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Wednesday, May 22, 2024

Falling textile exports in Pakistan

Pakistan has exported textile products worth $19.33 billion during the fiscal year 2021 making a record high on annual basis. The country exported textile products worth $19.33 billion during the fiscal year 2021 showing an increase of 25.53 percent when compared with $15.4 billion in the preceding fiscal year.

In 2020 textiles were the world’s 7th most traded product, with a total trade of $774B. Trade in Textiles represents 4.62% of total world trade. Even in the age of slow world economic growth export market has always been an area of opportunity and textiles is one of the well-established industries in the competitive marketplace. Textile and apparel exports are crucial to boost market competitiveness and diversification, strengthening local and national economies and gaining global market dominance.

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As the rest of the world is moving steadily towards more systematic, innovative, inclusive and sustainable growth we as a country have decided to continue to ignore the world bank’s advice altogether and somehow managed to make our economic environment more hostile for businesses than ever before. We have pushed our exporters into the deep waters with their hands tied and without a lifeboat or life jacket in sight.

Read more: Maintaining Exports Through Winter

Understanding the matter better

The textile and clothing industry is the backbone of Pakistan’s economy and Pakistan’s role as one of the world’s leading cotton producers has provided the basis for the textile and clothing industry’s development. The textiles and clothing industry has grown to be the single largest manufacturing sector in Pakistan. The sector employs over 38% of the manufacturing labor force. More than US$5 billion of textile and garment machinery has been imported into Pakistan in the last few years. The textile industry is today based almost entirely on the private sector.

Pakistan has exported textile products worth $19.33 billion during the fiscal year 2021 making a record high on annual basis. The country exported textile products worth $19.33 billion during the fiscal year 2021 showing an increase of 25.53 percent when compared with $15.4 billion in the preceding fiscal year, according to data released by the Pakistan Bureau of Statistics (PBS). Rebound in exports of textiles since last year was the outcome of a series of incentives to support exporters to meet the challenges in the wake of COVID-19 and disruption in supplies.

Moreover, the government’s decision to keep businesses open during the lockdown provided an opportunity to secure orders diverted from economies under strict lockdown. The textile export data for the last five years showed that volumetric textile exports are the primary driver with a double-digit increase in value-added items.

However, the country’s exports of merchandise entered a negative growth in July 2022 after 22 months when the economy recovered from the impact of Covid-19. The export proceeds fell 5.17 percent to $2.21 billion in the first month of the current fiscal year from $2.34bn in the corresponding month last year according to data by the Pakistan Bureau of Statistics. On a month-on-month basis, the export proceeds tumbled by 23.95pc indicating a downward trend in the export sector and just as the increase before the current drop in exports is entirely volumetric.

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World Bank’s Pakistan development update 2021 suggests that in order to sustain strong economic growth, Pakistan needs to increase private investment and export more as a key factor driving the trade imbalance is the declining export competitiveness. The share of exports in GDP has been declining since the turn of the century, from 16 percent in 1999 to 10pc in 2020.

According to Derek Chen Senior Economist, at the World Bank, the long-term decline in exports as a share of GDP has implications for the country’s foreign exchange, jobs, and productivity growth. Therefore, confronting core challenges that are necessary for Pakistan to compete in global markets is imperative for sustainable growth.

In examining the country’s persistent trade imbalance, the report identifies key factors that are hindering exports: high effective import tariff rates, limited availability of long-term financing for firms to expand export capacity, inadequate provision of market intelligence services for exporters, and low productivity of Pakistani firms. This falling export share has implications for foreign exchange, jobs, and productivity growth. At the firm level, the decline is consistent with low entry rates into exporting, and exporters that struggle to expand over their life cycle. At the economic level, the lack of sustained robust growth in exports has resulted in little diversification or sophistication gains for the export bundle.

Read more: Effective Energy Allocation for Export Growth

Pakistan is already ranked 108 among 190 economies in the ease of doing business, according to the latest World Bank annual ratings. With the increase in working capital levels and the interest rate, the cost of business has increased to unsustainable levels while the withdrawal of zero-rating sales tax (SRO1125) and the implementation of a 17 percent general sales tax on the export-oriented sector add to the injury. Inefficient tax policies inflate inventory and capital costs as well as encourage the trade volume to increase outside the tax system resulting in an increase in fraud, smuggling and import of clothing.

For a country like Pakistan, going through energy crises, with high costs and scarce resources in only makes sense that in order to increase productivity and ensure sustainable supply, the resource allocation should be such that the priority of gas supplied to different sectors of the economy should be such that productive sectors of the economy that add more value to GDP should be given preferential priority as such policy measures enhance exports, boost competitiveness,  encourage job creation and have a multiplier effect on value chains. However, Pakistan’s favoring of domestic over industrial consumption is a classic case of prioritizing short-term consumer satisfaction over long-term economic stability.

There is a dire need for pricing policy reforms for the inputs such as fertilizer, gas electricity. The export sector in Punjab is being provided gas at 9$/MMBtu even under the Regionally Competitive Energy Tariff (RCET) in late 2018 while the household basic tariff is $1 and about $2 on average per MMBtu. Similarly, gas prices for fertilizer start from 1$/ MMBtu, signaling a non – transparent and inefficient subsidy to the agriculture sector. In addition, some mills that are eligible for EOU power rates since 2019 are still being denied concessional power tariffs even after cabinet and ECC approval despite a multitude of meetings, letters and commitments.

Due to the high price of inputs the industry has already purchased raw materials at higher rates, at the same time banks are not clearing import documents due to a lack of dollars in the country many mills have imports pending at various stages. As a consequence of the delay, the businesses are not only incurring exorbitant demurrage and detention charges which the collector customs is refusing to waive but are also rendering textile exports uncompetitive in the process. A significant number of textile mills have also started to shut down due to non-maintenance; a consequence of a lack of spare parts.

The way forward

The issue of raw material clearance from the ports remains unresolved owing to the unavailability of forex and therefore mills are currently unable to obtain cash against documentation and are closing down owing to the shortage of raw materials. Many mills are waiting for Technology upgradation funds refunds for almost a decade as a result their bank guarantees and liquidity are tied up as a result.

Though the textile industry maintains its ranking as the single largest manufacturing sector in Pakistan, unfortunately, indigenous manufacturing of its machinery could not develop along with the growth of the textile industry. Resultantly, demand for textile machinery still is almost entirely met through global imports. The state bank of Pakistan announced Long Term Finance Facility (LTFF) in 2016 to promote export-led industrial growth in the country by providing subsidized financing for setting up export-oriented projects and modernizing plants & machinery.

Read more: Pakistan: The economic focus

However, SBP has not yet approved the limit for Long term financing facilities forcing the customers to retire their L/C for machinery at prohibitively expensive rates as the markup allowed may render the projects unfeasible. Textile machinery imports in Pakistan increased from around US$435 Million in 2020 to US$792 Million in 2021 which reflects around an 82% increase from the previous year. It was reported at 5,615.000 PKR mn in Oct 2018. This indicates capacity expansion as well as technology upgradation in the Pakistan Textile Industry.

With an investment of such sheer volume, Pakistan cannot afford to lose its principal industry, contributing more than 67% to the country’s total export earnings, and accounting for about 46% of total manufacturing, with the capacity for export if fully utilized the potential to produce export of 26 to 30 billion $ per anum.

 

Written by Shahid Sattar & Ureeda Majeed

Mr. Shahid Sattar, now Executive Director & Secretary General of All Pakistan Textile Mills Association (APTMA), has previously served as Member Planning Commission of Pakistan and an advisor to the Ministry of Finance, Ministry of Petroleum, Ministry of Water & Power.

The views expressed by the writers do not necessarily represent Global Village Space’s editorial policy.