Subsidy on low value-added products to harm exports sector

LAHORE: Pakistan stands no chance of increasing exports as no country has ever accelerated growth in exports by offering subsidy on low value-added products.

Rebate on yarn export announced under the export package and indifference to import of under-invoiced garments will keep apparel industry under pressure. 

The 18-month export package worth Rs180 billion offers four percent straight export rebate on yarn from January to June.

Thereafter, the rebate is subject to 10 percent increase in its exports on yearly basis. The move seems a desperate move taken in haste without evaluating its impact on higher value-added exports. 

Yarn is the basic raw material for weavers, which are also given five percent rebate on fabric export. Fabric is the basic raw material for garmenting and knitting units.

Yarn exporters have to cut rates sometimes to an extent of the announced rebate. In the local market, they, however, maintain higher prices, which mean that the weavers in Pakistan are at disadvantage against their foreign competitors. 

The weavers give up their rebate margin to get higher export orders. However, they charge higher prices for fabric in the domestic market. This places garment and knitwear exporters at a disadvantage against their competitors as they get basic raw material for apparel production at higher price.

The option of importing yarn or fabric has been effectively blocked through not only regular duty but through additional regulatory duty. 

Unfortunately, the garment sector has also been denied domestic market through import of under-invoiced garments. An example in this regard was witnessed almost a year back when a Lahore-based appraiser increased the per unit value of imported garment from $0.33 (or Rs34/piece) to $3.45/piece (or Rs360).

There had been a strong protest from the traders of Shah Alam market Lahore for weeks. The matter was silently settled later on. 

In reality, Pakistan produces low-value added products because making those products is not economically viable in developed and many developing economies. The developed economies have opted out of numerous low value-added products because of higher wages paying which is not feasible for them on low value products. Pakistan’s wages are lower than the developed economy and China as well. Its wages are marginally higher than India and substantially higher than Bangladesh. But if wages are the only criteria then Vietnam should not have challenged textile exporters of Pakistan, India and Bangladesh.

They have increased their textile exports from zero in 2000 to more than $28 billion in 2016.

The other factor is power tariff, which is higher in Pakistan when compared with India and Bangladesh. But, impact of power on input cost is less than 10 percent, which means even 30 percent difference in power rates would have an additional impact of 0.3 percent on the total cost. That should not be much of a problem.

Efficiency of machines can be another problem. In the last 10 years, textile millers from Pakistan hardly invested in new technology. During the same period countries like China, India and Bangladesh kept on investing in both spinning and weaving technologies. These countries were, in fact, the major importers of Pakistani yarn and fabric.

They added new machines that consume 40 percent less power, 60 percent less labour and their speed was two to six times higher than the machines installed in Pakistan.

Now, this really had a multiplier impact on cost. The power rate differential multiplied when power efficient machines were used.

The increased productivity with 1/3rd workforce in practical terms meant that the cost would appreciably come down. This is a reason that even with four percent rebate on yarn and five percent on fabric Pakistan has been booted out of competition.

Yarn and fabric is entering Pakistan despite normal and regulatory duties because it still costs less.

The export package would be a burden on the national exchequer as far as basic textile industry, which needs massive upgrade, is concerned.