Tuesday, May 4, 2010

Export-oriented industrial sectors: long-term remedy for sustained progress By SHAFIQ-UR-REHMAN

ARTICLE (May 03 2010): Pakistan's economy has been shattered during last 4 years due to global economic meltdown, domestic political uncertainties, law and order situation, high financial cost, high inflation and energy shortages (electricity and gas).

Manufacturing has remained most vulnerable during this period and impact of this pressure will be felt over coming years as well.

Out of manufacturing sector, textile is the economic driver of our country in the international market. During the years 2000-05, huge investment was made in this sector, anticipating big gains in the post-quota integration scenario and availability of cheap credit with the financial institutions. However, results of the post-quota integration period were not as good as anticipated due to heavy subsidies by the competing countries, levy of anti-dumping on bed linen by the EU, liberal market access to Bangladesh, successive cotton crop failures, and increase in financial cost.

We have to analyse that what actions we have to take today in order to overcome burgeoning trade and current account deficits, as no substantial direct investment is coming and our begging bowl is increasing day by day. Unemployment is touching alarming levels and existing industries are on the verge of extinction due to the aforementioned reasons. In order to comply with strict prudential regulations, most of the working capital was used for mark-up servicing and debt repayment. Now most of the companies are crippled under working capital shortage crunch.

Luckily, we have few sectors on which we can focus and help these resuscitate, including mainly value-added textiles (home, knit, garments, towel and so on so forth which provides employment to maximum workforce including women), leather, surgical, sport goods, light engineering, other sectors, which can maintain and additionally contribute in enhancing the exports and reducing unemployment on urgent basis.

During professional engagements, author of the article has observed the devastating consequences which follow due to inaction of policy makers and banks at appropriate time. Sometimes, there are committees (Beg Committee - a noble departed soul) CIRC, or circular 29 type solutions which erodes much of the national resources at a throwaway price.

The entrepreneurs are engines of growth in any society apart from a good economic vision at the policy-making level. We have dearth of this sacred talent and whatever is available with us let's not destroy it and chalk out pragmatic, justifiable and long-term strategy firstly for their survival and secondly for their growth. There are no pragmatic bankruptcy laws in our country and anyone, who undergoes is destined for a bleak future and the other sufferers are numerous, including labour, banks, creditors and economy as whole.

Focus of the paper is on how we can salvage substantial export-oriented industry with in-house production potential to maintain and enhance exports.

SUGGESTED MEASURES:

There has to be an estimate of exportable capacity and capability of each industrial segment. This will be based on installed capacities, and actual utilisation during the last 3 years, plus some cushion for better utilisation of existing capacities. This will be worked through industry studies and feedback can be obtained from the machinery suppliers and experts on urgent basis.

In the first phase, we can focus on industries having US $25 million per annum export potential. We can reduce this threshold level after evaluating one-year practical experience of this imitative.

The government should provide 10-year Equity Support Fund (ESF) to all industry segments, which directly or indirectly export 75% of their output. Provided the export value has been repatriated from the country of export. During the first 6 years, companies should only pay mark-up on this fund.

The ESF should be equivalent to 50% - all short-term and long-term outstanding (including lease finance) as of 31st March 2010 - excluding loans given by the respective companies to their associated companies, which are not engaged in export business, or invested in non-core business activities.

The ESF should carry mark up rate equal to the SBP's export refinance rate excluding any bank spread. It should be disbursed through existing banks of the companies.

Seventy-five percent of the ESF, to be used to repay long term and short term loans of the banks including the ERF where applicable and lease obligations. Twenty-five percent to be used for working capital purposes. Companies to issue TFCs or preference shares (convertible into ordinary shares) against the ESF, and these should be secured on pari passue basis with existing banks.

If an industry is not able to repay and service even 50% of the existing principal borrowing, then there is a serious business plan failure and in that case, other remedial measure must be initiated.

As an alternative to direct equity investment, there could be a special 10-year government bond for this purpose and the banks and leasing companies may replace these bonds with their borrowing on a pro-rata basis.

Mark-up rate on these bonds should be equal to the SBP refinance rate (excluding bank spread). These bonds may be made SLR qualified and some tax concessions may be added to the bond income in order to give a better yield to the holders.

PRECAUTIONAY MEASURES:

There should be a freeze on short term and long term borrowing and on private credit on the befitting companies. Management change agreements through consent decree and corporate laws must be entered into with the recipients of these funds.

Auditors of these companies must be rotated with 2 years' tenure and only first class firms to be eligible for their audit. There could be a special set-up under the SBP or banking council for monitoring of the benefited industries, comprising industry and banking experts, and the benefiting companies to reimburse all their costs.

Board of directors of the benefiting companies should be reconstituted and independent paid directors to be added to the boards of the entities qualified for ESF on rotation basis.

FISCAL AND REGULATORY CONCESSIONS:

There should be relaxation in debt equity and current ratios of the benefiting companies for the next 5 years. The ESF may be considered as part of the equity till its repayment.

Most importantly, there should be relaxation in prudential regulations for the financial institutions, which have substantial investment (over 25% of exposure in such industries) and provision requirements should be relaxed. Existing provisions allowed to be reversed.

Income tax exemption on investment portfolio of financial institutions in export-based companies be allowed for the next 5 years. This will encourage the already committed financial institutions to remain engaged and take more exposure in this vital sector of the economy.

STARTING POINT:

To start with, 30 companies from value-added textile sectors with highest export potential from in-house production capacities, which have achieved maximum value-added per kg of raw material and 5 industries each from other sectors selected for eligibility for the ESF.

CONCLUSION:

This proposal will increase/maintain export earnings of the industries. Most importantly increase employment opportunities and business confidence, boost the financial institutions' performance and increase their liquidity. The benefiting industries should be encouraged to invest in energy self-sufficiency and compliance requirements out of available resources.

There has to be a trade-off between export earnings or obtaining loans if we let our export-oriented companies close down. Timely investment and action will be of the essence, and this action is needed due to force majure exogenous and indigenous developments, which are beyond control of policy-makers and entrepreneurs.

This suggestion is in line with recent international practices and based on ground reality, which the author has observed through direct interaction with the industry, financial sector and entrepreneurs. Icon institutions like Citi Bank, Bank of America, General Motors, RBS and many more were provided equity support by the US, UK, EU and other governments instead of letting them go bankrupt. We should not be shy of supporting our national assets and stopping to bash industrialists, who need a sympatric and pragmatic treatment during this most volatile and dangerous phase of our history.

Current democratic government and entire political hierarchy have achieved incredible milestones on political issue and on the menace of war on terror (where we have to face idiotic lunacy due to distorted interpretation of our greatest religion), but if we won't act on economic front, all big achievements may be doomed for a failure. Therefore, a swift action towards revival of our export oriented industrial sectors is a must and that too on emergency basis. Domestic industry will also be immediate beneficiary as bulk of it is working as supply chain to the export based industries.

(The writer is former member, Finance of Corporate and Industrial Restructuring Corporation (CIRC) and former Textile Monitoring head of Habib Bank Limited.)

Source: http://www.brecorder.com/index.php?id=1052081&currPageNo=1&query=&search=&term=&supDate=

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