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Breathing space for exporters

Updated January 16, 2017


The Rs180bn stimulus for the five major manufactured goods exports — textiles, leather, sports goods, carpets and surgical instruments — should shore up the country’s dwindling export earnings, reward value-added industries and boost the companies’ profitability.

The Nawaz Sharif government has stitched together the 18-month package to partially compensate exporters of these products — for the steep hike in their costs — through generous cash support and duty and tax waivers on import of raw materials and machinery in order to help them compete globally.

Exporters, particularly the Punjab-based manufacturers, had long been complaining of losing competitiveness in the international market mainly on account of the higher-than-the-region energy prices, a stronger rupee and incidence of multiple domestic taxes. The government had announced similar incentives in the past but did not implement them.

The new initiative commits to provide exporters of five sectors unconditional cash support in the first six months of its announcement, to June 2017. But they will be required to grow their export proceeds by 10pc to become eligible for the rebate during the next fiscal year (July 2017/June 2018).

The sectors eligible for rebates under the stimulus package account for approximately 70pc of the country’s export earnings. The remaining 30pc exports, comprising smaller sectors like engineering goods and agriculture/food products, are not covered under the initiative though the increase in the cost of doing business has affected their competiveness as adversely as the beneficiaries of the package. Nor do the incentives offer anything to encourage diversification of the country’s exports.

The export incentives package had drawn a positive response from all sectors benefiting from it, but the textiles and clothing exporters, who fetched about 58pc of the total export revenues of $20.78bn last financial year, seem to be more bullish than the others because the chunk of the cash subsidy — almost 87pc — will be diverted to them.

“Protection given to the domestic spinning industry will act as an incentive for the spinners to spike their prices at the expense of value-added textile exports”

Unlike similar initiatives announced in the past as part of the federal budget or textile/trade policy, the new stimulus proposes cash support for the entire textile supply chain: 7pc on export of all types of garments, 6pc on home textiles and made-ups, 5pc on fabric, and 4pc for yarn and grey fabric. The removal of import duty and sales tax on cotton will also improve margins of the textile firms that import cotton to make their final products.

“The stimulus is a positive for exports in general and for the textiles and clothing sector in particular. It will significantly push profitability of the textile companies. Increasing exports shouldn’t be an issue,” noted Danish Ali Kazmi, an analyst at the Alfalah Securities.

“The firms operating below their installed capacity now have an opportunity to increase their production and exports to avail the cash subsidy, but the revival of the closed mills will be difficult in the near term because structural issues facing the industry remain in place.”

The expected positive impact of the stimulus notwithstanding, analysts argue, the initiative is at best a temporary measure aimed at arresting further decline in exports in the short-term. It doesn’t contain any long-term policy measures to address the ‘structural’ issues affecting international competitiveness of Pakistan’s exports. Nor does it do anything to eliminate expanding gas price disparity between Sindh and Punjab where factories are being run on expensive LNG.

Overall, the value of Pakistan’s overseas shipments dropped around 17pc to $20.78bn during the last financial year from its peak of $25bn in 2013/2014 owing to surging cost of manufacturing. Textile and clothing shipments have declined by almost 12pc to $12.1bn from the top-line earnings of $13.7bn three years ago. The trend continues to hold.

Commerce Minister Khurram Dastgir is hopeful that the initiative will help push exports by these five sectors to the tune of $2.5bn- $3bn in the next one and a half year. Others aren’t as optimistic as the minister.

“Major textile players are expected to gain significantly from the package and further drop in export earnings is expected to stop, but the incentives are not enough to turn around the entire industry,” insisted Ahmed Lakhani, senior research analyst at J.S. Global.

“Our rivals like Bangladesh, Vietnam and India are much more focused on the development of their textile and clothing exports through their pro-export policies than us. Our industry will take longer and more efforts to turn around as the markets once lost are difficult to recapture.”

Ijaz Khokhar, chairman of the Pakistan Readymade Garments Manufacturers and Exporters Association, said the government had given an ‘attractive export enhancement package’. “It success largely depends on its implementation. There is a lot of trust deficit between the industry and the government. Delays in the release of funds can’t be ruled out dampening the benefits of the package as we have seen in the past.”

He wasn’t very confident about the increase in export of the value-added textile sectors, saying it depended on the availability of yarn to the small- and medium-sized manufacturers at competitive prices. “The government should also have removed 10pc regulatory duty and 5pc sales tax on import of yarn just as it removed duty and sales tax on imported cotton. The protection given to domestic spinning industry will act as an incentive for the spinners to spike their prices at the expense of value-added textile exports.”

Others like former Pakistan Textile Exporters Association chairman Ahmed Kamal are happy over the announcement of the “breather” but argue that the Punjab-based industry will truly benefit from it only when the power prices are brought down to the regional average of $0.07 a unit and the wide gas price differential between Sindh and Punjab is bridged.

“The gas price difference between Sindh and Punjab is a very big issue for us. We have to first compete with Sindh and then with Bangladesh and others. We want competitive uniform energy rates across Pakistan. Unless that happens new investment is unlikely to be made in Punjab.”

Kamal, who is in Germany to participate in a textile show, urged the government to improve the country’s image if it is interested in boosting exports.

“Here at the fair, the international brands like Salisbury and Tesco have refused to buy anything

from Pakistan because of travel advisory. On the one hand we are more expensive than our rivals and on the other we are facing image problem.”

Published in Dawn, Business & Finance weekly, January 16th, 2017