Rupee depreciation fails to prop up textile exports

Tag : knitting oil

7/1/2008 LAHORE: The puzzle of declining textile exports despitedepreciation of rupee has been resolved as the cost of inputs inPakistan has increased at a much higher rate than the decline inthe value of its currency.

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

The inflationary impact is also felt by competing economies ofChina and India but appreciation of their currencies has reducedthe impact of soaring crude oil prices and related increase intransport and energy charges.

Leading knitwear exporter and former chairman Pakistan HosieryManufacturers Association (Punjab) Adil Butt says exporters havenot benefited from the substantial decline in the rupees valuebecause the cost of production during the last one year hasincreased at a higher rate than the decline in the local currency.

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

He says on demand of a foreign buyer to cut the rates because ofmassive depreciation of the rupee in the past two months, one ofthe exporters explained in detail the positive and negative impactsthat Pakistans economy faced during this period. He says hiscalculations are verifiable and could be applied across the boardto other knitwear exporters.

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

The exporter wrote to his buyer that his knitwear exports averageRs70 million. At the dollar rate of Rs62 in January, the exportsamounted to $1.129 million. The same exports now fetch Rs75.36million at dollar rate of Rs66.75. Net gain in local currency comesto Rs5.360 per month.

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

Container charges increased from Lahore to Karachi (for onwardshipments abroad) Rs16,500 to Rs22,000. The cost of goods sent by30 containers a month increased by Rs0.20 million. Electricity billafter increase in tariff increased from Rs2.5 million per month toRs3 million per month. After 30 per cent increase in gas tariff thegas bill of the factory increased from Rs0.5 million to Rs0.65million. Cotton yarn (10/1 quality) rate increased from Rs61 perpound to Rs68 per pound. The consumption of 65 pounds of yarn by227 machines is 555,000 pounds per month. The additional cost thusincreased by Rs3.89 million per month (Rs7 x 555000). The cost ofpolyester, dyes, chemicals etc is calculated as roughly half thatof cotton that comes to Rs1.95 million, he concluded.

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

He said the cumulative impact on the cost of production of these is2.78. He said EOBI and other minor taxes add another 0.58 per centto the cost.