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Removing structural inefficiencies in Pakistan

Patron in Chief of APTMA, highlights that despite its immense potential, Pakistan is currently underrepresented in the high-value textile sector. He identifies structural inefficiencies and the lack of implementation of reforms as two primary reasons for Pakistan lagging behind regional competitors and specifies several measures that can be adopted to accelerate the required paradigm shift.

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The textile sector continues to steer Pakistan’s economy through difficult conditions, consistently outperforming other sectors and adding value. Textile and garment exports increased by 23 percent year on year to $15.4 billion in 2020-21, and are expected to go up to $20.5 billion by the end of FY22.

There has been particularly impressive growth in a higher-value bedsheets, knitwear, and woven garment exports, coupled with a decrease in lower-value exports. Seventy percent of textile exports were of items that had undergone extensive processing to make value-added products. This indicates a new paradigm of demand for higher value addition that has taken over textiles globally, and in which Pakistan is still playing catch-up.

Read more: APTMA demands immediate action to save textile industry

Understanding the matter better

Despite its immense potential, Pakistan is currently underrepresented in the high-value garments and fashion sector. There are several measures that need to be adopted in order to accelerate the required paradigm shift. The current production of yarn and greige cloth that is not converted into higher-value products can add $12 billion per annum if converted into garments.

In order to take advantage of this opportunity, the textile industry needs to set up 1000 garment plants with each plant consisting of 500 stitching machines at an investment of $7 million. Each plant would be able to produce garments for exports of $20 million while generating employment for 700 workers. The total investment would be the US $7 billion generating annual incremental exports of $20 billion and providing employment to 700,000 workers. 1000 Garments plants could be established near major Textile producing cities i.e., Lahore, Karachi, Sheikhupura, Faisalabad, Kasur, Multan, Sialkot, Rawalpindi, and Peshawar.

However, enhanced exports rely heavily on a continuous and uninterrupted supply of gas and electricity to the entire value chain at regionally competitive energy tariffs – which is the main reason Pakistan’s entry into these markets has been laggard. New projects and expansions have not been energized since November 2021 due to the non-provision of energy. This 50% gas supply is completely insufficient to run the business normally, and as a result, 20 to 25% capacity is closed.

The major concerns

Power supply quality to the textile industry is largely compromised and a serious concern for the industry. Given that sophisticated machinery is involved in the production, inordinate shutdowns, breakdowns, jerks and interruptions have wreaked havoc and resulted in huge losses to the industry and to the national exchequer. The output of textile units operating on electricity is therefore hovering at less than 80% of installed capacity.

It is essential for the government to ensure regionally competitive energy prices across Pakistan throughout the value chain, restore the priority of the textile sector in the supply of gas and no-load shedding, and fast-track the applications of pending industrial electricity connections.

Read more: How textile industry helps in leading economic recovery?

This is not to say that things have not been improving –growth despite the absence of a supportive environment has actually been quite impressive. From 1947 to 2018, Pakistan could only achieve $13 billion in textile exports, but in just the last four years, textile exports have doubled. By the end of FY23, we are hoping to achieve textile exports of at least $ 25 billion.

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The textile sector invested $ 5 billion last year through TERF/LTFF, which has added to the export potential by at least $5 billion per annum. As a result of this investment, an additional capacity of 1.25 million spindles, 6000 air-jet looms, and 3 million square meters was installed.

If the private sector is enabled to step in and take charge of the shift to higher value-addition, it will be a game-changer for Pakistan. For this to materialize, intermediate products must be available at affordable and internationally competitive rates. The LTFF scheme would have to be extended to the entire value chain since the whole value chain requires up-gradation and modernization to meet export targets. Turnover tax must be reduced to 0.5 percent and turnover tax loss should be carried forward.

Furthermore, the implementation of the Textile Policy 2025 is absolutely essential to creating the policy environment in which exports can thrive. The Textile Policy 2025 was developed through extensive consultations with the entire industry and provides a comprehensive framework for the sector to expand exports rapidly to enable a sustainable economy.

Read more: Current RCET policy can lead to shutdown of textile industry: PIDE

Coming back to the ultimate goal of value-addition, it is important to emphasize that the international MMF to cotton ratio is 70:30, while in Pakistan it has remained at 30:70 for the past several years, making it difficult to increase our share of international textile trade significantly.

We cannot dream of higher economic growth without moving into value-addition, particularly in the highly productive textile sector, where the predominant focus is on cotton. Textile millers need to prioritize the use of specialized yarn and tap into the growing market for sportswear and athleisure. Relying on short-staple fiber raw cotton is a myopic approach that essentially centers on a shrinking market while neglecting the high demand for MMF products. Meanwhile, the MMF tariff regime prevents Pakistan from aligning its products in tandem with the rest of the world. The demand for MMF has grown exponentially owing to the convenience it affords us a cheap material used in the production of the ever-relevant active-wear trend.

However, the duty protection given to obsolete plants in Pakistan is denying the Pakistani industry any chance to compete in this booming market, internationally or domestically. This brings us to the issue of polyester staple fiber, a raw material of the industry upon which it would be unreasonable to apply any duties. Alarmingly, at present, there is a 7% customs duty on the import of polyester staple fiber. This racks up the total import duties, which subsequently fall in the range of 20% including antidumping duty. This must be abolished if our industry is to have any chance of being competitive.

Read more: Textile industry’s export orders booked for the next six months

As the Anti-Dumping Duty (ADD) is now applicable on imports through DTRE etc, the overall impact of the PSF duties is that our exports will be limited to cotton products only while the world now seeks high-performance and innovative apparel which are only possible through the use of MMF material.

As for cotton, Pakistan has potential and capacity to produce 20 million bales annually. Under these circumstances, we are unable to understand why we should be spending $ 3-4 billion on the import of cotton every year when this can be grown domestically.

A focused high-powered commission on cotton must be established immediately

The sector’s zero-rating must be reinstated, given that 80 to 90 percent of its products are exported, as the collecting and refunding costs are more than the sales tax yields. There is a total collection of Rs. 18 billion, while exporters suffer in the form of delayed, deferred and pending refunds. According to a recent IMF report, the cascading impact of GST has significantly harmed Pakistani exporters’ competitiveness.

Export-oriented industries in Pakistan are 25 percent more productive than non-export-oriented businesses, and their productivity increases with an increase in economic activity. However, structural inefficiencies cannot be exported, so it is essential to first mitigate them from all inputs.

Read more: Modern Slavery still prevalent in England’s Textile Industry

Since exports in Pakistan are labor-intensive, expansion in this industry is a surefire way to ensure large-scale job creation, as well as an increase in foreign currency to pay for required imports. The problem does not lie in a lack of policy development, but rather in the implementation of reforms. With a greater focus on implementation, there can be a tangible impact on sustainable development and economic growth, thereby greatly enhancing the position of the textile industry and Pakistan’s exports by 2030.

 

Mr. Gohar Ejaz has served as Chairman of All Pakistan Textile Mills Association (APTMA), elected unopposed in the year 2010-2011, the premier textile industry association of the country. He is the Chief Executive of “Ejaz Group Of Companies” comprising Ejaz Spinning Mills and Ejaz Textile Mills Limited. Mr. Gohar Ejaz was awarded Hilal-e-Imtiaz, in the year 2011, the highest civilian award. Moreover, he was recently conferred with an Honourary Doctorate from the University of Punjab.

The views expressed in the article are the author’s own and do not necessarily reflect the editorial policy of Global Village Space. 

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