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Banking crisis on cards as Pakistan’s textile sector near brink of default

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  • APTMA has asked for a Zoom meeting with top functionaries of SBP.
  • Commerce ministry says textile industry representatives may hold an urgent meeting SBP officials today.
  • APTMA says textile sector already running at less than 50% capacity.

ISLAMABAD: The textile sector has reached the brink of default in the wake of its inability to service the loans it received under TERF (Temporary Economic Refinance Facility) and LTFF (long-term facing facilities) which may also lead to a possible banking crisis, discloses the letter of APTMA to the State Bank of Pakistan written on February 27, 2023.

The State Bank of Pakistan (SBP) during the PTI era provided the TERF and LTFF facilities to help industrialists install more textile units for growth in exports of the country. 

However, because of the ongoing LCs crisis, stuck-up consignments of imported cotton at the ports owing to the dollars liquidity crunch and withdrawal of RCET by the government in line with IMF diktat, all the new and expansion units in the sector have become non-functional. This has led to immense pressure on export-reignited units which are unable to generate funds to pay even interest on the loans, leading to massive defaults, curtailment capacity and a possible banking crisis.

The textile industry has asked the SBP to extend the moratorium on debt under TERF and LTFF from June 1, 2023, to December 2023 to avoid large-scale Non-Performing Loans (NPLs) and severe negative impacts on the banking sector. 

The APTMA has also asked for a Zoom meeting with top functionaries of the central bank of Pakistan.

Banks are not opening LCs or retiring cotton imports, the letter says, which had led to the non-functioning of the textile units. 

“Now loyal international customers are reluctant and asking Pakistani suppliers whether or not they will be able to meet deadlines and ship orders on time resulting in a loss of export orders. The industry is running out of cotton stocks and textile mills have either shut down or will shut down in the very near future if decisive and urgent action is not taken.” 

The textile sector also urged the SBP to declare the opening of LCs of cotton imports the status of “Must Open.”

The commerce ministry says that textile industry representatives may hold today (Monday) an urgent meeting with top mandarins of the SBP. 

The commerce ministry’s top sources said that the prime minister convened meetings on export sector issues four times but the said meetings couldn’t be held mainly because of the premier’s pressing engagements.

The APTMA also mentioned that the business plan for new industrial units and expansion of the existing units had been carved out based on RCET (Regionally Competitive Energy Tariff) — electricity tariff of Rs19.90 per unit and gas rate at 9 cents per MMBTU. 

However, with the withdrawal of RCET, the industry is forced to run on an electricity tariff of 40 per unit owing to which the textile sector has started dying out day by day. 

The letter disclosed alarming facts saying that the textile sector is already running at less than 50% capacity. Around 7 million workers in the textile sector and textile-related industry were laid off since last summer and if this sector is closed down it will lead to more layoffs resulting in significant unemployment of more than 10 million workers and further deterioration in the balance of payments in the shape of at least $10 billion exports per annum.

The textile industry also highlighted in its letter the bleak cotton production in the country, saying that the country’s cotton production has declined to a historic low this year dropping to 5 million bales due to heavy rains and floods. The cotton production loss has been worth more than $2 billion. 

The textile industry consumes nearly 15 million bales and the current season’s anticipated demand indicates that about 10 million bales will need to be imported. However, banks are not opening LCs for the import of cotton.

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“Ready to work with Pakistan’s new government,” the IMF said.

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In response to the former premier’s request, IMF Director of Communications Julie Kozak stated, “I’m not going to comment on ongoing political developments,” during a news conference.

She continued by saying that they “look forward to working on policies to ensure macroeconomic stability and prosperity for all of Pakistan’s citizens with the new government.”

In addition to stating that the plan is “supporting the authority’s efforts to stabilise the economy and to, of course, with a strong focus on protecting the most vulnerable,” Kozack said the lender increased the total disbursements under the Standby Arrangement (SBA) to $1.9 billion.

This has been accomplished by closely adhering to budgetary constraints and safeguarding the social safety net. In order to keep foreign exchange reserves growing and rein in inflation, a strict monetary policy stance has been maintained, the speaker stated.

The PTI founding chairman decided to write a letter to the international lender, asking it to demand an audit of the election held on February 8 before it proceeds with discussions with Islamabad for a new loan programme. This move prompted the IMF to release its statement.

In response to the former premier’s request, IMF Director of Communications Julie Kozak stated, “I’m not going to comment on ongoing political developments,” during a news conference.

She continued by saying that they “look forward to working on policies to ensure macroeconomic stability and prosperity for all of Pakistan’s citizens with the new government.”

In addition to stating that the plan is “supporting the authority’s efforts to stabilise the economy and to, of course, with a strong focus on protecting the most vulnerable,” Kozack said the lender increased the total disbursements under the Standby Arrangement (SBA) to $1.9 billion.

This has been accomplished by closely adhering to budgetary constraints and safeguarding the social safety net. In order to keep foreign exchange reserves growing and rein in inflation, a strict monetary policy stance has been maintained, the speaker stated.

The PTI founding chairman decided to write a letter to the international lender, asking it to demand an audit of the election held on February 8 before it proceeds with discussions with Islamabad for a new loan programme. This move prompted the IMF to release its statement.

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In a new IMF agreement, Pakistan would “raise” the FBR tax-to-GDP ratio to 15%.

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The state bank reserves will be maintained at a level equivalent to three months’ worth of import bills, according to sources in the Finance Ministry.

According to sources, the ministry has also set a goal to maintain the primary balance surplus and reduce the current account deficit.

The ministry insisted that once the existing agreement expires, a new one would be negotiated with the IMF, and that the IMF will also be guaranteed that the requirements will be implemented prior to the agreement being finalised.

The founder of Pakistan Tehreek-e-Insaf (PTI) demanded that an audit of the election results be conducted before the International Monetary Fund (IMF) approved any additional loans for Islamabad. However, the IMF showed earlier today that it was eager to cooperate with the new administration in Pakistan by disregarding the demand.

According to Bloomberg News yesterday, Pakistan is to apply for a fresh $6 billion loan from the International Monetary Fund to assist the next government in paying off billions of dollars in debt that comes due this year.

According to the article, the nation would attempt to negotiate an Extended Fund Facility with the IMF, and it was anticipated that discussions with the international lender would begin in March or April.

Thanks to a short-term IMF bailout, Pakistan avoided defaulting last summer. However, the plan expires next month, and the next administration will need to negotiate a long-term deal to keep the $350 billion economy steady.

The IMF forced the South Asian country to enact a number of reforms prior to the rescue, including raising its benchmark interest rate, changing its budget, and raising the cost of natural gas and electricity.

According to a fund spokeswoman, the IMF staff is still in communication with authorities on the necessary longer-term reform initiatives. The fund is also prepared to assist the post-election government in addressing Pakistan’s ongoing issues by means of a new arrangement, should that request be made.

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39% increase in IT exports in January: Dr. Umar Saif

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According to Dr. Umar Saif, the acting minister for information technology and telecommunication, IT exports increased by 39.4% to $265 million in January of this year from $190 million in the same month the previous fiscal year.

The IT sector in Pakistan is expanding and breaking records. The minister wrote on X that “IT exports in January are up by 39.4% to $265 million, compared to $190 million in the same month in 2023.”

The minister also revealed that IT exports to the United States over the first seven months of the current fiscal year (July–January) were $1.7 billion, up 13 percent from $1.5 billion in the same time previous year.

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