Pakistan’s Textile Industry Needs Resurrection

Pakistan’s Textile Industry Needs Resurrection

Majyd Aziz

March 28, 2008


PREAMBLE:

From a single textile unit at the time of Independence in 1947, Pakistan’s textile industry has come a long way. Even today, the textile sector is the backbone of the country’s economy being the largest provider of employment, foreign exchange, and revenue. Even today, the textile sector is employing over 40% of the working population, generating 65% of the foreign exchange earnings, and contributing 8.5% to the nation’s GDP. Even today, the textile sector can boast of a major investment of over US$ 5 billion in the last few years, creation of a Ministry of Textile Industry at the Federal level, and having the vision to boost textile exports to US$ 20 billion and provide new job opportunities to six million people within a few years while it’s share in GDP would escalate substantially by 2015.

In 2007-2008, the textile exports were just a shade above US$ 10 billion. In comparison, the Indian textile exports were US$ 17.50 billion, and Bangladesh also crossing US$ 10.00 billion. However, India is now projecting textile exports to rise to US$ 80-85 billion by 2010 while Bangladesh is poised to go over the US$ 15 figures before 2010.

However, the 2007-2008 figures have sounded alarm bells in the textile industry. The export of textiles has declined while retrenchments, closures, and bankruptcies are everyday events in the textile industry. One can rattle off lots of figures to portray the dire situation but suffice to state that Pakistan has the ignominy of being one of those relatively few countries that has experienced stagnation in exports. The prognosis is that the country would not attain its export targets when we close the books end of June 2008. The finance managers of the country were hell-bent on ensuring the demise of the textile industry and it seems that their machinations may come true.

ECONOMIC PICTURE:

The scenario at present is that the economic picture seems robust with a GDP growth in excess of 7% for the fourth year in a row and much improved macro-economic indicators. The per capita income surpassed US$ 900, foreign exchange reserves hover around the US$ 15 billion figure, there is a sharp increase in foreign direct investment, the country’s Eurobonds received a much favorable international response. These figures have been parroted by the finance managers at all platforms and brandishing the contention that there is significant socio-economic development of the nation’s infrastructure, there is a much better implementation of economic reforms, and inspite of hiccups, the privatization process is in motion.

Of course, it is imperative to note that the 9/11 syndrome also contributed significantly to the achievement of economic objectives. The re-profiling and write-off of the debt portfolio, the assistance of multilateral lending agencies, the upsurge in remittances by expatriate Pakistanis, the role of Pakistan as a frontline state in the war against terrorism, and the trade incentives some countries, may not be possible in the years ahead. Pakistan is facing a tough international environment and recent events have highlighted the domestic economic challenges too. The country is in the throes of an over-heated economy, negative fiscal developments, and a widening external account gap. In this scenario, the textile sector has become vulnerable again.

PROBLEMS AND ISSUES:

On December 31, 2004, the Agreement on Textiles and Clothing ended resulting in the abolishment of the quantitative restrictions on textiles and clothing in international trade. Pakistan was projected as being one of the major players in the global textile market taking advantage of its inherent plus points, such as the fourth largest cotton growing country, abundant textile workforce, intensive investment in capital equipment and capacity building, low interest rates, a vibrant stock market, and entrepreneurial expertise, etc. Pakistan was poised to make inroads into the global share of countries such as Bangladesh, Cambodia, and Nepal, etc who were perceived as vulnerable to liberalization of international trade. Pakistan was designated as the producer of excellent quality towels, bedwear, and cotton yarn.

Much to the chagrin of the policymakers as well as the stakeholders, the oft-repeated motivational mantra, that after the elimination of the quota regime Pakistani textile sector would have more opportunities than challenges just did not hold juice. The textile sector faced pressure from internal as well as external influences. These impacted heavily on the cost of doing business in Pakistan.

The reasons for the higher cost of doing business could be enumerated in six broad categories:

Utilities: The Achilles’ heel for the textile sector has been the unpredictable and frequent increases in the rates of power and gas, the low availability of water, and the disruptions, power outages, and breakdowns in the systems. Moreover, the discretionary authority given to utilities to sanction connections has further aggravated the concerns of the industrialists. Gas is an important natural resource yet its tariff is excessively high because of subsidies given to some sectors and because of the method of calculating the guaranteed return on average net fixed assets provided to the two gas companies, i.e. 17% for SSGC and 17.5% for SNGPL. However from October 2006, a new formula has been devised that links the guaranteed return to gas companies to the KIBOR rate plus 8%. This, in effect, would increase the guaranteed return for the gas companies.

KESC, WAPDA, and PEPCO are unable to ensure uninterrupted power, and because of other crucial reasons like rates, attitude, and regulations, many industries have opted for the own captive power generation. These are based on furnace oil, diesel, or gas. Textile industries consume 8.7% and 10.96% of total sales of SSGC and SNGPL respectively while captive power plants consume 10.16% and 4.68% of their total sales. The gas rates in Pakistan are US$ 4.02/MMBTU for general industries as well as captive power plants, while in Bangladesh the rates are US$ 1.90 and US$ 2.65 respectively.

The power rates are substantially excessive and if the invisible losses due to load-shedding and power outrages are taken into consideration, then the impact on the total cost of the product is formidable. Water for Karachi-based textile processing industries is expensive too. Due to non-availability of the required water supply, the industries have no option but to depend on the water tanker mafia to supply water, and that too at a steep cost. The water supply situation is pathetic as well as inequitable since SITE Karachi, the largest and oldest industrial estate of the country having 3002 industries including 40% of the total textile processing mills of the country, has a meager laid down water quota. The estimated cost to Karachi units is about Rs 0.50 per square meter.

The solution lies in rationalizing the utilities rate and putting on hold the frequent increases. Gas prices must be reduced by atleast 45% on an immediate basis. Gas prices have gone up substantially in the last few years. Instead of coming up with a consumer-friendly formula for the gas companies, the new formula devised by the Petroleum Ministry will critically affect the viability of the manufactured textile products. The foreign-owned management at KESC has still not found its bearings and their methods of operation have made lives miserable for the business and industrial establishments as well as for the denizens of Karachi. The city is facing loadshedding from 8 to 12 hours daily. The non-chalant pronouncements of the concerned Ministry further adds fuel to the fire. The general impression is that the KESC hierarchy is not presenting the pragmatic and correct picture to the decision makers. The water problem in Karachi can be addressed to some extent by the installation of effluent treatment plants in all five industrial estates of the city so that environmental standards are complied with and also treated water is available for industrial utilization. The government must take the initiative and set up water desalination plants on a priority basis as the future supply of water to Karachi would continue to have negative ramifications.

Finance: As stated above, the textile sector made heavy investments in capital equipment and in infrastructure. The low interest rates enabled them to undertake these investments. However, the situation changed for the worst when interest rates were allowed to escalate thus putting massive pressure on the borrowers and making their feasibilities go haywire. Today, over Rupees 150 billion is the total principal and interest that is due on the investments made since January 2003. The interest rates are nearly 14% now and have a detrimental effect on the balance sheets of the textile sector. The spinning sector has been weighed down by the increased interest rate circumstances. The State Bank of Pakistan, in order to facilitate the export-oriented industries to overcome their prevailing financial crisis and to remain competitive in the international market, decided to allow a one-time opportunity to the textile industry to refinance their outstanding fixed term loans availed from banks or DFIs for import of plant and machinery with loans under its Long-Term Financing for Export Oriented Projects (LTF-EOP) Scheme resulting in reduction of about 5-6% in the interest rates.

Another demand that was accepted by the ECC of the Cabinet was to reduce the export refinancing rate from 9% to 7.5%. This has provided some relief to the exporters. Overall, the textile industry is still not satisfied by these steps and is adamant in their demand that the interest rates must be further lowered so that enterprises maintain their survivability and do not become the sick industries as in the olden days.

Taxation and Duties: The non-positive impact of high cost of utilities and prohibitive finance charges have rendered profits to a bare minimum or else have resulted in huge losses for many industries. At the same time, the outcome of various measures such as taxation, duties, and levies have been negative cash-flows as well as affecting the cost of production. These are custom duties, sales tax, withholding tax, Export Development Fund surcharge, labor welfare levies, local and provincial levies and taxes, and other miscellaneous such impositions.

The textile industry has recommended that custom duty on import of textile-related machinery and spare parts, generators for captive power plants and their spare parts, and other such equipment for textile industry should be zero-rated. Furthermore, sales tax, if any, on any of these items should also be zero-rated. Withholding tax on exports of textiles should be levied at a flat rate of 0.25% rather than the current multiple rates of 0.75-1.25%. Collection of Export Development Fund surcharge at the rate of 0.25% on textile exports should be held in abeyance for a period of three years. All contributions to EOBI, Social Security, Education Cess Fund, Worker’s Welfare Fund, etc must be frozen for all components of the textile sector for a period of five years.

The negative and biased travel advisories issued by various governments for their citizens who intend to visit cities such as Karachi have severely affected the inflow of foreign buyers into the country. Thus the local textile producers and exporters have to make frequent foreign trips to visit their customers and also to attend international fairs and exhibitions. These also influence a lot on their cost of production. It has been recommended that a 5% Travel Relief Support be introduced for exporters of processed fabrics, apparel, knitwear, home textiles, and made-ups.

Competition: Pakistani textile exporters are facing severe competition from the regional producers because of a non-level playing field. Their governments, being more pro-active, have been providing manifold incentives and benefits to them. The competition has an edge in the form of hidden subsidies, duty free import facilities, duty drawback schemes, lower wages and lower worker benefits, cheaper utilities, subsidized interest rates, and more importantly zero-rated market access for their exports to Canada and EU countries. The United States has Free Trade Agreements with many countries and regions such as Sub-Saharan countries (AGOA), Jordan, Mexico and Canada (NAFTA), Vietnam, and Sri Lanka, etc.

Pakistan’s bedwear industry also has been very much affected by the imposition of anti-dumping duty on exports to EU countries. Even though the anti-dumping duty has now been reduced from 13.5% to 5.6%, yet the ramifications are still problematic since there is also the import duty of 12.5% as Pakistan has not been granted GSP Plus status by EU. Thus countries such as Bangladesh have a 15-23% advantage over Pakistan in exports to EU.

The government had taken cognizance of this predicament and had provided Research & Development support of 6% on readymade garments and knitwear exports. Lately, after much lobbying, the government agreed to grant 3% R&D support to the dyed/printed fabrics and white-Home Textiles and 5% to dyed/printed Home Textiles. Nevertheless, these measures have not been effective in getting the industry out of the woods. This subsidy is still much less than demanded.

The government keeps on maintaining that subsidies are not on the economic agenda. However, the regional competitors and their governments are on the same wavelength when there is a need to subsidize the textile industry. What after all is ‘subsidy’? At a very general level, it is simply support which is meant to help the beneficiary deal with existing market conditions better than the other producers in the sector. In the interest of fair play, such assistance will always have to be for a specific period, preferably with a stipulation that the support will be discontinued on the achievement of the objectives. Moreover, the disadvantage which existing producers would have to face on account of this subsidy to a competitor can be justified only if the target is national economic development. In other words, every economic subsidy to be fair and equitable will have to be totally focused to the larger goal of enhancing national economic development. The Pakistani decision makers must take this into account very seriously.

Non-Official Channels: The domestic textile sector is subject to intensive smuggling of consumer, contraband, and capital goods for decades. The issue is compounded further by the encouragement given to those who mis-declare the consignments, and for turning a blind eye to under-invoicing of the imports. This phenomenon is very prevalent in the inflow of foreign-produced fabrics and apparel. There is an imperative need to control this threat since the domestic industry has been ruthlessly affected due to this multi-headed monster. The following are the reasons and effects of this menace:

· Porous and unmanageable international borders have made the job easier for the law-breakers. The matter has further aggravated ever since the control of the borders was handed over to a designated law-enforcing agency whose personnel have routinely displayed a lax and careless attitude and whose ranks have been allegedly corrupted by the smugglers.

· The corrupt and dishonest environment in the customs department, whether at various border check posts, whether at the seaports or airports, or whether at the ten Dry Ports. Dishonest officers, in blatant connivance with those who under-invoice or mis-declare, especially certain well-identified clearing agents, have wreaked havoc on the economy.

· The Dry Ports scheme was originally intended to serve as a facilitation point for exporters based in the northern parts of the country. However, fraudulent persons and insincere bureaucrats conspired to turn this scheme into a haven for imported goods so that all of them could mutually benefit from the unplanned utilization of the Dry Ports facility.

· The infamous Afghan Transit Trade Agreement has enabled the corrupt elements to misuse this facility and channelize the goods back into the country thru “legalized” and allowable procedures and thus goods much more in excess of the requirements of Afghanistan are imported under this scheme and brought back into Pakistan.

· Goods coming from China have been fundamentally responsible for the proliferation of smuggled, under-invoiced, and mis-declared items into this country. Due to the close and meaningful friendship between the two countries, the government policymakers ignored the devastation caused by the Chinese goods over the past many years. It has now assumed a significantly threatening scenario and has also contributed to the increase in the ranks of the unemployed, the poor, and the bankrupt. How will the FTA with China have an impact on textiles is worth considering.

It is proposed that to counter the menace of these non-official channels of trade and to maintain the sustainability of domestic textile industry, the following measured should be adopted:

* Computation of duties should be made strictly in accordance with the scientific mode prescribed by FBR.
* Strict control in ascertaining the quality, quantity, weight, and origin of imported fabrics at clearing stage.
*Accurate monitoring of wholesale and retail markets and establishments to determine price of the imported
fabrics.
*In case of mis-declaration in terms of weight of 20% or above, the entire consignment should be confiscated
and destroyed. In case the excess weight is less than 20% of the declared weight, than the percentage of
weight under-declared should be carried over for consideration in the clearance of the next consignment of
the same importer for the purpose of enforcement of the penalty.
*Suspending the clearance of fabrics at the various Dry Ports.
*Periodic consultative meetings with stakeholders to evaluate the performance of the customs department
and establishing the international rates of raw materials to decide on the assessment value for the purpose
of determining import duty.
*Introduction of Technical Non-Tariff Barriers to maintain transparency, to ensure compliance with quality
standards, and to protect the domestic manufacturers.
*Placement of the following testing equipment at the seaports, airports, and check posts: Yarn twist tester,
Denier tester, Fabric GSM cutter, Digital weighing scale, and any other equipment required for testing fabric.

General Factors: Apart from the above categories, there are other relevant issues that require concentration and resolution. These include:

Toning up the technical and vocational education and training (TVET) system. A skilled and professionally qualified workforce is now imperative. The present TVET scenario needs large-scale efforts in overhauling and expanding the infrastructure. There is a need to have industry-demand training and thus the syllabi needs to be updated and the system upgraded. There is a need to have a much comprehensive and focused approach towards this objective. There is a need to have a pragmatic public-private partnership in TVET so that the ensuing results are as per the requirements.

Knowledge-based export strategy is another key necessity. WTO Reference Centers have been established at the Trade Development Authority of Pakistan in Karachi, in Islamabad, and at the Lahore Chamber of Commerce & Industry. The WTO Reference Center is a program to disseminate information on international trade, provide a deeper understanding into the working of the Multilateral Trading System and to take advantage of the provisions of international trade rules and market access conditions. The object of the Center is to build national capacity for understanding the multilateral trading system and its implications for Pakistan. The use of the WTO Reference Center would be open to the business community, government organizations, academia, policy institutions, researchers, media, students and all who wish to derive a deeper understanding of international trade. Among the various on-line and off-line trade development tools on offer include Integrated Data Base (IDB) Countries Trade and Tariff Information, Consolidated Tariff Schedule Data Base (CTS) Information on Countries Tariff Bindings Statistical Data Base - Countries' Trade Data, Information on Trade in Services etc. At the same time, consultants, both domestic and foreign, should be engaged to keep the exporters in touch with the trends of the global marketplace. There is a need to create more awareness regarding WTO Reference Centers.

Focus on employment generation is imperative. The textile sector is the largest employer of the active workforce in the country. Any negative impact on this sector results in more pressure on the employment scenario. It should be noted that full employment opportunities manifest positively on the economy and the benefits are multiple. Jobs provide poverty alleviation, reduction in street and major crimes, curbing of extremist and uncivil sentiments, and general well-being and prosperity. The textile value-added industry can provide huge employment if most of its myriad problems and issues are handled in a benevolent manner by the government.

Protection of the textile industry from FTAs is essential. The government must ensure that unbridled inflow of textile goods from FTA or SAFTA partners do not sound the death knell for the domestic textile industry. It is imperative that the Pakistani policy makers do consider the fact that the Indian government has provided tremendous incentives, including duty drawbacks, under varied headings and schemes to the textile industry. It is still adhering to the imposition of non-tariff trade barriers making it tough for imported textile goods to enter the Indian domestic markets.

It is to be noted that the finished textile goods are subject to 14% import duties and zero sales tax. The reduction or zero rating of duty on Indian textile goods under SAFTA would prove to be a boon for the Indian exporters. It is a well-established fact that the Indian textile exporters routinely resort to over-invoicing and mis-declaring their products in order to obtain maximum advantages from the incentives provided to them by their government. Hence, they are able to provide their products at a comparably cheaper rate. This would be replicated in toto in their exports to Pakistan. It is strongly advised that formidable efforts should be undertaken by the Pakistani negotiators to impress upon the Indian officials that Pakistan is not in a position to accede to their demands until and unless there is transparency in their export regime, unless there is elimination of non-tariff trade barriers, and unless there is no official patronage of over invoicing of exportable goods.

Export Facilitation Inter-Ministerial Committee. The Commerce Minister had announced in the Trade Policy 2003-2004 that this Committee would be set up to oversee the progress and implementation of the Trade Policy, would be responsible to resolve all irritants faced by the business and export community, and would meet atleast once every quarter. The Committee would consist of the Ministers of Commerce (as Chairman), Finance, Industries and Production, Investment and Privatization, Governor of State Bank of Pakistan, Chairman of Export Promotion Bureau, and Secretary Commerce. The Committee was notified on September 11, 2003. Unfortunately, till today this Committee has not had a single session at all. It is imperative that this Committee should be revived. In Sri Lanka there is such a Committee that has nine Ministers as members and it meets regularly once every month.

Image building and branding of Made in Pakistan logo. The negative perceptions of extremism, terrorism, and the nuclear syndrome have had a detrimental effect on the nation’s products. It is incumbent upon the business community to play its role in combating these negative perceptions and the biased mindset. The government can assist in this respect by earmarking resources to project the country at all important international forums and on the world media. The Made in Pakistan logo must be developed and placed on all products manufactured in Pakistan. The logo must also be conspicuously placed on all official correspondence, at all Embassies and High Commissions, and on all national media. Postage stamps of the logo be introduced and used. All public transport must display the logo prominently. All Chambers and trade Associations must do likewise on their websites, correspondence, and within their establishments. The government must adopt the Indian experience of utilizing the services of Bollywood and emulate this with the support of the Lollywood film industry.

CONCLUSION:

The new government must now become very pro-active in the promotion of textiles, both in the domestic market as well as in the global marketplace. When a couple of years ago, the textile industry faced immense pressure from all fronts that added up into a precarious position resulting in demands for a level-playing field vis-à-vis regional competitors and when these demands reached a crescendo, the government set up a committee of stakeholders for finding a plausible and workable package to get the textile industry out of the quagmire. The Zubair Motiwala Commission developed and presented a broad-based package for the Prime Minister’s decision. Resultantly, on July 15, 2006 the ECC of the Cabinet announced the Rs 25 billion textile package. Further progress was made by the SBP decision and by the efforts of the Textile Ministry to broad-base the R&D subsidy regime.

The textile sector of Pakistan appreciated and acknowledged the sagacious and far-reaching decisions by the government to boost the textile sector and assist in its rehabilitation and its capability to sustain itself in the global market. Inspite of these incentives and measures, the textile sector continued to face difficulties since the regional competitors went a step ahead to maintain their position and their status. It is crucial that all the components of the textile sector be encouraged and should be appropriately satisfied that they have been adequately backed by the government. It is therefore imperative that the government must resolve on a priority basis the residual issues that still impact negatively on these components of the textile sector. This would definitely ensue into more employment, more exports, and more industrialization. The vision that Pakistan would be a major player in the global textile market would then surely be a reality. The recently elected government is at a vantage position to ensure that Pakistan’s textile industry continues to be the economic engine and propel the nation into a prosperous country.

Jo is sahat mein pinah hai ujala hum bhi dekhayn gay
Jo farq-e-subah per chamkay ga tara, hum bhi dekhayn gay