[Global Observation] The Foreign Exchange Crisis Is Difficult To Solve Pakistan'S Textile Enterprises Or A Large Number Of Defaults

Since 2022, Pakistan has experienced a serious foreign exchange crisis. Mohammed Dahl, the minister of economy of Pakistan, said that Pakistan spent a quarter of its foreign exchange reserves in a week, and now only $3.09 billion is left, which is only enough to support a month's foreign exchange reserves for imported goods.

The International Monetary Fund (IMF) loan of US $6.5 billion (about 45.1 billion yuan) was again postponed, mainly because the IMF unreasonably asked Pakistan to review the China Pakistan Economic Corridor and other China related cooperation, which was severely rejected by Pakistan. Although the board of directors of China Development Bank approved to provide Pakistan with a loan of 700 million US dollars, the procedures have been completed, but from the current point of view, because Pakistan is highly dependent on imports of food, energy, etc., it is extremely vulnerable to the impact of the soaring global oil and natural gas prices, and the solution of the foreign exchange crisis faces great difficulties.

According to feedback from some international cotton merchants and cotton yarn trading enterprises, the industry's concern about Pakistan's foreign exchange crisis has not changed much with China's help. The risk of a large number of defaults in the textile industry is rising, or it enters the "critical point" in April/May, which may trigger Pakistan's banking crisis.

On the one hand, international cotton merchants are not willing to accept the L/C issued by Pakistani banks for 180 days (most domestic banks in Pakistan have not yet resumed the L/C business), and they worry that once the government goes bankrupt like Sri Lanka, the L/C may be difficult to honor; On the other hand, because the letter of credit business of Pakistan's banks is mostly rejected, including the purchase of Pakistani cotton textiles by enterprises in China, Vietnam and other countries, contract execution has also been greatly affected, and the probability of default of Pakistani yarn mills, cloth mills, clothing enterprises and other enterprises has increased.

According to statistics, in February 2023, Pakistan's imports fell by 31.51% year on year, and its exports fell by 18.67% year on year. The impact of the foreign exchange reserve crisis is still in a fermenting state. Among them, not only did Pakistan's exports of textiles and clothing decline 10.69% month on month and 29.53% year on year, but also its cotton imports declined significantly month on month and year on year.

A foreign businessman said that due to the spread of anxiety about Pakistan's textile enterprises or large-scale defaults in 2022/23, cotton enterprises have taken a variety of ways to deal with them, such as reducing Pakistan's port shipments, reducing shipping quotations, and selecting large textile enterprises/trade enterprises as partners. For the contract breach (force majeure) caused by the foreign exchange reserve crisis of Pakistani enterprises, it is difficult for both cotton suppliers and downstream cotton gauze purchasing enterprises to obtain economic loss compensation.