Thin demand pulls textile exports

Shipments of textile goods to overseas markets fall 17% to $1.35b in December

KARACHI:

At a time of increased focus on giving boost to Pakistan’s exports to earn more foreign exchange, the performance of textile sector has remained unimpressive in international markets, where exports of textile goods decreased by 17% year-on-year to $1.35 billion in December 2022.

Lower demand in world market and import restrictions in Pakistan have been blamed for slack performance of textile industry, which has around 50% share in Pakistan’s exports every year.

On a month-on-month basis, textile exports slipped by 6% in December as compared to November. Overall, in first half of financial year 2022-23, exports of textile industry dipped by 7% year-on-year to $8.8 billion.

“Slowdown in global demand and restrictions on import of raw material for textile sector by the State Bank of Pakistan (SBP) were the prime reasons for the fall in textile exports,” commented Tahir Abbas, Head of Research at Arif Habib Limited (AHL).

Besides, delay in export proceeds due to uncertainty about rupee-dollar exchange rate also played a role in reining in exports, he said.

Insight Securities’ textile sector analyst Ali Asif elaborated that textile exports went down primarily due to curbs on opening letters of credit (LCs) for raw material import, gas shortage and slowdown in import orders from European countries amid inventory pile-up.

“We expect Pakistan’s textile exports to remain muted in the coming months amid inflationary pressures and global economic meltdown followed by domestic gas shortages in winter.”

Moreover, a higher working capital requirement will continue to pile pressure on textile players while the clearance of raw material at ports is still awaited owing to the unavailability of foreign exchange.

“Textile exports fell in the wake of looming recession in the West and possible US economic slowdown,” remarked Ahsan Mehanti, CEO of Arif Habib Commodities. “Import of goods meant for value-added textile exports has also dropped.”

Mehanti predicted more challenging times for textile exporters as International Monetary Fund (IMF) had pushed for increasing energy prices and jacking up export refinance rates.

“Dollar unavailability and polyester yarn containers stuck at ports may aggravate the situation,” pointed out Sohail Nisar, Senior Vice Chairman of Pakistan Yarn Merchants Association, and asked the government to waive demurrage and detention charges.

A large number of containers stuffed with imported polyester yarn have been help up at ports and delay in their clearance has caused huge losses to importers. Therefore, Nisar said, for timely supply of raw material to textile industry, yarn containers should be released immediately, and demurrage and detention charges should be waived.

Calling textile industry the backbone of Pakistan’s economy, he said production activities had been disrupted by the unavailability of polyester yarn, a basic raw material.

Insight Securities’ Ali Asif pointed out that textile industry was heavily relying on subsidised financing schemes to meet its working capital needs as its production chain needed around six months before giving final output.

In a recent circular, State Bank further reduced the spread between policy rate and rates for subsidised financing schemes – Export Finance Scheme (EFS) and Long Term Financing Facility (LTFF) – from 5% to 3%, raising rates from 11% to 13% per annum.

Asif recalled that in order to encourage export-oriented industries, SBP had initiated EFS and LTFF in 1993 and 2008 with financing rates of 4% and 6.5%, respectively. However, multiple changes have been made since then and rates stood at 7.5% and 7% in June 2022.

The central bank linked EFS and LTFF rates to its policy rate with a 500-basis-point discount in July 2022, but it further shrank to 300 bps at the end of December 2022. In aggregate, in past 12 months, SBP has increased EFS and LTFF rates by 1,000 bps and 625 bps, respectively.

As of November 2022, aggregate outstanding loans under EFS and LTFF stood at Rs714 billion and Rs648 billion, respectively. Of these, textile sector’s outstanding loans were calculated at Rs469 billion and Rs390 billion.

He voiced fear that higher policy rate could further dent the growth of textile sector, which accounted for 66% and 60% of the total outstanding EFS and LTFF loans, respectively.

Published in The Express Tribune, January 13^th, 2023.

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