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Pakistan will have to raise Rs. 333 billion — where will this come from?

Jul 03 - 09, 2000

The major commercial banks and Development Financial Institutions (DFIs) would soon be offering financing for Balancing, Modernization and Replacement (BMR) mainly to the textile sector to enable this export oriented sector to be competitive in the export market.

While the committees constituted by the government for recommending the mark-up rate for BMR financing, probably on floating rates, the textile experts feel that the issue of mark up rate should be allowed to decide by the market forces. Since the textile industry is running without BMR for more than a decade it requires at least Rs40 billion for the current fiscal and an aggregated amount of Rs333 billion during next five years. These funds are said to be required to stand with the pressures of quota free market and demands of the choosy international market, said textile experts.

Keeping in view the past record of various segments of the manufacturing sector regarding utilization of bank funds, the situation demands for evolving of a mechanism to keep an eye over utilization of the public money under BMR financing allowed by the government. There were some bad instances in the past that the financial facilities were misused by a number of manufacturing units on various pretexts. They generally transfer the funds to their sister organizations, which were originally meant for BMR purposes.

The banks or DFIs which are being assigned to provide BMR financing are the custodians of the depositor’s money. Spending of these finances on any project which does not pay back properly deprive the depositors of the actual return on their hard earned money. Hence the situation demands that a fool proof mechanism is required to protect depositors and the shareholders of the financing sector as the financing is actually provided by the public and not by the government or any financial institution from its own resources. The immaculate credit worthiness is the key true growth of economy. Hence any provision for allowing investors money to any sector requires extra prudential banking whatever and whosoever the sector requiring the funds.

Being dominated by the privileged class i.e. politicians, feudal and other influential people; the textile industry has always enjoyed the lion’s share of the banking system in Pakistan. It is however unfortunate that the results produced by the textile sector do not justify to the amount spent on it so far.

Despite availability of locally produced raw material i.e. cotton and all out support extended by the previous government of Nawaz Sharif who himself diverted his business interests from Steel Sector (Ittefaq Foundries) towards the textile sector. However, the industry was unable to break the psychological barrier of $5 billion exports because the beneficiaries of the banking facilities were not honest for increasing exports but to fatten their purse with the public money. Although the banks’ kitties were kept open for the textile sector right from the early 90s but the facility did not produce any tangible results rather it culminated into a big financial scam in the banking sector. Out of the total stuck up loans of the banking sector the largest amount of the defaulted loan held by the textile sector. It is generally alleged that those who had the access to the banks loans never bothered to think about repayment of the loans and that was the reason why they did not mind about the high mark up rates. The huge loans allowed to the textile sector were neither used for establishment of any new unit or expansion of the projects. It may be mentioned that not a single new unit has been set up in the country for the last 10 years.

According to a careful assessment, currently 345 large- scale units are in operation most of them are spinning units.

The average age of these 345 units, registered with the All Pakistan Textile Mills Association (APTMA) as its members, is estimated between 17-18 years. With a few exceptions, no Balancing, Modernization and Replacement (BMR) has taken place in these units at least for the last 10 years. The reason for this stagnation is stated to be non-availability of financing for BMR purposes. This is of course a sorry state of affairs as it amounts to be suicidal for export oriented industries which to face strong competitions in the export market. BMR provision is of vital importance even for the newly set up industries especially in a situation of rapid changes of technology around the world while majority of the existing textile units are based either on second hand machinery or obsolete technology.

Accepting the textile industry as a priority sector of the national economy for increasing exports, the present government has however assured to provide all possible facilities required by the textile sector for boosting textile production and exports.

This assurance was given by Shaukat Aziz, Federal Minister For finance at a recent meeting held at the State Bank of Pakistan.

Prominent among those who attended the meeting were including Abdul Razzak Dawood, Minister for Commerce, Dr. Ishrat Hussain, Governor SBP, Heads of Banks and Financial Institutions and Mohsin Aziz, Chairman All Pakistan Textile Mills Association and other senior members of the association. The agenda of the meeting was ‘Financing Requirements of the Textile Industry.

Shaukat Aziz while addressing the meeting emphasized on innovative and dynamic financial products and services would require to be offered by the banking sector. The venture capital, leasing to group entrepreneurs as well as Islamic Mode of Financing to cater to the present and future requirements at all levels of the production chain.

The finance minister has advised the banks to efficiently process requests for financing and informs the applicant about the decision within the shortest possible time.

Agreeing with the point raised by APTMA chairman that value addition is not limited only to textile made ups but any product that secures a higher price than the basic product, is value addition.

Shaukat Aziz also urged the textile industrialists that they should join with local and foreign entrepreneur’s bid for purchase of Nationalized banks, which are soon to be offered for privatization. The minister also suggested that ginning institute should be established through government and APTMA funding to improve quality of textile products.

Speaking on the occasion Razzak Dawood, Minister for Commerce assured the textile industry that the government would ensure that all hurdles in operations as well as exports are removed expeditiously. He was of the view that Small and Medium Enterprise Development Authority (SMEDA) shall also provide advisory support to entrepreneurs for putting up new projects as well as BMR.

Dr. Ishrat Hussain, Governor SBP while endorsing the need for implementation of the long term textile policy aimed at to optimize the textile potentials assured that SBP as well as banks would provide full support to make the textile policy a success.

He said that all companies, which have not been classified as defaulters, could freely avail of bank loans for BMR, new projects and working capital requirements.

The governor said that if CIB report of one company in a group of companies shows overdue/default in repayments, other companies of the same group continue to avail credit facility from Banks. (CIB clearance is not a requirement of Prudential Regulations).

In order to give transparency to the credit facility and efficient processing of loan cases, the SBP governor proposed a mechanism in which representatives of the banks; Textile Association and SMEDA could review and recommend cases of groups or companies for Financing by the banks.

Mohsin Aziz, Chairman APTMA apprised the finance minister and the bank presidents that the textile sector is keen to upgrade the production facilities through BMR as well as by putting up new projects. However, he complained that in spite of the government’s keenness and instructions to the banks, the banks are still very reluctant and extremely slow in evaluating and deciding upon the financial requirements of the textile industry.

According to Mohsin Aziz at least $400 million is required for BMR of the textile industry which should be provided by the banks at the earliest at reasonable rates of mark up. Chairman APTMA also stressed upon the need for providing financing as well as government’s permission for establishing warehouses and marketing offices in the major international markets around the world so as to cut down the long delivery time of textile exports. He also emphasized the need for innovative and flexible approach by banks while evaluating the funding requirements of the textile industry for BMR and new projects.

According to informed sources, banks and development financial institutions are currently exploring the possibility of offering finances to textile sector for BMR projects at a floating interest rate.

They are however yet to finalize their recommendations on this and other relevant issues and forward the same to the State Bank of Pakistan (SBP). The State Bank would then evaluate the recommendations before providing its own input in the textile vision 2005. A long-term textile policy being drawn to prepare Pakistan to compete in a quota free and restriction free markets by 2005.

The issue came under discussion at a meeting of top executives of four lead banks including HBL, UBL, NBP and MCB and three development financial institutions i.e. PICIC, NDFC and Small Business and Finance Corporation.

The participants discussed pros and cons of financing BMR projects of the textile industry at floating interest rates with a minimum benchmark. They said it was not clear which debt-raising instrument would be used for determining floating lending rates.

Normally floating rates are worked out by adding certain basis points over treasury bills but the use of other instruments like a proposed government bond with tradable coupons cannot be ruled out.

It was felt in the meeting that the need for having a floating interest rate for financing BMR projects of textile industry over five years for the purpose of consistency and for keeping banks and DFIs from unnecessary competition.

According to initial projections of textile vision 2005 the textile sector would need at least Rs333 billion in the next five years of which Rs40 billion is needed in 2001. Two top-level meetings have already been held at the State Bank under the chairmanship of Governor Dr. Ishrat Hussain to discuss financial and other aspects of this policy

Two committees have already been set up one for developing eligibility criteria for financing and the other for formulating strategies for technical evaluation and pricing of textile machinery.

The meeting was chaired by PICIC MD Muhammad Ali Khwaja who told that two committees would submit their reports within fifteen days.

Textile sector honoured

Despite all odds and evens, the textile sector still enjoys the most important position in the national economy. It has been placed under special focus through Vision 2005 by present team of the economic managers. In order to make the textile industry internationally competitive, it deserve a special place in our economic policies. The much publicized program i.e. Textile Vision 2005 which covers improvement of cotton quality, project finance, promotional measures, marketing strategies and quota policy is now in the final stage and shall be announced on August 13, said Abdul Razzak Dawood in the trade policy announced last week. Before the announcement of textile policy, the government has taken following steps, which include a) permission to allow export of raw cotton right from the beginning of the season. b) Setting up of Ginning Research Institute. c) Reduction of Customs Duty on import of saw gins. d) Amendment in Karachi Cotton Association bylaws to permit shift from varieties to grades. e) Grading by PCSI at Ginneries from July 1. F) Withdrawal of excise Duty on import of raw cotton under the restructuring and redirection envisaged in Vision 2005 and in order for the focus to shift to the higher value added sector, it has been decided to withdraw with immediate effect the export finance facility for yarn and gray cloth.

Withdrawal of the export finance facility for yarn, however, has sent a shock wave among the spinners. Mohsin Aziz, Chairman of APTMA has said that on one hand the government resolves to provide all facilities necessary for promoting textile exports of the country while on the other hand it has decided to withdraw the export refinance facility on all counts of yarn and gray cloth. Mohsin Aziz strongly criticized the abrupt and complete withdrawal of export refinance facility. According to Chairman APTMA yarn and gray cloth comprise 42 per cent of the total textile exports of Pakistan. Export Refinance is a significant incentive tool for promoting export of yarn and gray cloth in increasingly competitive international markets. He expressed his fears that the sudden and complete withdrawal of export refinance facility on yarn and gray cloth could jeopardize a very significant portion of Pakistan’s Textile Exports particularly when all other competing countries are offering the same facility on these products at a very low interest rate. While supporting the government thrust on value addition Mohsin Aziz insisted that unless new products and new markets for export are sufficiently developed, the government should not remove the existing equilibrium lest the existing markets share of Pakistan’s textile exports could be lost.

While appreciating the government for identification of the textile industry as the main vehicle for achieving what he called the ambitious export target of $10 billion for the current fiscal, Mohsin said that APTMA members fully accept the government’s emphasis on value addition as a step in the right direction.

However, until the spadework is done for documentation any abrupt change in the existing system may prove counter productive. Spadework includes the implementation towards production and export of value addition item i.e. commercial spinners of yarn and weavers of gray cloth are provided sufficient funds for establishing new units for BMR. The abrupt withdrawal of export refinancing facility from low value added items to high value added items is like letting the bird in hand to go in the hope of catching the bird in the bush.

The shifting of export refinancing should be gradual in particular gray cloth, yarn of the fine counts, dyed yarn, lycra etc. which come under the category of value added items should be allowed refinance till such time that higher value added production is achieved. The switch over from low value added to high value added should be gentle, caring and smooth. Any sudden change, like torrential flood in the hilly ravines, would carry with it good and bad indiscriminately, he remarked.

Whatever the concerns expressed by the textile sector and even by other sectors for that matter clamouring for incentives has become a feature of our economy.

The time has come to judge what we have taken from the country and what we have given in return. People are fade up with cliches.

Economy is suffering from huge foreign and domestic debts having a bad impact on our sovereignty. A vast majority of the people is compelled to live below poverty line due to non- availability of even level playing ground. Policies of privileges should come to an end now.