The textile industry in Pakistan, which accounts for 60 percent of the country’s total exports, may soon receive much-needed relief, according to analysts at Insight Securities Limited.
With the State Bank of Pakistan (SBP) expected to cut the policy rate in its upcoming monetary policy, there could be significant respite for this key sector.
Currently, the textile sector is facing numerous challenges, including rising energy costs and record-high financing rates. These factors have put immense pressure on local manufacturers who rely heavily on debt to meet their working capital requirements. The high interest rates have escalated finance costs, further complicating the situation for these manufacturers.
Additionally, the industry has been grappling with sluggish demand over recent quarters due to a slowdown in the global economy and the uncompetitive nature of its export products. The situation has been exacerbated by consecutive hikes in energy costs and the manufacturers’ inability to innovate their product offerings. According to the All Pakistan Textile Manufacturers Association (APTMA), the textile industry in Pakistan is currently paying electricity costs at 17.5 cents/kWh, which is the highest among its regional competitors. This has rendered the local textile sector uncompetitive on pricing and significantly increased the risk of closures of local mills.
Amid these challenges, the SBP’s potential rate cut appears as a beacon of hope. With headline inflation now below 20% and all major demand indicators showing a significant economic slowdown, the central bank has the leeway to reduce the benchmark interest rate. Analysts suggest that a decline in the interest rate may be the only viable solution for manufacturers, particularly as there seems little prospect of a reduction in energy tariffs. The International Monetary Fund (IMF) has emphasized the need for full recovery of energy costs, which leaves little room for lowering these expenses.
Export facilitation schemes such as the Export Financing Scheme (EFS) and Long Term Financing Facility (LTFF) are now directly linked with the policy rate. The high rates have severely eroded the profitability of the textile sector, making the anticipated rate cut crucial for its survival and growth.
In the listed space, Nishat Chunian Limited (NCL) is likely to benefit most from any rate cut. The company’s debt-to-asset ratio stands at 62%, with finance costs consuming approximately 93% of its operating profit. Other major companies in the sector also have debt-to-asset ratios above the 35% mark, indicating that a reduction in interest rates would have a significantly positive impact on their financial health.
As the SBP’s monetary policy announcement approaches, stakeholders within the textile sector and broader financial markets are watching closely. A reduction in the policy rate could not only stabilize the textile industry but also stimulate broader economic growth in Pakistan by easing the burden on one of its most vital export sectors.
