ATIF SALMAN DR. MUSTAGHISUR REHMAN

1. INTEREST RATES AND ITS IMPACT ON THE EXPORTS OF READYMADE GARMENTS IN PAKISTAN: A STUDY FROM 2000 TO 2010. ATIF SALMAN DR. MUSTAGHISUR REHMAN

2. INTRODUCTION • Readymade Garments or Apparels are the final product of textile sector which is backbone of exports in Pakistan. • Passing through different stages of value addition e.g. ginning, spinning, weaving, dying, printing and stitching, cotton and other raw materials are transformed into readymade garments. • Pakistan’s textile sector, though biggest foreign exchange contributor; garment export growth has remained stagnant for quite a long time now because of growing competition this sector now faces from Bangladesh, Sri Lanka, India and China

3. INTRODUCTION • Interest Rate is the main factor that directly effects the cost of funds of exporters. • The State Bank of Pakistan SBP introduced Export Refinance Scheme ERF in 1973 with the intention to bring down borrowing costs for exporters. • Not only that ERF provide funds at subsidized rate, but also matches exporter’s cash flow needs. • An exports that increase by 17.5% would actually translates in a 1% increase in GDP

4. RESEARCH PROBLEM • Country’s interest rate is one of the main cost factors in the production of readymade garments. • Government of Pakistan has taken various initiatives to increase the volume of exports of garments. Offering subsidized interest rate for the growth and development of the garment industry is one of those initiatives in last ten years. • The question “How far the interest rates in Pakistan have been an influencing factor for the growth of the garments’ exports here from the year 2000 to 2010?” is important to investigate

5. OBJECTIVES OF THE STUDY To find the effects on the volume of textile garment’s export due to the interest rates that prevailed in Pakistan in last decade 2000 to 2010.

6. BENEFIT OF THE STUDY • This study identified the problem faced by garment exporters with special focus on interest rate. • This study can be of help to State Bank of Pakistan in designing monetary policy especially in fixing interest rates on Export Refinance Scheme • It is beneficial for the exporters to understand the interest rate as a cost driver.

7. LIMITATIONS OF THE RESEARCH • Time constraint: For this research the allowed time is about three months which was a constraining factor. • One factor analysis: This research is limited to the one factor (interest rate) responsible for the export increase and decrease, while other factors, such as subsidies, fiscal deficit, devaluation, availability of utilities etc have not been included into the focus of this research.

8. LITERATURE REVIEW • For any business, Interest Rate IR cost is the main input in business. In an economy, IR directly impacts inflation, exchange rate & cost of other inputs for garment exports. • According to Quddus & Saeed (2005), Export-led growth increase efficiency in the economy and allows a better utilization of resources. • Export oriented policies guide optimal resource allocations in the economy & generate technological enhancement in response to exposure to international competition (El-Sakka & Al-Mutairi, 2000).

9. LITERATURE REVIEW • Increase/decrease in IR affects not only investments but exports in a very dramatic manner. IR influences inflation affecting the cost of input for exports and investments. • Increase/decrease in IR strongly impacts exchange rate that in turn effect exports positively or negatively. • Devaluation and Revaluation has a very strong impact on exports, imports, foreign remittances & balance of trade of an economy • Interest rate has shown a lot of variation in the last 10 years under study.

10. LITERATURE REVIEW • Export Refinance Rate varied from as low as 3% to 12%. • Market (Kibor + Spread) rate also hovered around between 6 % to 17% (SBP-Handbook of Statistics on Pakistan Economy). • Haque & Kemal (2007) found that ERF and rebate/refund have insignificant impact on exports in long run. • A study by Mahmood and Azhar (2001) that subsidized credit facility and other subsidies to garment exporters resulted in inefficiencies. • Pakistan lies along with few countries where borrowers face the highest interest rate in the world (Sabir 2011).

12. RESEARCH METHODOLOGY • This research is interpretative in nature and of time series types based on the existing stats. • This is based on the secondary data i.e existing statistics. • The data was collected from the publications of the State Bank of Pakistan, Economic Survey of Pakistan, database of Ministry of Textile Industry, database of Trade Development Authority of Pakistan TDAP, Federal Bureau of Statistics, Ministry of Commerce, Federal Board of Revenue etc

13. DATA COLLECTION & PRESENTATION • For the literature review the research papers, published reports by various institutions and studies available on the subject on internet, journals and SZABIST library have also been consulted. • The collected secondary data has been analyzed with Time-Series technique. • We collected monthly data of readymade garments exports from 2000 to 2010 from SBP.

14. DATA COLLECTION AND PRESENTATION Descriptive Data Analysis • We plot the value of readymade garments exports over time in the following chart. The chart shows that a readymade garments export has a great deal of variation over the time period under study.

15. Source: SBP

17. TIME-SERIES DATA ANALYSIS • The research used dynamic correlations to investigate relationship between exports of Garments and EFS Interest Rates. • Dynamic Correlation means computing correlation of some variable with different lag of some other variable. • Since exporters need time to prepare merchandize after getting loans of EFS, we investigate relationship between lags of EFS and readymade garment exports.

18. TIME-SERIES DATA ANALYSIS • Owing to generally associated issues of seasonality with monthly data, first of all we seasonally adjusted the series of garment exports using X12 algorithm through Eviews. • After seasonal adjustment, we obtain correlation matrix between garment exports, current EFS and its lags. • We construct correlation matrix till 12th lag of EFS rate.

21. KEY FINDINGS • The table in previous slides clearly depicts that there is negative correlation between lags of EFS rate and readymade garments exports. • Not only the correlation is negative; its magnitude decreases (i.e. gets closer to -1), or negative correlation increases, as correlation with older lags is calculated.

22. KEY FINDINGS • Dynamic correlation analysis reveals that readymade garments exports generally move in opposite directions of EFS rate. • The lags show that interest rate and readymade garments exports are negatively correlated and in order to boost their export the interest rate is needed to be lowered. • However, since the values of correlation are on the lower side, i.e. even less than 0.5 (more than -0.5 in this case), there are other reasons which impact the exports of readymade garments even more.

23. KEY FINDINGS • The positive finding is that by the end of the twelfth month the correlation becomes threefold. • This shows that the impact of interest rate comes much later. • The policy of maintaining interest rate at a lower rate has some positive effect on garments exports.

24. KEY FINDINGS • This shows that EFS helps RGX boost but not as much as we expected. • If there would have been related better then the correlation values have been, at least, higher than 0.5 (lower than -0.5 in our case). • So in the case of Pakistan, EFS only impacts RGX in a limited way.

25. CONCLUSION • Our results have proved that there is a negative relationship between increase in interest rates and exports. • An increase in interest rate has negatively impacted garments exports of Pakistan from year 2000 to 2010.

26. RECOMMENDATIONS • In order to promote exports of readymade garments, SBP should maintain EFS rate at low and stable level.   • The Export Finance Scheme should be continued as there are rumors that the central bank may withdraw the scheme again. • The difference between EFS interest rate and KIBOR plus, charged on regular financing, is hardly 3 percent.

27. RECOMMENDATIONS • The credit scheme should be made easily accessible to all large to small sized exporters. • If the scheme is to be discontinued exporters other problems should be solved.

28. RECOMMENDATIONS • Government should provide electricity and other utilities at competitive rates and ensure continuous availability of these utilities to their industrial sector at competitive rates. • Government should control its fiscal deficit and spend money judiciously on development projects so that the exporters can reap true benefits of the infrastructure available in the country.

29. FUTURE AREAS OF RESEARCH • Future areas would be to have a multivariate regression analysis including the other factors affecting the garment export. • I would like to further explore how these other variables impact garment exports.

30. REFERENCES. • Haque, N, U, 2007, ‘Impact of Export Subsidies on Pakistan’s Export’, Pakistan Institute of Development Economics Working Papers, 2007:26, Islamabad. • Recorder, B, 2011, ‘Textiles on the move from Pakistan to Bangladesh’, Buisness Recorder. • Sabir, I, 2011, ‘Consumer financing: a blessing or a curse (III)’, Daily Times. • SBP, ‘Handbook of Statistics on Pakistan Economy’, State Bank of Pakistan. • Baloch, I, 2006, ‘Falling Exports of Textile Products’, The Dawn. • Bashir, T, 2006, ‘Impact of Small Industries in Pakistan’, Growth and Development, International Conference on Human and Economic Resources, Izmir, 167-179. • Economics, T, 2011, ‘Interest Rates, List by Country’, Trading Economics. • Gulzar, S, 2006, ‘A Study on the Problem of Deficit in the Balance of Payments: The Case of Pakistan’, Harbin Insitute of Technology, China. • K,V, Ramaswamy, 2000, ‘India's Apparel Exports: The Challenge of Global Markets’, The Developing Economies, XXXVIII (2), 186-210. • Khan, A, A, 2010, ‘Pakistan Textile Industry Facing New Challenges’, Research Journal of International Studies, Volume 14, pp. 21-29.

31. REFERENCES. • Khan, A, 2007, ‘Trade, Financial and Growth Nexus in Pakistan’, Pakistan Institute of Development Economics, Volume 6, No 14. • Bader, S, 2006, ‘Determining Import Intensity of Exports for Pakistan’, SBP Research Bulletin, Volume 2, No 2. • Khan, N, Z, 1998, ‘Textile Sector of Pakistan: The Challenge Beyond 2004’, The Pakistan Development Review, Part II (Winter 1998) pp. 37:4, 595-619. • Malik, A, 2005, 'Demand for Textile and Clothing Exports of Pakistan’, Pakistan Institute of Development Economics. • Manjur, A, 2001, ‘Garment Industry in Pakistan’, Small Medium Enterprise Development Authority, Lahore. • Memon, D, N, 2011, ‘Readymade Garment Manufacturers Face High Cost of Production’, Pakistan Textile Journal. • Mukhtar, A, 2008, ‘Insight into the Problems Facing Pakistan’s Textile Industry’, • Shah, A, A, 2011, ‘Performance of SMEs in Export Growth and Its Impact on Economy of Pakistan’, International Journal of Business Management, Volume 6, No 7, (July,. 2011), pp. 287-297. • Quddus, M, A, 2005, ‘An Anlaysis of Exports Growth in Pakistan’, The Pakistan Development Review, Part II (Winter 2005) pp. 44:4, 921-937. • Thoburn, J, 2009, ‘The Impact of World Recession on the Textile and Garment Industries of Asia’, United Nations Industrial Development Organization, Vienna. • Tyler, W, G, 1979, ‘Growth and Export Expansion in Developing Countries’, Instituto De PlanejamentoEconomico E Social, No 20. • Krugman, R, P & Obstfeld, M, 2000, International Economics, Theory & Policy 5th Edition,Addision Wesley, USA.