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Will Financial Challenges Undermine Pakistan’s GSP Opportunity?

All eyes have been on Pakistan’s progress as an apparel and textile exporter ever since it was granted duty free access to European markets under the Generalized System of Preference Plus (GSP), effective January 1, 2014. However, there remains considerable concern regarding how sufficiently prepared it is to capitalize on the opportunities the coveted trade status brings, given stubbornly persistent economic and governmental dysfunction.

One major source of anxiety has been the idle capacity in the value-added textile sector, which is estimated to be worth as much as Rs 150 billion ($1.5 billion). Many argue that the added capacity could double Pakistan’s exports in as little as three years, from $13 billion to $26 billion. However, the government has been slow to respond to the problem and banks are reluctant to lend to manufacturers who have badly tarnished credit histories. Speaking to the Dawn, one financial insider commented, “The banks have not blacklisted Faisalabad-based groups without a reason. The region’s credit history is far from ideal. Some bankers suspect that loans are taken, not to return them. Why should a bank take such risks when it can get reasonable margins by investing in risk-free Treasury bills.”

However, that same industry expert refrained from placing all the blame on the government’s inertia. The same expert said, “To blame everything on the government [insufficient energy, delay in sales tax refunds, rupee appreciation] or external factors [slump in export market post-2008] is easy, but not convincing. The skills of textile tycoons with families dominating their businesses come in question when companies fail.”

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According to the Pakistan Textile Exporter Association, many of the failing exporters lost significant ground as a result of the global economic downturn, a problem that picked up steam long before Pakistan won GSP status. Some financial experts, however, complain that the State Bank of Pakistan, (SBP) has compounded the difficulty by acting with such halting hesitation. One CEO of a private bank, speaking anonymously to the Dawn, said, “The SBP’s capacity to play the role of an effective institution has been compromised. It failed to address sectoral and geographical distortions in the lending policies of the banking sector. I told current acting SBP governor Wathra to build capacity, desist endorsing interventions of the finance ministry and ensure the banking sector plays its role in reviving the economy by better allocation of peoples’ savings.”

Also, while there has been a substantial increase in private sector bank loans in general–February 2014 saw a rise of nearly 50 percent over last year at the same time–very little of that credit growth has been directed toward the textile industry. This is unusual since most analysts predicted a marked increase of loans to textile manufacturers in the wake of the new GSP status.

However, most of the new loans have been channeled toward food products and beverages or energy needs. As a category, textile borrowing comes in at a distant third as far as credit growth is concerned, with the vast majority of that slated for spinning and weaving. The reason for this might be that those businesses that stand to benefit the most from the GSP–manufacturers in the value-added textile sector–very rarely procure capital financing from banks. This means that, at least from the perspective of capital expansion for textile and apparel manufacturing, there are serious obstacles to capital expansion that could result from the GSP status.

Additionally, the export business in Pakistan has been stymied by the historically aggressive appreciation of the rupee, a boon for investors but problematic for manufacturers. According to financial experts, there is a complex constellation of reasons that accounts for the rising strength of the rupee. The country received foreign direct investment of $523 million dollars from the U.S. in the first seven months of their fiscal year, with $106.9 million in the month of January alone. Also, the Pakistan government expects $550 million from the International Monetary Fund next month. Overall, the country increased its foreign reserves to $9.5 billion. An increase in foreign reserves typically functions as an anti-inflationary measure.

Undoubtedly, the appreciation of the rupee has been supported by several government measures; a prohibition of the importation of gold certainly boosted the currency’s value. And now a tempestuous debate has erupted over the nature of Pakistan’s newly interventionist monetary policy and the disparate ways the rupee’s rise will affect different compartments of the economy.

While the new GSP status doesn’t exclusively impact Pakistan’s textile industry, it should be among the biggest beneficiaries. Bilal Qamar, an analyst at JS Research in Karachi, said, “The domestic textile industry is likely to take the benefit of adding value itself and increase direct exports to the EU after GSP Plus status.” More than 20 percent of Pakistan’s exports will enter the E.U. market’s tariff-free, and more than 70 percent will enjoy dramatically reduced tariffs.

Thirteen textile products are included on the list of those than can be exported duty-free to the twenty-seven members of the E.U., accountable for $231 million worth of goods last year. Some are predicting this will increase Pakistan’s exports to the E.U. by $1 billion. Currently, the E.U. is Pakistan’s primary destination for its textile exports. Overall, Pakistan’s textile exports topped $13.06 billion last fiscal year, including $2.7 billion worth of yarn and $2.5 billion of fabric to Bangladesh, specifically. Pakistan’s exports have grown by approximately 12.5% per year, with a growth of 10.3% to the E.U., in particular. The textile industry accounts for more than 50 percent of the nation’s total exports. While forecasts regarding the full reverberations of the new status for Pakistan vary widely, many predict growth by as much as 100 percent over the next four years.

Despite the progressive growth of its textile industry, Pakistan has had its share of economic troubles. A steep rise in gas and electricity prices will likely consume much of the additional revenue textile exportation produces. The gas tariff for captive power plants has risen by 17.4% and electricity rates for industrial units has skyrocketed 57 percent in recent months. And Pakistan’s stalwart regional competitor, India, is anticipating a big year as well, forecasting $17 billion in textile exports.