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Squeezed breathing space for industry

December 14, 2015

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THE Sui Northern Gas Pipelines Limited announced last week that it would be cutting gas supplies to the entire industry in Punjab from Wednesday ‘until further notice’.

This did not surprise manufacturers and only added to their frustration and anger against the Nawaz Sharif government.

While textile producers, who annually fetch almost 55pc of the country’s total export earnings, issued a couple of statements warning of “the adverse impact of the gas cut on their cost of doing business, exports and jobs,” the industry appeared to have stoically accepted the decision as fait accompli.

Ironically, the SNGPL’s decision coincided with the release of trade numbers for the first five months of this fiscal, which showed that the country’s exports declined by just under 14pc to $8.54bn from $9.9bn a year ago.

Growing energy shortages and the rising cost of doing business over last several years has not only stalled fresh investment in the manufacturing industry but also spawned bankruptcies.

At least 35 textile factories in Punjab, which houses around 70pc of the production capacity, have already closed down. Some manufacturers sold their factories for a pittance and several others have put their mills on the market as part of their plans to exit textile manufacturing.

Others are struggling to survive as one-third of the total textile and clothing (T&C) production capacity in the province — equivalent to export revenues of $3-3.5bn — has shut down primarily owing to high cost of doing business, claims the All Pakistan Textile Mills Association (Aptma).

A variety of factors — energy crunch, high electricity and gas rates, unpaid tax and other refunds, multiple local, provincial and federal taxes on exports, appreciation of the rupee, import of cheap Indian yarn etc — are responsible for the unprecedented surge in the cost of doing business. This has made Pakistan’s products dearer in the international markets than those of competitors like India, Bangladesh and Vietnam.

Pakistan’s share in the world T&C trade of an estimated $718bn has plunged to 1.7pc from 2.2pc less than a decade ago, with regional rivals capturing a greater market share. Bangladesh’s share has increased from 1.9pc to 3.3pc and India’s went from 3.4pc to 4.7pc during the same period.

“The textile and clothing industry [in Punjab] was getting only 17pc of its gas requirements for producing [cheaper] electricity and running processing mills. Even that has stopped,” says an exporter from Lahore. “By doing so, the government has sent a very bad message to the industry: we don’t care if the industry operates or closes down.”

Manufacturers like Shahid Mazhar argue that the export-oriented large-scale textile industry in Punjab could be saved from total collapse if it is provided continuous power supply at regionally competitive prices or if 24/7 gas supplies for captive power generation are restored for it, like it is in Sindh and Khyber Pakhtunkhwa.

Asghar Ali, chairman of the Faisalabad-based Pakistan Textile Exporters Association (PTEA), says gas cuts will have ‘multi-dimensional’ consequences for the industry.

“This decision will not only lead to production cuts but also put thousands of jobs at stake. At a time when industrial production and exports are declining, the curtailment of gas to factories will leave industrialists with no other option but to shut down their mills.”

An Aptma-Punjab spokesman also voiced similar concerns. “The discontinuation of gas will lead to export and job losses in the province on a bigger scale. At least 200,000 jobs in the textile industry in Punjab have already been lost in the last five years.”

A textile producer from Faisalabad, who asked not to be identified, said the government’s seriousness could be gauged from the fact that it had not announced the relief package it claimed it had put together to restore the viability of the industry.

“Who should we turn to when the prime minister does not fulfil his commitment,” he asked. “The solution to the country’s problems lies in investing in manufacturing and in producing exportable surpluses and not in borrowing from global lenders like the IMF.”

According to the State Bank of Pakistan, the country has been facing a slowdown in industrial growth since 2009.

“The persistent energy shortages, difficult security situation and low investment rate are some of the reasons for this slowdown. Despite low cotton prices (reflecting better crop) in the local market, the production of cotton yarn and cloth saw a slowdown in 2014-15. The domestic industry continues to face multiple constraints, such as delays in the settlement of sales tax refunds and persistent gas shortages, especially in Punjab.

“A further setback came when the depressed external demand held back growth in production,” reads the SBP’s state of the economy report for the last fiscal year.

The report admits that Pakistan could not take advantage of the trade concessions allowed by the EU’s GSP Plus scheme.

“During the initial months following the granting of GSP-Plus, the textile industry successfully expanded its export share in the EU market. However, this came at the expense of other markets (e.g. China and the US). In fact, Pakistani yarn is losing export market in China to India and Vietnam.

“Even in the domestic market, low-cost Indian yarn has been gaining grounds. In fact, Pakistan could not contain its imports of Indian yarn. The industry is, therefore, demanding a higher import duty on yarn imports from India.”

Although the report celebrates an ‘improvement’ in the external sector, it admits a boost in exports is necessary along with foreign direct investment (FDI) to sustain it.

“Two factors are critical for sustaining this stability over a longer time period: exports and FDI. As things stand, exports declined by 3.9pc last fiscal (mainly in quantum), whereas FDI inflows more than halved. In fact, it is the weakness in these two indicators over the past few years that made Pakistan increasingly dependent on external borrowings.

“How to boost these indicators and build servicing capacity against fresh borrowings, therefore, remains our major concern,” the report adds.

In the case of exports, global factors appear predominantly responsible. Many emerging economies are struggling with lower export revenues as depressed commodity prices weigh on nominal export values.

“However, despite this commonness, there are three concerns that are distinct for Pakistan: [First], in the case of other emerging economies, export volumes were mostly unhurt. But [for] Pakistan, exports were pulled down primarily by quantums; this suggests that even if prices had stayed the same as last year, Pakistan’s exports would have declined.

“[Second], Pakistan’s share in world exports has begun to taper from fourth quarter of FY15 onwards. Intuitively, this period has coincided with divergence in the real effective exchange rate (REER) trend between Pakistan and other countries: while the rupee appreciated in real terms during Q4FY15, other Asian currencies posted real depreciations.

“And [third], while the weakening in the euro has made the EU a tough market for almost every exporting country, Pakistan has failed to benefit from the booming US market.

In fact, Pakistan’s exports to the US have actually declined at a time when the US’ overall imports have increased to record-high levels,” the report concludes.

While the SBP report largely confirms the claims of the textile and clothing producers and exporters, it is unclear if the government is prepared to support the distressed industry.

Published in Dawn, Business & Finance weekly, December 14th, 2015