RajaRawal111
Prime Minister (20k+ posts)
Pakistani businesses have traditionally been export-oriented and they have done a great public service by bringing in precious dollars for our economy. The textile sector tops the list of these exporters, followed by the distinguished rice exporters.
However, in recent times, our exporters are finding it increasingly difficult to compete internationally, leading to a decline in their margins. At the same time, retail businesses in Pakistan are making a killing in profits.
Eight months into the current fiscal year, textile exports have already declined by 2%, with the drop not only occurring in volumes but margins as well. Additionally, exporters are too eager to sell. Hence, they are taking greater risks to get orders.
For example, they are currently exporting against firm contracts (not against the letter of credit which is relatively more secure) that too with credit periods ranging up to 180 days. Due to such long credit periods, these exporters are compelled to utilise bank loans that come with a financial cost. There is always an inherent risk of default with credit sales.
Alternatively, retail businesses have relatively lower risks as they sell from one hand and receive payment from the other. Therefore, there is no risk of bad debts. Furthermore, since these businesses dont have to sell on credit, their utilisation of banking loans is also very low, almost nil in most cases, which results in financial savings. The icing on the top is that these retailers have net margins which are several multiples above the net margins of the exporters. In a nutshell, retailers are making more profits with much less risk.
The case of rice is not so different either. Decades ago, Pakistani rice exporters used to export in bulk. The business used to be profitable, but with multiple yields and effective marketing by Indian exporters, the trade for Pakistan is becoming more and more difficult. It has already declined by 15% in the eight months during the current fiscal year.
This should raise some red flags in policy-making avenues. Since we are losing established markets to other international players, our rice exporters are eager to export to troubled areas like Yemen. They, like Oskar Schindler, believe that war brings opportunities. These exports, even though declining, are done at historically minimum margins.
A distinguished rice exporter Kazim Khandwala recently revealed: Margins in rice exports have declined to almost 1%; however, the retail market is offering margins up to 10%.Just like textile, selling rice in retail doesnt have the risk of bad debts. Hence, we are witnessing an increasing wave of locally branded rice in our supermarkets. Furthermore, most business personnel are pooling their money to invest in retail and real estate nowadays. Malls and luxurious residential projects offer returns which cant be matched by the traditional export business models.
The real magic behind the Holy Grail of retail business in Pakistan is the exponentially growing population. According to some, the country offers the largest untapped, homogenous and middle-class consumer market of the world. And our population is becoming increasingly spend thrift. The longing for comfort is beating the price consideration these days. Hence, retail is gaining prominence. This untapped market and huge potential in our retail market may have lured Royal FrieslandCampina to acquire Engro Foods for around $500 million and Arselik to acquire Dawlance Pakistan for $250 million.
Although this retail frenzy is attractive for businesses, it has some negative implications for the consumers and policy makers. Brands come with a premium. For example, when packaged milk hit the Pakistani market, the price differences in loose milk and branded milk was not so much. Since brands have gained prominence in recent times, the price difference has increased to about 40% most of which is the brand premium.
The other and more challenging situation presents itself on the front of economic policy making. This retail boom would encourage exporters to move to the retail business as it offers higher returns with lower risks. This would lead to a sharp decline in exports which would mean more current account deficit in the backdrop of falling remittances. This ballooning deficit would bring our policy makers to their knees in front of the International Monetary Fund and World Bank.
The writer is a corporate banker and teaches economics
Published in The Express Tribune, March 27[SUP]th[/SUP], 2017.
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