Islamabad, March 22, 2021:Textiles has recently been criticized as a non-performing sector despite conferred with ample ‘subsidies’ from the government. Naveed Qamar has also suggested that subsidies should be given to sectors which are performing, and the Commerce Secretary said that subsidies need to be stabilized. Moreover, it has also been alleged that yarn manufacturers and spinners sell maximum products locally but enjoy the status of an export-oriented industry. The textile sector is also wrongly indicted of presenting ‘fake invoices’ to reap the benefits of subsidies.
These accusations indicate a complete lack of understanding of the Textile Sector and its existing contributions to the economy in the form of investments, employment and exports. This is because:
Firstly, the so-called ‘subsidies’ are actually the cost-of-service including the cross- subsidy the sector is paying.
The implementation of FBR’s FASTER and WeBOC systems ensures invoices are scrutinized digitally without any human involvement. The taxes and processing of refunds are also done automatically after complete verification of transactions. Thus, faking invoices for ‘subsidies’ is highly improbable, given the efficiency of FBR’s portal. The companies in this sector pay their dues in full in a timely manner, and with honesty.
Yarn manufacturers lie at the bottom of the Textile Value Chain feeding raw materials to value-added entities to make exportable products. Spinners are indirect exporters. A quick analysis would reveal that yarn export decreased since larger firms were locally procuring raw material for the export of value-added products – earning precious foreign reserves, reducing import bill, and promoting the domestic industry.
The performance of the Textile Sector has been unprecedented. While other regional economies fell short in exports, there has been an astonishing increase of 18.3% in exports in December 2020, despite the pandemic. The order books are already full, and the sector is operating at full capacity and expanding to meet the enhanced demand. In fact, the increase in production has been such that the sector is short of labor. It is clarified that the sector’s brief dip is not because of incompetence but the non-provision of a level playing field, including factors such as the absence of Regionally Competitive Energy Tariffs (RCET) and a long-term policy, gas moratorium, irregular supply of grid electricity etc. APTMA has been tackling these issues fiercely to ensure export-led sustainable economic growth in Pakistan. The textile sector contributes 60% to Pakistan’s exports, 40% to employment and 40% to banking credit, adding up to 8.5% of the country’s GDP. The sector has endured high manufacturing expenses, recurrent power shortages, high energy costs, and flawed strategies, and yet remained undeterred by the pandemic to
record a 10.79% growth in exports during January 2021, MoM basis. The sector’s performance therefore justifies the RCETs that have been awarded to it.
Given high energy costs, RCETs are a dire need in the textile industry. In the textile sector, energy cost is the leading component in terms of conversion cost. Among all the factors that make the textile sector of Pakistan regionally un-competitive, energy tariff is at the core. Since it makes up around 35-40% of conversion cost in textile, it is pertinent to ensure the availability of energy at regionally competitive tariff rates.
Remarkably, a recent announcement by the State Bank of Pakistan (SBP) declares that out of recent loan applications under temporary economic relief facility (TERF), around 60% came from the textile sector alone. Moreover, the textile sector has experienced approximately $1.60 billion investment during the first half of the current fiscal year. These loan demands for new investment from the textile sector are partially due to competitive energy tariff rates and partially due to concessionary mark-ups.
Lastly, a recent study by Pakistan Institute of Development Economics (PIDE) emphasized the significance of RCETs. The letter stating the same is being attached for reference and the summary of their findings are appended below.
Due to the RCET policy, the textile sector has shown promising growth which is resulting in substantial investment in capacity in up-gradation and new projects.
Energy & power is the leading component of conversion cost, especially in spinning and weaving.
Energy & power cost makes up around 35-40% of conversion cost in textile products, therefore, to keep textile products internationally competitive, availability of regionally competitive energy tariffs is inescapable.
Data collected from listed textile companies indicate that the implementation of the RCET policy has reduced energy costs by 4 percentage points.
Resultantly, both domestic and export sales increased by 14% at the aggregate level from 2017 to 2020. Moreover, the quarterly comparison indicates a 22% increase in sales during the first quarter of 2021 compared to the same quarter of 2020.
The recent surge in investment initiatives by textile industrialists compared to almost stagnant investment growth before the RCET policy discloses the spill-over effects of the RCET policy.
The estimates show that the elasticity of investment to the energy and power is -0.1 1, which means a 10% increase in the energy tariff causes a 1.1% decrease in investment in the textile sector of Pakistan.
The average capital employed is around Rs. 3.8 billion in the listed textile units. Moreover, the analysis also indicates that around 75% of textile units take new investment initiatives when the energy tariffs fall. Therefore, out of 571 textile units, it is expected that 387 units will venture on
Semi-elasticity of employment to the energy and power is around -622. This indicates that a 10% increase in the energy’ tariff makes a firm lay off 62 employees on average. Since the number of textile units is around 521, therefore, a 10% energy tariff increment also brings a loss of 32,302 employment opportunities. Our data also indicate that the average textile units provide employment opportunities for
around 2,303 individuals. Consequently, a 10% increase in the energy tariff takes around 14 textile units at the brink of closing the operations.
Full NEPRA tariff for B3 will mean an increase of 70 percent over the current 9 cents
/ kWh and 100 percent on power generated through in-house gas-based power generation. This policy shift will lead to a near-complete shutdown of the upstream and midstream industry as they will have to compete with duty-free imports which will be significantly cheaper.
To highlights the point that RCET is crucial for the sustainability and functionality of the textile sector, we undertook a simulation exercise. The exercise has been performed on 8 textile products (we maintain that it applies to the entire textile sector) where we remove the competitive energy tariffs and compare the price offered by Pakistan in the international market with regional countries that include Bangladesh, China. and India.
The results indicate that the upstream industry (spinning and weaving) will become regionally uncompetitive in the event of the RCET policy withdrawal. The spinning sector will not only lose international market share but also put domestic sales in jeopardy.
While downstream, although will remain in the competition without RCET rates but lose the price rankings.
The concept of refunds of higher energy costs through DLTL is entirely unworkable given the DTRE & Bond Schemes of Duty-free imports for exports and the fragmented nature of the industry.
In short, the study finds convincing evidence that the electricity tariff above 7.5 cents/kwh is not competitive, particularly within the region. Therefore, the call by the industry for reverting to 7.5 cents/kwh tariff for electricity along with $6.5/mmbtu for Gas/RLNG has legitimate grounds. As these are the prevailing regionally competitive tariffs an increase in these as is being proposed will lead to significant adverse outcomes.