Will Pakistan's Export Package Save Its Textile Industry?

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Will Pakistan's Export Package Save Its Textile Industry?

High energy costs, severe power shortage, unsupportive government policies and government inaction, are just a few reasons why Pakistan's textile industry is shrinking, according to various industry associations.

Industry experts estimate that US$ 4 billion worth of textile production capacity in Pakistan has closed down across the textile value chain over the last few years. This accounts for almost 35% of the industry's production capacity. Pakistan's textile exports are in decline too. Exports last year were down 11%, global market share fell by 23% to 1.7%, investments dropped 17%, and 30% of the workforce has been rendered jobless.

This is a sad state of affairs, when Pakistan's textile industry contributes 8.5% to its total economic output of US$ 300 billion.

Pakistan slows down as rivals race forward

According to a recent report by the All Pakistan Textile Mills Association, Pakistan's already meager share in the global market has come down to just 1.7%, while regional competitors have been faring much better in comparison.

For instance, textile and apparel exports from India were worth US$ 36.4 billion in 2016-17, compared to US$ 27.7 billion in 2010. Similarly Bangladesh's textile exports rose to US$ 31 billion from US$ 19 billion in the last seven years. And Vietnam's exports too rose to US$ 31.5 billion from US$ 15.2 billion in the last seven years. India enjoys a global market share of 4.9%, and Bangladesh and Vietnam 4.2% each.

High costs of production in Pakistan

The APTMA report points towards dwindling investments in this important industry. Investments registered a fall of 44% over the last decade. And the industry is gradually losing its technological edge over competitors.

The textile sector registered investments of US$ 1 billion in textile machinery in 2005-06. Annual investments since then have come down with a mere US$ 560 million invested in 2016-17, down 44% from 2005-06.

India and Bangladesh, on the other hand, added 25 million and 4.29 million spindles respectively to their textile sector infrastructure between 2005 and 2015 along with 78,600 and 42,900 shuttleless looms respectively.

Pakistan has been unable to attract FDI into its industry, even as foreign investments are helping Bangladesh, Vietnam, Cambodia, and a number of African countries to build and modernise their textile and apparel industries.

The Pakistan industry's poor performance over the last few years has been attributed to the ever increasing costs of production and doing business, in the face of government inaction and instability.

According to industry officials, gas tariff in India was US$ 4.5/unit; Vietnam US$ 4.20/unit; Bangladesh US$ 3.10/unit and US$ 7.65/unit in Pakistan. Energy cost is more than 30% of the total conversion cost in spinning, weaving and processing industries. And gas and electricity tariff is 30-60% higher than in the regional competing countries. Use of obsolete technology in the absence of modernisation has resulted in production inefficiencies.

The industry also laments the high rates of taxes on exports. While in Bangladesh taxes on exports are around 0.25%, in Pakistan it is 1%, and after including various indirect taxes and levies, the total tax on exports is as high as 11%. Political instability and insecurity seems to be much more severe in Pakistan than in other South Asian countries.

Government inaction over policy issues has resulted in rising debts in the industry. The government owes the industry Rs 200 billion in just sales tax refunds, creating a liquidity crunch. Non-compliance is another major issue in the Pakistan industry.

The result has been falling exports over the last many years. At a time when global consumer spending on textiles and apparel is anyway slow, Pakistan's textile and apparel exporters could be losing precious ground to India, Bangladesh, Vietnam.

Is it too late for the Pakistan industry?

In a bid to give a boost to exports, the Pakistan government had conceptualised Pakistan Textile City (PTC) 13 years ago, it was supposed to attract foreign and domestic investments, create employment, and make Pakistan the textile manufacturing hub in the region.

The project cost Rs 2.5 billion. But the PTC never really stood a chance of viability and the fact that it has no water, gas or electricity connection ensured its death long ago. With debts accumulating at Rs 800,000 a day, over the last 13 years, the government has finally decided to cut the losses, and shut down the project.

Besides this, Pakistan has not really been able to integrate regionally and internationally. This is also a reason for its competitors moving ahead in the global market. Pakistan has remained out of some of the regional pacts - SASEC and BBIN to name two.

It has not been able to make the most of the GSP+ benefits granted by the EU, unlike its rival Bangladesh. The country does not have many free trade and preferential trade agreements.

The USFIA consumer benchmarking study has stated the US buyers would prefer to increase their sourcing from Bangladesh and Vietnam. Pakistan claims to have worked towards reducing obstacles to improve ease of doing business. However, traders do not agree. The facts too disclaim government statements. Clearly the Pakistan textile industry is facing an uphill task of holding on to its global markets.

Will the latest export package help?

The textile industry will be the main beneficiary of Pakistan government's Rs 180 billion Trade Enhancement Package. The textile ministry will receive Rs 162 billion from January 2017 to June 2018, for the various trade incentives to be given to the industry.

These include among others incentives for investment, modernisation and development of the industry and reducing the cost of doing business. The government has relaxed import of textile machinery, and introduced 16 new varieties of cotton to ensure better availability of the fibre to the local industry. The government and industry are in agreement that given an enabling environment, textile exports could touch US$ 36 billion annually.

However, the package seems to come with a glitch - it restricts the fiscal incentives to only those exporters who register a 10% increase in their export revenues wef July 1, 2017, as compared to a year ago. Industry bodies point out that with the industry burdened with so many problems, there is little likelihood of an exporter registering a 10% export growth.

Exploring new markets

There are some efforts at trying to explore new markets now. The TDAP (Trade Development Authority of Pakistan) is participating in full strength in Heimtextil Russia later this month. The country has signed a preferential agreement with Indonesia. Negotiations for FTAs, PTAs are on with Turkey, Iran. A number of agreements have been signed with China.

China's CPEC looks to be one of the few bright spots for the industry, making Chinese and other markets more easily accessible to Pakistani traders.

However, this alone will not help. The industry and the government will need to ensure better production, sustainable production and policies, conducive economic and political environment for this industry to gain back its competitive edge.