The textile exporters in Pakistan are facing difficulties because of the increasing cost of production, erratic government policies, and the worsening doing business environment. The urgent appeal by the exporters for financial assistance in conjunction with overdue changes in energy prices, taxes, export finance and logistics demonstrates the basic contradiction in the economic policy of Pakistan. Despite the emphasis by the government to promote exports to improve foreign exchange reserves and avoid borrowings from abroad, government policies are making it increasingly difficult for the exporters to compete in international market.
The Pakistan Textile Exporters Association has made valid points on the conditions in which the industry has been operating. Another point that needs to be considered is that how the government expects exporters to earn more foreign exchange when important decisions regarding the production and commercial activities are being taken without proper consultations from the business community. The promotion of exports has emerged as a recurring theme in the country’s economic policies. It is absolutely necessary to boost the exports for bringing about improvement in the balance of payments position by reducing the strain on foreign exchange resources and reducing the dependency on international financial institutions. But this can only be done if the exporters are assured that the conditions under which they function will remain stable.
But this is far from being the case in Pakistan. There have been repeated changes in electricity and gas rates, tax structures, financing schemes and other regulatory arrangements without much consideration being given to the implications of such actions for any prior commitments. The international buyers set their prices and terms of agreement several months in advance. The exporters in Pakistan are supposed to keep to these agreements despite any rise in the cost of production.
The most recent meeting organized by the Ministry of Commerce has again drawn attention to all these issues. There were complaints of cross-subsidies incorporated into the industrial electricity rates and objections related to gas prices as well as complaints about the delays in receiving tax rebates. The textile exporters also pointed out the shortcomings in the application of concessional export finance programs and poor railway freight services for the connections of Punjab’s industrial regions with the ports along with increasing shipping costs internationally.
It might seem that individually, these issues are easily solved, but together, they might greatly affect the competitiveness of the export-driven industry. Textile production is a rather competitive sector of international business characterized by narrow profit margins. Small changes in electricity, gas, transport, or financial costs might determine whether the order will be received or not.
Energy pricing is still an important issue since energy supply plays a vital role in manufacturing textiles. The constant change of tariffs and the involvement of cross subsidies makes forecasting expenses difficult for manufacturers. Pakistan’s exporters should also be able to compete with those from other countries which have more stable industrial energy policy. Unless this is taken into account in energy policy, the industry faces a structural problem.
Taxation and financing issues are among those as well. The delay in reimbursement of sales taxes and other money related to exports blocks capital that manufacturers need to buy raw material and to pay wages and to carry out orders. The same applies to concessional loans – if terms announced are not followed, or exporters face unnecessary bureaucratic hurdles when using this opportunity, then no help can be expected from them.
Temporary aid might be required when high domestic costs pose a risk to the existing export linkages and competitiveness of the firms. But such aid needs to be given on the basis of clear eligibility criteria and goals along with its fiscal impact. The government also needs to make sure that the aid is given so that there are tangible benefits in terms of exports rather than being just another recurrent subsidy. This aid should be able to motivate the firms to increase their investments and efficiency levels.
In fact, the textile sector itself realises that short-term help will not provide a sustainable solution. The most important thing that exporters require is an effective and competitive policy environment that would enable them to achieve greater efficiency, use the latest technology, produce diversified products, and place bigger orders from foreign markets.
In addition, consultations between policymakers and exporters should also become a standard procedure in economic decision-making. The producers have better knowledge about the cost of production, foreign consumers, deadlines for deliveries, and competition compared to the government bureaucrats working in administrative agencies.
The government should introduce a system whereby any changes in policies should be negotiated with business organizations before the implementation. Any increases in the costs of energy for industries or changes in the financial and tax systems should include the assessment of their influence on production costs, jobs, and exports. Transitional periods would also facilitate business adjustment to new conditions without violating existing agreements.
It is necessary to make the government departments responsible for inefficiency in their administration leading to extra costs for the exporters. Delays in tax refunds, non-uniform application of the financial schemes and complex bureaucracy procedures are not just inefficient but affect adversely the efficiency and competitiveness of manufacturers. Public services should not be judged only by the policies they have introduced but also by how they implement them.
Logistics infrastructure calls for the same treatment as well. Poor railway cargo connections of industrial regions in Punjab make Pakistan’s exports dependent upon costly transport. Costlier transport will further undermine the competitiveness of Pakistani goods in international markets. Improvement of the efficiency of railway transport, ports and coordination among transport authorities will help to cut down these costs.
It is impossible for Pakistan to sustain economic growth in future without expanding its exports. In this respect, textile exporters have been significant source of employment and economic activity and also earn valuable foreign exchange for Pakistan. Therefore, their concerns must be taken seriously by the government when formulating national economic policies.
In reality, the government has to understand the fact that export competitiveness will not come by making announcements or offering temporary financial inducements. Export competitiveness is dependent on availability of cheap energy, sound tax structure, easy access to financing, efficient logistics and consistent rules. It will not be possible to ask exporters to bear the brunt of policy inconsistency while demanding better export performance from them. Pakistan will have to first develop an atmosphere where business can prosper and compete.