Pakistan Rupee depreciation fails to prop up textile exports

By Mansoor Ahmad

LAHORE: The puzzle of declining textile exports despite depreciation of rupee has been resolved as the cost of inputs in Pakistan has increased at a much higher rate than the decline in the value of its currency.

It has been found that those exporters who reduced the prices of their products in line with the rupee’s fall are in deep trouble as they now find it impossible to execute orders because of the high cost of production. They have also put pressure on some prudent exporters who had refused to cut per unit rates of their products. They first calculated the impact of high inflation on their production before refusing any reduction in prices.

The inflationary impact is also felt by competing economies of China and India but appreciation of their currencies has reduced the impact of soaring crude oil prices and related increase in transport and energy charges.

Leading knitwear exporter and former chairman Pakistan Hosiery Manufacturers Association (Punjab) Adil Butt says exporters have not benefited from the substantial decline in the rupee’s value because the cost of production during the last one year has increased at a higher rate than the decline in the local currency.

He says the dollar has been falling against global currencies at the rate of 9 per cent for the last five years. Oil prices that averaged $60 in 2007 are currently $135-140 per barrel. Food prices have increased by 35-45 per cent in Pakistan during the past one year.

He says on demand of a foreign buyer to cut the rates because of massive depreciation of the rupee in the past two months, one of the exporters explained in detail the positive and negative impacts that Pakistan’s economy faced during this period. He says his calculations are verifiable and could be applied across the board to other knitwear exporters.

The calculation shows that despite earning a benefit of Rs5.36 per month on average monthly export of $1.129 after the rupee declined from Rs62 against the greenback to Rs66.75, a knitwear exporter is incurring additional expenses of Rs2.95 million per month.

The exporter wrote to his buyer that his knitwear exports average Rs70 million. At the dollar rate of Rs62 in January, the exports amounted to $1.129 million. The same exports now fetch Rs75.36 million at dollar rate of Rs66.75. Net gain in local currency comes to Rs5.360 per month.

Against this, he explained the minimum salary increased by Rs1,400 per month. For his factory employing 1,000 workers the increase in monthly salary amounts to Rs1.4 million. Subsidised food provided to workers as a compliance condition of buyers increased by Rs0.22 million per month. Subsidy per meal increased from Rs3 to Rs6 while the number of workers availing this facility also increased due to higher food rates outside the factory.

Container charges increased from Lahore to Karachi (for onward shipments abroad) Rs16,500 to Rs22,000. The cost of goods sent by 30 containers a month increased by Rs0.20 million. Electricity bill after increase in tariff increased from Rs2.5 million per month to Rs3 million per month. After 30 per cent increase in gas tariff the gas bill of the factory increased from Rs0.5 million to Rs0.65 million. Cotton yarn (10/1 quality) rate increased from Rs61 per pound to Rs68 per pound. The consumption of 65 pounds of yarn by 227 machines is 555,000 pounds per month. The additional cost thus increased by Rs3.89 million per month (Rs7 x 555000). The cost of polyester, dyes, chemicals etc is calculated as roughly half that of cotton that comes to Rs1.95 million, he concluded.

Butt said due to this loss the exporters did the benefit from the revaluation of Indian and Chinese currencies. He said in addition the exporters are subjected to 3.36 per cent taxes. It includes one per cent tax on cotton, stitching, processing, exports, and 0.50 per cent tax on knitting, 0.3 per cent stamp duty and export development surcharge of 0.25 per cent.

He said the cumulative impact on the cost of production of these is 2.78. He said EOBI and other minor taxes add another 0.58 per cent to the cost.
Source: The News, 1/7/2008

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