Daily Times

If increasing import numbers are being considered mysterious, a probable U-turn on the upcoming Textile Policy is termed as deadliest for the sector giving more than 50 per cent of exports of the country. Inflation is going double-digit followed by discount rate-making cost of living and doing business more expensive. Everything is related to the Balance of Payment crisis and to secure the last trench of the International Monetary Fund (IMF), the government needs to take harsh steps towards financial legislation. IMF is focused to secure its repayments whereas the government cannot play anymore with the general public and the business community. However, the grant of IMF final trench and positive assessment is related to fetching further loans from other international financial institutions, issuance of bonds and already held Saudi Grant. Control over financial emergencies is also related to government efficiency towards knocking down new variants of Coronavirus while the world may not witness another great global lockdown. The deadly virus has hit the world economy badly where the international commodity market is witnessing inflationary pressure at large.

According to a report, statistics related to imports show some anomalies to be addressed by the government as swelling numbers are giving a very gloomy impression of increasing trade deficit. November 2021 recorded the highest ever import figure which stood around Rs 8 Billion approximately. Half-year current fiscal calendar trade deficit popped up with a dangerous figure of $24.79 billion where imports are increased 63% as compared to the same period of last fiscal year. Though in December 2021 imports recorded less than $1 billion from last month however increasing Trade Deficit and Current Account Deficit i.e. Twin deficits making an overall picture of Pakistan Economy in a problem towards the balance of payments. Government officials suggest that the pace of Export is improving and by end of the current fiscal year exports to increase to $31 billion with Remittance to record at $32 billion. Apart from the increasing inward flow of Dollars, imports are making the economic picture troublesome for Twin Deficits. Imports mainly increased due to 3 most important segments of present times; Oil, Machinery and Vaccine.

Control over financial emergencies is also related to the government efficiency towards knocking down new variants of Coronavirus.

In great global lockdown due to Coronavirus in the year 2020, industrial activities stopped for a longer period which impacted the price of the world’s top useful commodity i.e. petroleum price to crash. Import bills of countries dependent on petroleum products fell considerably in that period till then when world economy started again with great pace to coup up the backlogs. Now the price is the highest ever and impacts these dependent economies including Pakistan. In such a period, the State Bank of Pakistan, in consultation with the government of Pakistan, took some measures and gave support to the business community so that the economy may be kept going. Among such measures control over interest rates, subsidized loan to the construction sector and Temporary Economic Relief Facility (TERF) to import machinery for the industry to impact in years to come if not administered rightfully. Interest rate obliged borrowers to take more loans to make their industries a going concern in such global lockdown and no doubt it worked well during the period where Pakistan was open as compared to neighbours and the momentum is on the go. More activity means more imports if inputs are not available in the country especially for the export segment i.e. cotton bales if we may take textile as a major export segment. Further, through the TERF facility, industries booked a huge amount of machinery from relevant countries for improving their production efficiencies and adding other segments to increase production. Now in the current fiscal year, the payment of such imports is due and it is adding up the import bill. Unavoidable import is related to medical equipment and vaccines for Coronavirus treatment.

It is, however, important to understand that the machinery coming into the country through TERF will improve the production efficiency of related industries. Majorly, the TERF facility is availed by the textile sector, which means that such additions into plant and machinery export would gradually relax the trade deficit in years to come. There is another point of view of the said facility that it is hijacked by the textile industry where almost half of the amount is used by a spinning segment of the said industry, which is not a value-added segment. When another subsidized facility by SBP for the long term loan is available to the textile industry for the import of machinery, why is TERF allowed to the said industry? TERF should be available to startups and for those industries, which can be beneficial to reduce the dependency of the country over imports i.e. industries related to import substitutions. Now, time will tell if the TERF facility allowed to textile is a good idea or not. Still, it is a notable fact that exports will increase as soon as production efficiencies increase. Another segment that disturbed the balance of payment is spare parts and the import of cars. Now the government has taken measures and is making it a little difficult to buy a car. However, the same is negatively impacting over allied industries as margins are reducing.

Recently, the government of Pakistan has drafted Textile Policy 2021-25 where the target is set to double the exports by such period i.e. from $20 Billion to $40Billion. By such time, subsidized loans and energy would be made available to the textile sector, together with duty drawback arrangements. However, the government is backing out of such policy–majorly due to pressure of IMF and securing the last trench from the financial institution–, which is very important to lodge bonds into the international market, loans from other financial institutions and retain already held Saudi loan. According to some reports, the IMF is of the view that subsidized loan facilities by SBP to revoke so that industries may flourish according to market forces naturally without discrimination. It is imperative to mention here that exporters are getting around three per cent all-inclusive loan facility for working capital exigencies against the performance of exports i.e. Export Refinance Facility. For the long term, on around five per cent interest rate exporters are allowed to import machinery i.e. Long Term Finance Facility.

It is also important to note that the discount rate has been increased to 9.75 per cent and is going toward the double-digit to control inflation. The textile industry has, however, posted the highest-ever net profit margins, where major spinning units earned profits in the first quarter of the current fiscal year, which they used to earn in the full year of performance. But, this is considered a one-off phenomenon due to the impact of the lockdown of neighbour countries and the flow of orders towards Pakistan. If these subsidized loans may not be available by the State Bank of Pakistan, textile or other export industries will have to bear the normal rate of borrowing where the interest rate is increasing by each passing day due to inflation. It will double the figure of borrowing cost where profitability margins reduce considerably. Reduced profit margins can compel present export industry segments to invest in diversification, which can slow down the pace of exports in short term. Maybe, in the long term, another segment of export may come forward which is not in limelight presently.

The writer is a Corporate Finance Specialist and a Chartered Banker (UK). He tweets @ syedaliimran75.