Accelerating Investments for Sustained Investment Growth

The much-needed “incentives” by the PTI government for the exporting industry will provide impetus to the country’s exports. Initiatives like subsidising electricity and gas prices for exporting industry and rationalizing import duties on raw materials in an effort to reduce cost of doing business will help certainly render our exports more competitive in the world. However, to sustain increasing exports, huge investments in balancing, modernizing and expansion are required. These will come about with a supportive textile policy and measures some of which are dilated below.

An international GHERZI benchmarking study in 2007 on textile sector of Pakistan in comparison with competing countries India, China, Indonesia, Egypt, Vietnam and Bangladesh, deduced that Pakistan’s textile infrastructure was the most updated and had modern spinning technology in the region. While the findings also indicated that at that time, the Pakistani government incentives were geared towards export of value added products while Indian government incentivized modernization and expansion of plants. Analyzing those policy results today indicates that India, Bangladesh and Vietnam have moved forward many folds due to long-term planning and investment in fundamentals while Pakistan has been unable to achieve any greatness.

Investment and expanding basic infrastructure is critical to growth; Chinese growth model is the most recent miracle that has defied many theoretical economic models. In Pakistan, the last decade was a decade of industrial stagnation and downfall. Over 150 textile mills have shut down in last five years due to low profitability, squeezed margins and liquidity crunch owing to cash flows soaked up by FBR and State Bank in delayed refund/drawbacks. These factors seized the financial streams of textile industry, breeding liquidity jerks compelling export sector to limit production operations and restrict investment in up gradation of units.

Now, with the government’s determination to reduce cost of doing business, businesses will be willing to invest in their manufacturing infrastructures and upgrade their production units since international quality standards to export in developed markets cannot be fully achieved without automation and modernization. Liquidity of industrial base can be enhanced by making timely sales tax refund and schemes like Long-Term Financing Facility (LTFF) and Duty and Tax Remission Scheme (DTRE) available to indirect exporters.

The Long-Term Financing Facility (LTFF) scheme will gain further importance in the days to come. The scheme enables borrowers to avail loans to build their infrastructure or business channels through purchase of required equipment and machinery. Currently, the maximum borrowing limit for a single export oriented unit is Rs 1.5 billion under LTFF and that also is only for machinery excluding building costs which constitute more than 50 percent of costs.

It is time that the LTFF scheme is expanded to the entire value chain of the textile sector to enable a wholesome expansion of the industry for sustained export growth. Further, the maximum limit of Rs 1.5 billion under LTFF should also be increased or removed in full to incentivize exporters to expand their operations and modernize their production units to capture a larger share from the world textile and apparel market. The government’s aim of curtailing trade deficit through export expansion cannot fully materialize until and unless production capacity of exporting items is increased along with efficient production of products meeting international quality standards.

Further, Duty and Tax Remission Scheme (DTRE), a government’s temporary importation scheme which allows traders to import duty-free goods only if they re-export them. The scheme at status quo is only provided to direct exporters to facilitate them in import of raw material required to produce quality export products which should be expanded to indirect exporters as well. It is dogmatic to allow the DTRE scheme to only those exporters, having end-to-end facility to meet the export orders, this curtails growth in manufacturing sector.

Expanding DTRE to indirect exporters will result in surplus raw materials available to direct exporters even locally putting off some of import burden of processed raw materials. This will complement the expanded LTFF scheme as well as reduced production costs, all directing towards one goal of increasing exports exponentially in next five years. The government may come up with a security mechanism to avoid misuse of the scheme.

The growth in the textile sector over the last several years is greatly hampered due to huge amount of GST refunds and rebates stuck with the Ministry of Finance, FBR and State Bank as 20 to 30 percent of the working capital of most of the exports remained stuck in refund cases. This has severely curtailed growth and as a result, many companies have shelved their capacity enhancement projects. Further, many have had to resort to bank borrowing to plug the gap in cash flows.

To develop and implement effective trade policy, it is crucial to understand the constraints on trade and regional competitiveness from the perspective of the sectors engaged in export activities. In Pakistan, trade has not been effectively leveraged to catalyze economic growth, generate employment and bring masses out of poverty. Due to the excessive support of their governments, countries such as Bangladesh, Thailand and Vietnam have moved quite far ahead in the exports even for the sake of comparison.

A coherent policy approach is the right step to sustained export competitiveness and economic growth of Pakistan. Pakistan has a vast potential for economic growth and regional integration owing to our geostrategic position, natural endowments and a bulging youth. All that is required is to have a vision to invest and capitalize in our assets to materialize our desired output. Pakistani textile industry has estimated an untapped exportable surplus of almost $20 billion, which can help reverse trade account deficit.

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