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mtgondal · #2 Monday, May 28, 2007

Is the direction of our economy showing alarming trends?
By ADIL MAHMOOD

ARTICLE (May 26 2007): Years 2003 to 2005 were good years for the Pakistani economy. Some say that it was the incoming post 9/11 funds, which gave the economy a boost while others truly believe that the economy was managed well and years of sustained efforts, post 1999, resulted in the average 7+% growth rates in the economy.

To be fair it was both. Unfortunately, we seem to have lost direction somewhere along the line, to have gone from the strong positives of two years ago to a situation which could be disastrous to say the least!

We are heading towards a serious problem in our economy! The first step to solving any problem is to recognise that there is a problem in the first place. Unfortunately, many in power refuse to recognise that there is any problem! For those I have no words but for the others I will attempt to give an overview of the ground reality.

From a relatively comfortable position of holding enough foreign exchange reserves to pay for 9 months imports we can now only pay for 5 months imports and the situation gets worse with each passing day as the export vs. import gap widens.

The rate at which exports are increasing has fallen to 3.36% fetching $13.9 bn, whereas imports continue to gallop ahead at an alarming rate of 8.92% and totalling $24.993 bn during the ten months. At this rate, a report says that our trade deficit should hit a staggering $14 bn this fiscal year.

It goes onto to say that "the more we borrow, the more money we would need in foreign exchange in future to service the debt. Selling the family silver to the foreigners is an option but no sane person would favour such a reckless attitude".

Textiles, whether we like it or not, is our economy's mainstay. With over 66% of export earnings coming from this single sector we cannot afford to ignore this vital sector. It will not be out of place to mention that many considered the Bangladeshi economy like those of the many failed states whereas today, because of textiles alone, that economy is growing, vibrant and progressing in leaps and bounds.

It is critical that in an effort to diversify the economy so as to reduce our reliance on a single sector, we should not do so at the cost of the single most important sector. Causal comments, reported and unreported, from the SBP Governor, the PM's advisor on Finance and others are disturbing indeed when one hears about such people suggesting that the textile industry should "die". Others have reported that the powers that be want to transform our economy into a marketing economy at the cost of the manufacturing industry.

The textile industry has recently been accused of being dependant on handouts and inefficient. One has to reasonably ask how the most efficient industry in Pakistan, that was the Government's blue eyed boy with a $6 bn investment in new textiles, increasing exports, and providing the largest industrial employment etc-etc has now become the untouchable, inefficient and dependant on the kashkol!

What is the reality? Our leading industrial association, APTMA has been facing the wrath of the Government, with the powers that be openly criticising them. So much so that a break away group is proposing to form their own Association of Spinning Mills (APTA), as they feel that APTMA is perceived as having become a rich man's club, whereas the problems of smaller mills and single units are not highlighted.

To add salt to wounds, the few benefits and handouts that have been given by the government have been only to the larger vertical units and downstream industry whereas the base industry, spinning, which is the worst hit is getting squeezed further day by day.

APTA has been after the issue of the government providing an honourable exit strategy to mills who want to wind up their businesses and go and do some other business, where they can get some respect. They say that selling imported juices and imported mobile phones should be better as that seems to be the future of our marketing economy.

The only hesitation for them to close down is that the present banking laws are criminal in nature and whereas, the world over debtors prisons were done away with 200 years ago, the same exist in our one-sided banking laws. Publicly listed limited company's directors can be hauled up to pay for the Company's losses and defaults.

There is no practical form of bankruptcy like the Chapter 11, 13 and 7 bankruptcy laws in the USA. They said that one of their colleagues had his factory stock wiped away in floods 30 years ago and spent the next 20 years fighting the banks after which he got Parkinson disease and died.

The desperation in the textile sector can be gauged by the APTMA spokesman's press statement in the May 17th newspapers, asking for an honourable exit strategy for mills who want to close and wind up their business and basically call it a day!

What has happened in the last two years for such a drastic downturn? We spoke to the first Chairman of the proposed APTA, Mr Adil Mahmood and asked him as to what had changed. He gave us the facts, which we found to be startling. He gave us a list of increases in costs of production within a period of less than two years, which has led to an increase in a spinning mills conversions costs by over 70 to 80% in less than two years!

Wages were increased by 33% on July 1, 2006, petroleum prices increased resulting in increases in transport costs from Rs 18,000 to over Rs 55,000 for an up-country truck resulting in a spiralling increase in costs of incoming raw material and stores and outgoing finished products. Packing materials like polybags, paper cones, lubricants all increased over 80% during this period.

Gas prices for captive power generation units increased from Rs 182 per mmbtu during December 2005 to Rs 264 during July 2006, an increase of 46% in 6 months and over 53% in last one and a half years!

This figure had us bewildered as Bangladesh's gas prices are reportedly around Rs 80 per mmbtu ie their industry gets electricity at one third the cost than what our industry gets it at! One of the main reasons for this disparity is that the industry finances cross subsidy to other sectors like fertiliser and domestic. This rate was recently decreased by 10%.

Adil continued that one of the problems with industrialists is that if they are making money, they want to expand. The textile industry were earning and had the assurance of the government in respect of continuity of policies, so they went ahead and invested over $5 billion in new machinery.

The rates of mark up were 3 to 4% so the risks were thought to be minimal. Lo and behold, within a short period of two years, we are now sitting at close to 15% mark up rates and even at this level, banks are not willing to lend to this now risky sector.

An increase of 400% in two years! Is this continuity of policies? The Government must realise that these increases in costs of production in such a short period of time is not possible for any industry, however efficient, to absorb.

We were further amazed when Adil showed us the details of what support our regional competitors were giving their industry. Bangladesh wages are Rs 1,500 per month, gas prices one third of ours, fuel substantially cheaper than ours, cash rebates of 5% and soon to be 10% on local purchases of raw materials, yarn and fabric.

Imported textile machinery purchases of Bangladesh have been double of Pakistan's despite no local cotton production. Looms purchases, spinning mills have all boomed in the last few years and continue to do so. This is apart from the preferential tariff treatment that their products get into EU. Foreigners feel safe in Bangladesh despite its strikes and roam around freely in hand rickshaws.

India's conversion costs are slightly higher than Pakistan's but more than compensates its industry through a special scheme called TUFFs to fund cheap rate interest to its industry and the most critical of all is its agricultural research and development base.

India's cotton crop has been increasing in quantity by over 20% year on year over the last few years. Such growth in agriculture is phenomenal and a win situation for the entire chain of their textiles. Resultantly India's raw material costs are much lower than Pakistan's. Again, in India, all buyers are willing to travel and stay.

Recently Gherzi, a consultancy firm hired by the Government, submitted its report on Pakistan's competitiveness in which it praised the efficiency of the spinning industry and detailed the subsidies provided by the various Regional Governments including China. The incentives provided by Pakistan to its industry is miniscule compared to that provided by India, China and Bangladesh.

Adil pleaded that costs of production increased beyond comprehension during the last two years, while regional competitors Governments were providing unfair subsidies to their industry, no buyers were willing to travel to our country particularly Karachi and raw material, cotton production, going from 14.5 million bales to 12.3 million was of very bad quality cotton.

He asked me if I had begun to understand why the textile millers were so upset and were highlighting the lack of a continuity of policies. He once again highlighted the fact that now millers were asking for an honourable exit as they had given up hope of the government facing up to reality in the region.

Adil said that he had taken on the task of forming the APTA in order to try and make the government realise the true magnitude of the problem that the mills were facing as many of their members believe that the people in APTMA, speaking to the government, are big groups which can sustain such downturns and in fact are happy, as many weaker single units would close to their delight.

While export of traditional products like footwear, surgical and leather goods and carpets have witnessed a negative growth, during the last couple of years, the focus on and the strategy for promoting exports of textile products also seems to have backfired.

It was known about 10 years before the end of MFA that China and India would be posing a real challenge to the large textile sector of Pakistan but the government and the textile sector failed to make an effective strategy for times to come.

Surprisingly, Bangladesh has also emerged as the main competitor of Pakistan, replacing it from its traditional markets of Europe and America. No serious attention has also been given to the policy framework. Judged by the huge imbalance in the external sector, the Pakistan rupee is overvalued.

Fiscal and monetary policies are still expansionary and attuned to high growth in imports. Factors like shortage of energy and its high cost are also impacting exports adversely.

Clearly, there is an urgent need to reserve the situation otherwise the mismanagement in the external sector would have serious repercussions, such as threat of default on external payments, massive depreciation of the rupee and high inflation. We could only hope that the government would take appropriate measures well in time to narrow the widening gap in the external sector of the country. Conclusively, the country is left with no alternative but to finance its import payments mainly by enhancing its export earnings.