The high depreciation of the rupee against the dollar has made Pakistan even cheaper in labor wages than Bangladesh. Still, the inflation that would follow after the implementation of the mini-budget would make local inputs expensive for the industry.
The increase in petrol rates and regular increases in the central bank policy rates would continue to increase the cost of production of all exporting sectors. The basic textile sector would come under immense pressure if gas and power rates are enhanced. This is not part of the mini budget but is part of conditions imposed by the IMF that wants additional taxes levied, subsidies withdrawn and power and gas tariffs enhanced.
The agreement with the IMF has not yet been finalized. It is unlikely that the current gas and power tariff agreed by the Pakistani government with textile exporters would stand. The IMF has only recently forced the Bangladesh government to increase its gas tariff by 176 percent. The increase in gas or power tariffs particularly hurts the spinners, weavers, and processors in the basic textile sector. The apparel sector consumers with relatively less power and energy would not be impacted much.
But the problem is that the Pakistani apparel sector sources its yarn and fabric from domestic mills. If the cost of yarn and fabric goes up it would impact the cost of apparel as well. The recent liberal bounded facility for the import of inputs meant for exports would force the large apparel exporters to import yarn and fabric in bonded warehouses if the import prices are cheaper. They will feel no impact or one to two percent higher cost because of higher power and energy bills. Those operating on sharp margins would earn even less and would survive.
However, the small exporters and they are in majority cannot afford to maintain a bonded warehouse and stock imported inputs for long. They buy in small quantities on a regular basis from local manufacturers or distributors. Their cost would soar and might make them uncompetitive globally. This would impact exports negatively.
Another problem faced by the exporters is the different gas tariffs in Sindh and Punjab. Would the government succeed in announcing a uniform gas tariff across Pakistan? The tariff could be calculated on the weighted average of domestic and imported gas. This formula would increase the gas tariff in Sindh and decrease it in Punjab from the current level. The power tariff in Pakistan is based on this uniformity principle. The power tariff in Peshawar Electric Supply company where line losses are over 30 percent (hence the cost higher) is the same as in Islamabad Electric Supply Company where the line losses are 9 percent.
The All Pakistan Textile Mills Association-North has urged the government to adopt a uniform price of $7 per million British thermal units (mmBtu), demanding that different gas rates for the export-oriented industrial units of Punjab and Sindh be abolished. Sindh enjoys a cost advantage of at least $575m per year due to the price difference of $5 per mmBtu with export-oriented units based in Punjab.
