High Interest Rates, Power Tariffs, PKR Drop Will Hurt Textile Sector in FY24: APTMA

The textile sector will continue to experience economic headwinds related to high-interest rates, exchange rate depreciation, high power tariffs, an increase in the cost of raw materials, and suspension of the zero-rating status in the fiscal year 2024.

All Pakistan Textile Mills Association (APTAM) in a report “Overview of Pakistan’s commitments under The International Monetary Fund (IMF) Stand-By Arrangement (SBA)” stated that the cost of borrowing will remain high in the near term. The central bank policy rate was increased to 22 percent in June 2023 in the lead-up to the IMF SBA.

The government aims to bring inflation within the target range of 5-7 percent by FY26, and SBP has committed to further hikes until inflation and inflation expectations are on a clear downward trend.

Inflation expectations began to recede in FY23Q4 and increased market confidence following the IMF SBA and subsequent foreign capital inflows may help in anchoring them further, but they continue to remain exceptionally above desirable levels. Keeping this in mind, the policy rate can be expected to at least stay at the current level of 22% in the near term.

Another episode of exchange rate depreciation can be expected during the gradual return to a market-based exchange rate. While the Rupee experienced an appreciation following the IMF SBA, this effect was a combination of an increase in market confidence and depreciation of the US dollar.

Because the trend depreciation since FY23 has been driven by a deterioration of economic fundamentals, the effect of increased market confidence was only temporary, and the Rupee-Dollar exchange rate has returned to pre-SBA levels.

Power tariffs for B3 and B4 consumers remain high and will be further increased with effect from 1st July 2023 following the full annual rebasing exercise and adoption of the updated Circular Debt Management Plan by the cabinet.

The provision of regionally competitive energy tariffs (RCET) has been referred to as an “unbudgeted subsidy” for exporters in the SBA as the revenue differential between RCET and non-RCET tariff revenues was not budgeted for by the government when RCET was in effect, and, therefore, added to the power-sector and fiscal deficits.

However, this does not necessarily mean that an exclusive power tariff category for exporters is not compliant with the IMF SBA. If the revenue differential resulting from the provision of such a tariff category is budgeted, for instance by spreading it over other consumer categories, it will not contradict the government’s commitments under the SBA but may entail high political and other costs, added the report.

The commitment to give no more tax amnesties or exemptions will most likely mean that the zero-rating status for exporters (SRO 1125) will remain suspended, at least for the duration of the current SBA, it added.

There may be positive impacts from progress on structural reforms, including the implementation of the WACOG mechanism for gas pricing, simplification of approval processes for FDI, reduction in customs-related processes, and simplification of tax regimes. However, until a clear policy is brought forth and implemented by the government, both the intended reforms and their potential effects remain ambiguous.

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