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Export incentives

Published Jan 12, 2017 02:40am


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THE prime minister’s announcement of a package of incentives for textile exporters is perhaps generating more optimism than is warranted. The size of the package, as calculated against the foregone revenue for the government, is large indeed, but it would be a mistake to think that this is money being pumped into the ailing sector. In fact, on closer examination, the package appears to be designed in haste. For one, the textile sector remains internally divided between the spinners and the so-called ‘value added’ sector, comprising garments and other segments, and the impact of the package will be different on each. An export incentive in the form of a 4pc rebate given to spinners, for example, could end up raising the cost of yarn for the value added sector by the same amount, which could inhibit value added exports correspondingly. As in previous such meetings, the spinners’ lobby appears to have carried the day simply by virtue of being the largest. The duty drawback reduction also appears to be built in such a way that the eventual payout, should an exporter meet the target of raising export orders by 10pc from last year, will come in July 2018, by when there is likely to be a caretaker government in power which may or may not honour the terms of the package.

In so many ways, the package betrays a near total absence of thought. Pakistan’s exports have been dropping for 10 consecutive quarters now and if this package is the best thinking the government can come up with to tackle the problem, which is a broad based one and not specific to industry, then it shows the lack of depth in their thinking. All that has happened is that the government has postponed dealing with the core issue raised by exporters: the expedited processing of tax refunds stuck up by granting all other demands that don’t carry a cash payout but have an impact on future revenues. If the thinking going into this package is at all serious, we should see a corresponding set of revenue measures designed to offset the revenue impact of the package, given that the fiscal framework is already coming under serious stress. But simply agreeing to everyone’s demands, so long as the demands involve no cash payout, smacks of expediency more than serious policy thinking.

Published in Dawn January 12th, 2017


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Comments (3) Closed

iqbal Jan 12, 2017 06:53pm

Very unclear about how a cash rebate will raise the cost of yarn for the value added sector. If anything it will help reduce the price of yarn.

Secondly your information is inaccurate on the mechanism of the payout. You claim that the rebate will be determined end of 2018, but the scheme envisions payout regardless of any growth or preconditions across the board for the first 6 months of 2017. If the exporter demonstrates a 5% or more growth during the first 6 months of 2017, then they will be eligible for the full rebate from July 2017 to June 2018.

Asma Tanoli Jan 12, 2017 08:55pm

@iqbal It is simple. If yarn exporters are given subsidy to export, they would not sell it to the loca value-added sector unless they pay them what they can get from exports. Instead of giving this package, the government should have paid all the outstanding rebate claims. Also it could have reduced some import taxes on items which are used in export. It is likely that some countries would impose anti subsidies duty on this incentive and thus the subsidy amount will be paid to the other governments.

Iqbal Jan 12, 2017 11:56pm

@Asma Tanoli most yarn mills are running under capacity and many are closed shut. The rebate will help these mills normalise their margins. Right now they have very little export orders. A healthy spinning and fabric industry is equally essential in rallying up the value added garment sector. Let's also assume that yarn will become dearer for these garment factories. By 4%, which is the amount exports would offer, correct. But yarn cost is about 15% to 20% of the cost of goods for a garment maker. Who in that case will experience less than 1% incremental cost but will gain 7% in rebates for their sales price. Certainly a bargain. The government offer is well drafted and comes at a critical moment when the export industry really needed this support.