Critical importance of competitive energy prices throughout the textile value chain – Opinion


Pakistan’s textile sector is of immense importance to the economy, as evidenced by its contribution to the country’s GDP as its largest manufacturing and exporting sector. The sector grew 27% in the first quarter of FY22 compared to the same period last year, and is experiencing impressive levels of expansion. After a period of 13 years, there has been $ 5 billion of investment across the entire textile value chain, including spinning, weaving, finishing, processing and garments. The introduction of pro-export policies by the government in recent times has allowed unprecedented growth in the sector. It is important to note that the cost of energy is the first component of the sector in terms of conversion cost, accounting for around 35 to 40%. Going forward, continuing to provide energy at regionally competitive prices is essential for the country’s long-term economic stability and GDP growth.

As the Pakistani economy moves towards sustainable growth, it is essential that export-led growth becomes the cornerstone of government policy. An economic growth rate of 7-8% has been deemed necessary over the next 30 years to meet the needs of our growing population, and with over 100 new textile units created across the country, this goal appears achievable. The new investments have a central role in the expansion of the sector and will serve as a scale for economic growth, generating 500,000 new job opportunities along the way. However, it all depends on the future of energy tariffs. Numerous studies have shown that an electricity tariff above 9 cents / kwh is not competitive at the regional level and that the industrial demand for the supply of electricity at 9 cents / kwh and gas / RLNG at 6.5 $ / MMBtu is unassailable.

The main factors of production in textiles, besides capital, are raw materials (i.e. cotton), energy and labor. In terms of processing cost (where the cost of raw material is subtracted from the total cost of production), the cost of energy is the main component, especially in spinning and weaving. Due to the intense competition between regional countries, a minor cost difference in relative terms leads to an exponential impact on the international market.

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Cross-Country Comparison of Conversion Cost
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                                   Pakistan                                       India                                     Bangladesh
                      Power          Wages      Depreciation       Power         Wages &     Depreciation       Power         Wages &      Depreciation
                     & Fuel       & Salaries                      & Fuel        Salaries                       & Fuel        Salaries
=======================================================================================================================================================
Average
(2017-20)             34.6           29.3           10.3           29.8           28.0           16.0           25.5           33.8                18.0
2017                  36.1           29.9           10.0           26.9           26.6           16.5           26.9           33.0                17.5
2018                  36.4           29.3           10.1           30.6           27.1           14.8           24.4           29.8                15.8
2019                  33.6           29.4            9.6           31.2           30.8           16.4           26.0           35.8                18.4
2020                  32.8           28.7           11.8           30.4           27.6           16.3           25.0           37.1                20.9
=======================================================================================================================================================
Source: PIDE

The cross-country comparison of the conversion cost in the table above shows that textile units in Pakistan incur electricity and energy costs 2.4 percentage points higher than in India and 7.8 percentage points more than in Bangladesh. This shows that the ideal regional competitive electricity rate would be around 7.4 cents / kWh. The industry currently demands that the tariff not exceed 9 cents / kWh, as any increase would have disastrous consequences for exports.

The textile sector is currently expanding, where it needs unwavering support to maintain its growth, so the sustained delivery of a supporting energy package will have long-term benefits for the whole economy. In the unwanted case of replacing competitive energy tariffs with DLTL, which has been proposed in the past, 80% of the textile industry would end up having to pay electricity tariffs at 14 cents / kwh, thus rendering all exports unaffected. competitive. The exit price will also be uncompetitive; any unit down the value chain will prefer imported inputs to expensive domestic inputs. In this case, local units at the top of the value chain risk closing, losing countless jobs.

As highlighted in the in-depth study we carried out on RCET via PIDE in March 2021, the upstream industry (spinning and weaving) would be the most affected in the event of a change in competitive energy prices, making these two links crucial. regionally uncompetitive textile chain. The spinning sector will not only lose international market share, but will also jeopardize domestic sales.

The State Bank of Pakistan (SBP) said that of the Temporary Economic Assistance Facility (TERF) loan applications in 2021, around 60% came from the textile sector alone. In addition, the textile sector saw around 1.60 billion dollars of investments during the first half of the previous fiscal year. The overwhelming demands for textile sector investment loans are largely due to competitive energy prices. Continued investments are therefore based on an uninterrupted supply of RLNG / gas for electricity and steam at regionally competitive energy rates, with 9 cents / kWh for electricity and $ 6.5 / MMBtu for gas / RLNG across the entire textile value chain.

Any increase in energy tariffs will undermine the efforts of the entire industry and offset the economic progress made over the past year, as the textile industry will find it difficult to remain productive under the pressure of energy tariffs. high and unsustainable. At this point where the Pakistani industry is expanding impressively and succeeds in attracting a good level of investment, an increase in costs would directly lead to a reduction in market share, once again leaving Pakistan far behind its regional competitors. The promising levels of export growth in recent months with positive impacts on industrial expansion and job creation are a boon to the economic stability of the country and must now be maintained through the continued critical policy of the country. RCET.

Copyright Business Recorder, 2021


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