Budget FY22: perspective of the textile sector – Opinion

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The federal budget for fiscal year 22 was announced on June 11, 2021. The new economic team has therefore set itself objectives for the next two years, with an agenda characterized by two points: (i) inflation and (ii ) income generation to finance social programs for the masses. Of current spending, the bulk of 72.34% will be spent on general public services which include debt repayment, pensions, salaries and benefits, among others.

Textile exports have served as the mainstay of the economy, accounting for the majority of Pakistan’s total exports and generating a substantial amount of income in the form of taxes and foreign exchange for the balance of payments. The TERF regime led to a substantial increase in investment levels at a time when capacity was already full, presenting a golden opportunity for expansion. In the sector’s recent leap towards capacity development, government policy support is expected to play a critical role, as it is imperative to support textiles in order to achieve sustainable export-led economic growth.

The government has, despite the challenges, successfully shifted from “recovery to stabilization to sustainable growth” (PIDE). Although it remains necessary to continue these efforts for sustained long-term growth, debt indicators are generally improving as the current ratio of public debt to GDP remains at the current level and the service ratio remains unchanged. debt to income shows a downward trajectory. . The government aims to support these trends, notably through revenue mobilization, and supporting export-oriented sectors is a very effective method of achieving this.

There are several bright spots in this budget, especially with regard to the continued import of duty-free cotton, concessional financing under the Long Term Finance Facility (LTFF) and the financing program. of exports (EFS), and the entry of retailers into the tax bracket. However, like every year, the budget leaves several pressing issues unanswered, particularly those aspects that may harm Pakistan’s export-oriented sectors. Export sectors have the capacity to pull Pakistan out of its debt cycle, and helping them stay profitable and productive should be one of the government’s main concerns. Yet tariffs, sales tax, energy and logistics issues continue to create barriers for these sectors, contributing to an anti-export bias that has kept Pakistan behind its regional competitors in exports.

First of all, the unfavorable evolution of tariffs on the Polyester / MMF value chain is worrying. The articles directly concerned are those which involve polyester yarns and acrylic yarns. In the case of polyester yarn 5509.2200 / 2100, where the applicable duty was 11% + 2% ADD + 2%, a total of 15% RD, this has now been reduced to 10 + 2 for a total of 12 %, while the duty on PSF remains at 7% despite repeated submissions and reports from the textile industry on the negative impact of continued protection. There are also anti-dumping duties of up to 12%, which makes matters worse. With these rights in place, Pakistan’s already uncompetitive textile sector will face additional stress. Meanwhile, in the case of acrylic yarns 5509.3100 / 3200 produced with acrylic staple fibers, the duty is proposed at 0%, which goes against the basic principle of the cascade that the difference in duty must be at least 5%.

The sales tax rate has been raised to 17% from 10% on both cotton and importation of machinery and installations. This increase will unnecessarily increase the amount of working capital required for operations and increase the capital cost of new projects. The point to note about the cotton sales tax is that the refund can only be made on consumption while the cotton has to be purchased in bulk, thus locking up working capital for a long time. The increase in sales tax on plant and machinery increases the cost of installing new facilities as the sales tax refund cycle will have to wait for business operations which in some cases will last for many years. The rebate of sales tax on the importation of plant and machinery by business units is still not streamlined despite the passage of 2 years, as the Faster system rejects any claim above an arbitrary percentage that does not does not take into account extremely high claims in a given month due to machinery imports. These changes in the sales tax regime will have a negative impact on new investments in the sector as funds that could have been spent on factories and machinery will be unnecessarily blocked. The feasibility of new projects in particular will be strongly impacted.

Going forward, a fundamental concern is the need for regionally competitive energy prices / tariffs. Our country’s energy tariffs have not been commensurate with the prevailing tariffs in the region, as shown in the table below:

=========================================================================================
Regional Energy Tariffs
=========================================================================================
Region                   Electricity Tariff (Cents / kwh        Gas/RLNG Tariff ($/ mmbtu
-----------------------------------------------------------------------------------------
Pakistan                 9                                      Sindh                 5.9
                                                                General               6.5
-----------------------------------------------------------------------------------------
Bangladesh               9                                      4.05
-----------------------------------------------------------------------------------------
India                    Maharashtra        7.8                 4.06
-----------------------------------------------------------------------------------------
                         Punjab             7.1
-----------------------------------------------------------------------------------------
Vietnam                  7.3                                  The PM has the authority to
                                                              decide which project is
                                                              charged what tariff rates
=========================================================================================
Source: Calculation based on World Integrated Trade Solution (WITS) database.

Despite an unreliable energy supply and higher tariffs, the textile sector operated at full capacity and received increased orders, leading to the re-launch of non-operational units and the creation of new jobs. Textiles have been a strong support for the economy, but the profitability of the industry is hampered by illogical energy tariff hikes and policies. The export oriented sector has repeatedly given detailed reasons for providing a fixed electricity tariff of 7.5 cents / KWh and $ 6.5 per MMbtu for RLNG / gas across the value chain in order to ensure competitive export prices. Competitor countries are already ready to fight against very competitive market conditions thanks to cheaper electricity and gas prices. Energy accounts for 35% of conversion costs in the textile value chain and therefore competitive pricing of exports is very sensitive to energy pricing. Therefore, the provision of regionally competitive energy prices is essential, and any deviation from these prices will derail export targets.

Regionally competitive energy tariff allocation and domestic tariff differential is less than required – Rs. 64 billion needed according to Energy Ministry estimates. The allocation for the electricity differential is Rs. 21 billion while the estimated differential at $ 9 per KWh will be Rs. 40 billion. In addition, the allowance for the gas differential is Rs. 10 billion while the estimate at current LNG tariffs is Rs. 29 billion. It can be clarified that these two allocations are indicative and that any deficit, it is assumed, will be filled by additional subsidies. Therefore, the continued supply of gas to the textile industry can be ensured for the sector to support production to meet the target of more than $ 20 billion in exports next fiscal year.

The International Monetary Fund (IMF) has kept the Pakistani economy in a straitjacket and our exports remain limited to intermediate goods, while we remain importers of petroleum, edible oil, tea, pulses, machinery, raw materials. and even knowledge. Right now, remittances are our saving grace when it comes to foreign debt. It is essential to support exporting industries in order to fight sustainably against foreign debt and to enable growth through the diversification of our export portfolio, expansion towards added value with higher added value and investment in capital. human to make Pakistan competitive in today’s knowledge economy.

Given the rapid expansion undertaken by the textile sector, where the industry is on track to meet the target of $ 20 billion next year, it is crucial to recognize that this is a substantial increase from $ 5 billion to $ 6 billion. Such an increase will be accompanied by a pressing increase in the working capital requirement. The production line takes about 6 months to export, and without simultaneously increasing working capital to keep pace with the demands of an expanding industry, the progress of the industry will stop. The most effective way to ensure that working capital needs are met may be to cut the GST rate in half, or better yet, to restore the rate to zero. This will be a defining step in Pakistan’s journey to meet and exceed the export target set for fiscal years 2021-22 and 2022-23.

Copyright Business Recorder, 2021



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