more discount. There is a debate as to what would be the quantum of increase in exports in the first six months.

During the first six months, the announced discounts would be available to any export by the five major exporting sectors. Thereafter only those exporters would be eligible for discounts that manage 10 percent increase in exports over the previous year.

The textile sector has been claiming that capacities worth $3.5 billion of exports are not operational due to high cost of doing business.

Now that the competitiveness is restored one expects that at least 66 percent of that capacity would become operational, while it might not be possible to start the rest that has gone sick. This means availability of $2.5 billion export surplus.

Another factor to be taken into account is that the cotton rates are increasing rapidly in global markets. Cotton prices in Pakistan have jumped from Rs5,500/37.5kg to Rs7,000. This will increase the per unit value of all textile export items, as Pakistan’s exports are based exclusively on cotton.

In addition, the garment exports should jump by at least 10 percent in the next six months because of higher discount. All in all, there should be an improvement of $1 to $1.5 billion in textile exports after announcement of these incentives. Since the discount of leather, footwear and sports goods are also high at seven percent, the exports in these categories should also jump by 20 percent (because of lower base). The yarn, bed wear and fabric should also show some increase. All in all the exports in 2016-17b should be $1-2 billion higher than the exports of $19.81 billion achieved in 2015/16.

The government has provided the textile industry a chance to enlarge its product range by allowing imports of all manmade fibres except polyester on zero duty. This will bring balance in the textile mix that currently uses 75 percent cotton and 25 percent manmade fibres in its products.

The global trend is 75 percent manmade fibre blended with 25 percent cotton. The concern that should be addressed is that the discount on yarn and fabric export should be restricted to those that use Pakistani yarns. This would discourage dumping of Indian yarn. Indian yarn imports have reached 72,000 tons per annum that is equivalent to the production of 50 spinning mills of the country.

By ignoring other exporters, the government has ensured that the export sectors base remains narrow for Pakistan. The non-textile and non-traditional exports declined at a rapid pace during the last three years. It has eroded the past efforts to bring more sectors into exports.

Three years ago, textile exports were 51 percent of the total exports now they are 63 percent. The cost of doing business has also increased for non-traditional sectors.