Textile Exports Facing Quadruple Whammy

Textile Exports Facing Quadruple Whammy

The export bonanza of the previous two fiscal years must now be said goodbye by Pakistan’s textile industry, it seems beyond question. Textile exports first broke the $13 billion barrier in FY21, rising to $18.5 billion by FY22, but are now expected to fall back below $17.5 billion during the current year, with only a small chance of slipping even lower.

It’s said that tragedies tend to happen in threes. And it appears that’s exactly what’s happened to textile exports. The first blow to exporter profitability came from the global economy’s sluggish recovery following Covid, which drove cotton prices to an 11-year high on the international market. Then the 2022 monsoon floods occurred, which resulted in a 55 percent decrease below the target in the nation’s cotton production. Later came the dollar liquidity crisis, which made imports both prohibitively expensive and inaccessible. Finally, the price of cotton has drastically dropped worldwide, falling by 40% from its peak levels just nine months ago. That will also not be good for Pakistan’s exporters.

Why? According to estimates from the Pakistan Central Cotton Committee, Pakistan Cotton Ginners Association, APTMA, and USDA, the milling segment processes anywhere between 12 and 14 million bales (each weighing 170 kg) annually, if cotton consumption over the past ten years is used as a proxy. With carryover and imports included, the amount of cotton available on the local market this year may not even come close to 12 million bales. Although cotton prices in many competing exporting markets have fallen in recent months in local currency terms, Pakistan’s currency has depreciated by up to 25% since September 22 and prices have remained high in rupee terms.

And this confluence of misery has come at a time when the central bank has started to wind down its concessionary financing portfolio to the exporting segment, leading to a decline in working capital loans outstanding to the industry of a third in dollar terms. The cost of working capital borrowing in rupee terms for the exporting industry has increased from an average of 5% a year ago to close to 18% at this time as the screws on the monetary policy have also been tightened. In the meantime, the federal government has also reduced subsidies on energy prices, which have severely hurt upstream industries like spinning and weaving.

Since the industry was able to secure extremely low-cost long-term financing during the pandemic, cashflows may remain positive in the short term and the industry may be able to stay afloat for a little while longer. However, for far too long, Pakistan’s textile industry has survived on a combination of state generosity in the form of concessionary financing, cheap energy, and inexpensive access to raw materials, without investing itself in the upstream value chain, such as increasing the productivity of cotton crop through better seeds and mechanization, ensuring profitability for farmers, or bringing efficiency to ginning operations. The chickens will now finally come home to roost because the state no longer has any money to spare. It might be time to ask whether Pakistan’s textile industry has any comparative advantage in the export market now that it is difficult to obtain capital, energy, labor, or even raw materials at competitive prices.

Reference: brecorder.com

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