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SOON after coming into power, the government has been faced with a stubborn conundrum. Exports have been declining consistently, in spite of Pakistan receiving GSP Plus status from the European Union. Textile exports make up slightly half of our total exports, so clearly the focus fell on this sector to try and understand what is going wrong.
Until June 2014, the main problem was slow growth of textile exports. But in the year ended June 2015, the sector’s exports actually went down, albeit marginally, but where the country’s balance of payments is concerned with the outside world, negative growth in exports of the largest category is clearly an alarming problem. Then the latest data, covering the period from July to September of the current year, showed a continuing decline of almost 5pc from the same period last year. The government had a problem on its hands.
Even for the last year, which showed marginal increases in textile exports, there is an important caveat to bear in mind. Sometime in late 2013, when export proceeds were not coming in at the rate the government expected, Finance Minister Ishaq Dar adopted a harsh tone towards exporters, saying he expected them to remit their dollars back to Pakistan expeditiously or face the consequences because, as he warned, the rupee was about to fall and they would suffer losses if they held out bringing their export proceeds back.
Then in February, a grant from Saudi Arabia arrived, totalling $1.5 billion. The rupee immediately rose from Rs105 to Rs97 to a dollar. What happened was that exporters panicked at the sight of a large windfall of dollars arriving in the government’s coffers, and expecting that these to be sold in the market to bring the currency down, stampeded into bringing their funds back and converting them into rupees quickly. The stampede itself caused the currency to rise, without any intervention from the government. Dar had delivered on his threat, and everybody took him seriously after that. The stampede back then played a role in boosting the export figures of that fiscal year.
The clout that APTMA wields over the government grows out of its unity. It allows spinners to make credible deals with the finance minister.
In its next quarterly report, the State Bank pointed to the rupee’s newfound strength, but added the caveat that it was easy to achieve but harder to sustain. In the months that followed, its analysis was borne out, with the rupee falling to near Rs102 to a dollar, where it has remained ever since. Nevertheless, by most independent estimates, this value is also higher than what it should be, given Pakistan’s competitiveness in global markets.
This was Dar’s muscular moment, but sadly (for him) it was to be a short-lived one. The costs of that gambit came in the form of declining exports, and today the government finds itself in the same position that the Musharraf regime was around 2004, when its continuing commitment to a stable exchange rate created disaffection amongst exporters, who had to be compensated through other means.
For Musharraf, that compensation ultimately came in the form of tax relief, telling textile and leather and other exporters that in exchange for the acquiescence to the exchange rate, his regime would issue a circular zero rating the tax to be levied on their industry in certain categories. In short, he gave through tax concessions what he took from them through the exchange rate.
Dar has no such luxury, unfortunately (for him). The ability to use the tax base of the country as a bargaining chip is now far smaller than it was back in the heyday of the Musharraf regime. So either he gives ground on the exchange rate, which will anger the trader lobby further still, or he bargains on other turf.
This week he did just that, he bargained on other turf, and ran into another problem. The textile lobby is divided, and in the matter of regulatory duties and the like, it has opposing interests. Of the $13.5bn of textile exports that Pakistan had last year, almost 32pc came from spinning and cotton cloth. Of the remaining two-thirds, the bulk was accounted for by knitwear, bed-wear and readymade garments, the so-called value-added industries.
These two categories — spinners vs so-called value-added industries — have opposing interests because the former want yarn prices to be high and the latter want them to be low. But the spinners have a far more cohesive leadership, which unites them all under the umbrella of the All Pakistan Textile Mills Association (APTMA), whereas the latter are divided under many fractious groupings along regional lines, as well as industry.
With their united clout, the spinners are able to carry the day with the government. On many occasions in the past, the spinners and value-added sectors have sparred over yarn prices, with the latter urging a ban on exports and freer imports of cotton yarn from India over the Wagah border, while spinners argued for letting the market set the prices.
This time the reverse happened. The spinners asked for a regulatory duty on imports of yarn while the value-added sector asked for increasing yarn imports to push down the price. The spinners prevailed as they did in the past.
The clout that APTMA wields over government grows out of its unity. It allows spinners to make credible deals with the finance minister, who is interested in two things primarily: revenues and reserves. The gambit that is presented to the exporter community, led by the textile sector is simply this: whoever can assure higher inflows of foreign exchange and higher revenues to meet quarterly targets gets to have his way. The spinners can do this far more credibly than the others because they have a larger membership under a more cohesive base. Until the value-added sectors sort out their leadership issues, they will continue finding themselves on the losing end of any bargains struck between the state and the textile lobby.
The writer is a member of staff.
Twitter: @khurramhusain
Published in Dawn, October 22nd, 2015
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