What are they playing at?
Pakistan’s exports are rapidly declining and within the break-up of national exports the share of the textile exports, which forms nearly two thirds of Pakistan’s total exports, is nose-diving. This development becomes even more worrying read when one further dissects its trend. What we see is that when we compare the period July-December 2016, with the same period in 2015, our value added sector lost heavily, whereas, the exports of raw cotton ironically gained grounds. In essence this means, textile manufacturing in Pakistan is fast losing its competitiveness, factories are closing down and a large number of jobs are being lost – Textiles by nature and especially exports are known for being labour intensive by nature. Further, unlike what the government would like everyone to believe, the reality is that this decrease in our exports neither corresponds to any regional trend nor that to any global trend. During the above-mentioned period in review, Bangladesh, Vietnam and Myanmar actually registered significant increases in their respective textile made-ups exports and textile made-ups per se, in the context of overall global textile trade, increased by nearly 2.40%. Needless to say the problem is at home and not somewhere else.
Anyway after a lot of cajoling and prodding the government finally realised that it had a serious situation on hand and something had to be done – Perhaps a year too late but then, better late than never! Amidst a lot of fanfare, Prime Minister, Nawaz Sharif, announced a textile package on January 09, 2017, allowing a rebate of 4% on yarn & grey fabric, 5% on processed fabric, 6% on made-ups and 7% on carpets, garments, sports & leather goods. In addition, custom duty and sales tax on import of raw material was reduced to zero percent to ease raw material supply side issues; import of manmade fibre, except polyester, was allowed at zero percent; and import of machinery meant for the export industry was also allowed at zero percent. The timing was good in the sense that it was announced virtually at the advent of the Heimtex 2017 – the largest home textile fair in the world – giving the exporters an ideal opportunity to start the year on the right note. However, as the respective notifications and implementation details now begin to unfold the excitement amongst exporters seems to be fading away. This initiative also, like many in the past, seems destined to be a victim bureaucratic negativity and hurdles.
No new revelation that for Pakistan to ever become an exporting tiger it first has to overcome Islamabad’s complete lack of understanding on global exports’ dynamics. Without an integrated industrial and export trade strategy, the dream of high GDP growth will always remain elusive. Sadly, this yet again becomes apparent as the fine details gradually emerge of this textile package. For example, the initial period for giving rebates has been fixed from January 01, 2017 to June 30, 2017, where after only those firms will be allowed this facility that achieve a 10% growth. Notwithstanding the fact that this period has subsequently been reduced by another 15 days (commencement now on January 16, 2017), the issue is that such a linkage totally negates the need of the hour, which for now is not to expect an increase but to primarily arrest the declining trend in our exports; any talk about growth can come later once stabilisation is achieved. Further, how can any company vying for international sales make a break-through in a short period of only 165 days and then also go on to post a 10% growth – And by the way, all this merely on the back of a 4 to 7% rebate? One often wonders: who makes these calculations? Also, one reckons the government has learnt nothing from the previous rebate drawback mechanism’s fiasco or has it! We all know by now that to avoid graft and fake claims, export rebates should always be kept simple: Upon receipt of a foreign exchange payment, the exporter should be directly reimbursed by the State bank through the commercial bank via which the exports were originally routed. This ensures timely payments, transparency, avoids corruption or the burden of unnecessary deductions, and optimises the net effect of the given incentive. Lastly, any fear of artificial foreign exchange inflows to claim excessive rebates – as being feared by a circle of revenue officials – is totally unfounded, simply because the rationale and the math of the entire exercise does not add up.
In short, the government will do well by understanding the true spirit behind providing such facilitation to exporters. A basic back-of-the-envelope calculation is enough to explain how the real winner in this endeavour will always be the government itself. Given the external account woes, this essentially means securing foreign exchange at a cost of between 4 to 7%, as against borrowing from the international market at more than 8%. Also, this cost will only decrease over time while adding to national growth and job creation, whereas, for the open market the cost will only escalate with each successive float/borrowing.
In addition, if these rebates can yield the desired results, it means that the government in essence can access foreign exchange at a comparatively cheaper rate of about 5% and at the same time also address national competitiveness. Calculate the GSP plus package backwards and what it tells you is that even the importers of Pakistani textiles believe that manufacturing in Pakistan at present is un-competitive by close to 15%.
With pressure on foreign exchange outflows likely to increase in the coming months – external debt repayments, firming up oil prices, rising imports and fast increasing profit/dividends repatriation – boosting or at least stabilising exports will be critical in 2017. To ensure that efforts in this regard do not go in vain or simply fall prey to traditional hurdles, the following will be essential: The government to first realise that the main issue that confronts our manufacturing is that of competitiveness (a difference of anywhere between 10% to 15% with regional competitors) and there are only two quick-fix solutions: a) devalue currency by as much or b) to see to it that the support package it has announced practically works by further improving upon it. The writer recommends the following: 5% gradual currency devaluation (by June 2017); extending the applicability of announced rebates to December 30, 2017, and thereafter linking them to a firm’s retention of dollar-based export sales instead of linking to 10% growth in sales (a dollar denomination will in any case mean a minimum 5% increase in rupee exports); all rebates to be directly payable upon receipt of payment by the central bank into exporters’ accounts; and in addition abolishing all line-loss surcharges being unfairly charged to the industry in its power bills.
