October Issue 2015

By | Economy | Published 4 years ago

Pakistan’s textile business has always remained in private hands, untouched even by the nationalisation spree of the 1970s during the left-leaning PPP government of Prime Minister Zulfikar Ali Bhutto. At the same time, this business has remained the most pampered baby of the public sector because not only does it contribute the most to our Gross Domestic Product (GDP) year after year, but also generates the most employment and has remained a major source of foreign exchange.

Over time, the All Pakistan Textile Mills Association (APTMA) has come to be regarded as an old boy’s club of the country’s richest tycoons, who are known to wield enormous financial and political clout. Indeed, even the so-called ‘deep state’ knows better than to interfere with the business practices of these tycoons.

Originally a product of the Pakistan Industrial Development Corporation (PIDC), these mills used to be set up in the public sector and then ‘sold’ to the private sector for peanuts — and mostly through nepotism.

The ‘golden age’ of permits and licenses allowed the textile industrialists to grow by leaps and bounds, secure behind the high walls of protective tariffs. It was all so easy. People with the right connections but no entrepreneurial skills were becoming millionaires overnight.

The upheavals in the world textile markets or in the domestic cotton fields were never allowed, by successive governments, to adversely affect the margins of these textile tycoons. Every time their margins were threatened, the government of the day compensated them with generous relief and concessions financed from the taxpayers’ money.

By the mid-1970s, Pakistan’s textile industry had turned into the proverbial golden goose. And from then onwards began the efforts to kill it, with both the private and public sectors working in tandem — the former by consistently neglecting to update its machinery and by not investing its windfall profits in value addition and the latter by spoiling it with all kinds of unearned benefits and by not redesigning national trade policies to bring them in line with the on-going process of globalisation.

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As we entered the 1990s, the East Asian tigers, none of whom was a cotton producer, had captured the clothing and garment markets of the world, leaving Pakistan far behind in the textile value chain.

We entered what is called the Asian century around 2000, pursuing the same outdated policies to see China, India and Bangladesh surging past Pakistan and going at least a decade ahead in the textile business.

What is puzzling in the extreme is that a government led by an industrialist and whose closest advisors in the private sector are said to be textile tycoons seem paralysed in the face of the slump in the textile sector.

Textile exports have seriously faltered in the past 18 months or so. After having shown an upward trend of nearly 3 per cent in 2013-14, exports in value terms have declined by 5 per cent the following year. In July this year, export earnings dropped nearly 17 per cent, caused mostly by a serious decline in textiles exports.

Indian exports are said to be growing at an average of 16 per cent against Pakistan’s 2 per cent, in a global export market that is growing at 6.6 per cent.

The growth in Pakistan’s textile and clothing exports has remained pathetic (cumulative 22 per cent during 2006-2013) compared to that of Vietnam (230 per cent), Bangladesh (160 per cent), China (97 per cent), India (94 per cent) and the global average of 44 per cent.

Even worse are the latest figures. In the last one year, there was an 11 per cent quantitative growth in yarn exports but a 28 per cent fall in foreign sales of cloth and bed-wear items, 16 per cent in towels, 53 per cent in tents and canvas, 23 per cent in readymade garments, and 64 per cent in art and silk. All the 11 major textile product categories went down steeply in value terms.

Pakistan’s per capita textile consumption is said to be around 10kg per person and the local industry produces only 2.5kg, with the rest coming from abroad, including around 5kg of second-hand garments being smuggled.

Pakistan’s textile industry contributes 8.5 per cent to the GDP and employs about 15 million people or over 40% of the manufacturing sector workforce. Being the fifth largest producer of cotton with the third largest spinning capacity in Asia after China and India, and contributing 5 per cent to the global spinning capacity, Pakistan was in the best position to travel fast on the value chain. But it did not do so, for which both industry and the government are to be blamed.

Even today, Pakistan boasts of 1,221 ginning units, 124 large spinning units and 425 small units which produce textile products. Besides, the spinning industry, being the sole consumer of cotton, sustains the country’s cash crop.

Steep increases in domestic energy tariffs while the supply itself is short, imposition of the Gas Infrastructure Development Cess Act 2015, and the blocking of an estimated Rs 300 billion in genuine tax refunds and the deliberate overvaluation of the rupee are said to have combined to serve as an impossible hurdle for textile export growth.

Let us look at what APTMA believes to be the main reasons for such a poor showing of textile exports in recent years. Its first and main complaint is the recent hike in power tariff, which has climbed to Rs14 per unit after the government increased duties on electricity by Rs4 per unit. This increase is said to translate into an additional burden of Rs200 million per day on the textile industry–or Rs72 billion every year.

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Power tariffs in all regional economies are said to be lower than 10 cents per unit. APTMA claims that against Pakistan’s textile exports of $13 billion, the textile industry will be paying an additional $1 billion on new power and energy taxes imposed in the 2015-16 budget. As a result not only global buyers but also local buyers of yarn and fabric are said to be shifting to cheaper suppliers from competing economies, mostly India.

Opposing the five per cent sales taxes on non-registered buyers of yarn and fabrics in the new budget, which it believes threatens to burden the exporters with an additional cost of around Rs65 billion, APTMA insists that Pakistani consumers should not be asked to bear the high cost of the TAPI (Turkmenistan-Afghanistan, Pakistan-India) gas pipeline project.

The high production costs, energy shortages, backward technology, cotton shortages and marketing handicaps are said to have made the industry non-profitable. As a result, currently 30 per cent of textile capacity has been rendered idle, claims APTMA.

By demanding a ‘fair’ trade policy, APTMA perhaps wants the government to impose a ‘reasonable’ regulatory duty on yarn and fibre imports from India, which currently carry only 5 per cent duty, rendering domestic products largely uncompetitive.

The minimal use of man-made fibre in the fibre mix is also said to have adversely affected the growth of the textile industry. In order to improve the product range as well as broaden the range itself, the industry needs to maintain a correct fibre-mix ratio. Therefore, APTMA has demanded that all duties on import of man-made fibres be withdrawn. It has also proposed encouragement of new investment to overcome man-made fibre shortages.

The main trouble with the textile industry seems to be its low-value products and the very high cost of producing them.  But then the government does not seem to be in the mood to bring down this cost and has not said why.

This is doubly puzzling because in order to meet the trade and balance of payments gaps we go to commercial markets and raise loans at forbidding interest rates but seemingly continue to refuse to give a helping hand to our major foreign exchange earning industry and do not even say in very clear terms why it is not doing what is being expected of it.

Perhaps the government somehow is convinced that the textile mill owners have enough financial capacity to go into higher, value-added products thus bringing down the cost of production to a level where its exports become competitive in the world markets.

Meanwhile, on paper, Pakistan plans value-addition from $1bn per million bales to $2bn and textiles exports from $13bn per annum to $26bn in the next five years; facilitate an additional $5bn investment in machinery and technology; improve the fibre mix in favour of non-cotton from 14 to 30 per cent; and improve the product mix, especially in the garment sector, from 28 per cent to 45 per cent. Also the government has extended by two years the facility of duty-free import of textile machinery.

But in view of the on-going tussle between the industry and the government, this plan does not seem to be going anywhere.

This article was originally published in Newsline’s October 2015 issue.