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Sunday, May 19, 2024

The textile industry needs state support to survive COVID-19

Unfortunately with consumption in the EU and the USA collapsing, the lack of demand has resulted in industry closures not just in Pakistan, but also in competing countries like Bangladesh, India, China, Vietnam, Myanmar and others.

Last week SDPI (Sustainable Development Policy Institute) organized through webinar a “Consultative Dialogue on Textile & Garment Sector Outlook Amid Covid-19”, between the Government, the World Bank (WB) and the Industry Stakeholders. One must compliment Dr. Vaqar Ahmed on his timely efforts and the way he successfully managed the whole event.

The WB presentation and recommendations were well researched, the private sector came prepared and contributed by highlighting some pertinent issues, and especially Ms. Batool from the FBR was very impressive in her knowledge of the industry and adopting a proactive stance.

Long term vs short term strategy

Her understanding, being up to date, patience, and a remarkably positive attitude to honestly addressing the genuine problems of the businesses involved must be lauded. While there were a lot of positives to take home vis-a-vis situation assessment, difficulties post Covid-19 and the long-term way forward, one felt that there needed to be more emphasis on the short-term.

Meaning post Covid-19 where exactly does this industry stands today, what sort of existential threats it faces and what precisely needs to be done “now” to ensure that it remains sustainable and does not get eroded by global competition – the immediate term solutions.

Read more: German fashion brand Hugo Boss places first textile order at Pakistani firm

The WB recommendations, understandably so, focused more on future long-term strategy and how this industry needs to change to become productive going forward, however, the problem is immediate.

Quite a few of the present issues are primarily Covid-19 related and therefore also need to be addressed ‘now’ (right away), that is if the industry is to survive or not shrink significantly. One was hoping to elaborate more on this aspect in the questions and answers session, but regrettably, the webinar never came to that, since the time ran out!

What does the ground reality mean?

Pakistan’s two main international markets in Textiles & Garments are the EU (European Union) and the USA (United States of America). Take these two out and almost 75% of the total exports stutter (directly or indirectly) and nearly 50% of the capacity shuts down since like it or not, 75% of the installed capacity at home is export based.

Unfortunately with consumption in the EU and the USA collapsing, the lack of demand has resulted in industry closures not just in Pakistan, but also in competing countries like Bangladesh, India, China, Vietnam, Myanmar and others. The Pakistani textile industry accounts for nearly 67% of national exports, 12% of GDP and 40% of industrial employment, so it is imperative that it gets back on its feet with all cylinders firing, sooner rather than later.

Read more: Covid-19: Pakistan’s textile exports dealt a blow

To make this happen, we must understand that the recent global developments subsequently lead to two important phenomenon that have either already happened or are about to grip us very soon.

One, that as markets normalize the competition is going to be even more fierce than before, because these countries will be eager to regain or improve upon their previously held market shares and two, some countries will simply lose out owing to their government’s mistake that it did not support its respective industry during this interim period, which means that when the times comes that country will simply not have the operational capacity anymore to get to its previous level.

So what precisely is required at this juncture?

This takes us back to my opening observation that prudence requires that the government at present should ‘only’ be focusing on the short term, whereas, the long term can wait for now. This is the time to ensure that companies survive so that their infrastructure and the production installations do not get dismantled and they are in a position to restore supply chain when the time comes.

And the only way the government can do this is by making sure that that these businesses stay liquid. Unfortunately this is where our government’s efforts are falling short. In fact on the contrary the recent measures and the budget announcement work towards the very opposite.

A cursory look around us and we see wage cum furlough sharing schemes, direct support measures like outright cash grants to SME in some countries, reduction or waiving cum deferring of taxes and levy contributions like the social security, etc. are just some of the measures that others have taken and in comparison just put our efforts in this regard to shame; only two come to mind, the SBP (State Bank of Pakistan) wage loan scheme & the mere announcement on moratorium on LTF’s principal amount.

Read more: Pakistan to export textile masks and sanitizers to developed countries

Also, at a time when these companies need cash, the stubbornness on maintaining the current unsustainable Sales Tax regime belies all logic. To tangibly help these companies, one would have liked to see either the restoration of zero-rating or at least the reduction of sales tax to 5%.

The 250 billion (figure though is disputable) the government claims to have collected under this head in 2019-20 from the previously zero-rated sectors, even if true, is not only unlikely to be replicated this year, but in present times a lower rate is perhaps the only logical way to generate any significant revenue from this head without damaging the national exporting apparatus.

At a time when it is necessary to provide the much needed liquidity to our exporting companies, such levies instead act as a heavy toll on their working capital cycle by blocking almost 8/9 months (in most cases) of their total deployed capital.

What are the others countries doing?

Make no mistake that this is the period to just survive and any product developments in these times are in overall terms going to be at best miniscule. Any delusions about quickly shifting to medical exports like, PPEs, Anti-Microbial, etc. are ill-founded, as the process entails a long and time consuming process of product developments, compliances, certifications and trials, which can take at least 1 to 2 years, if successful.

Implying that the need right now is to play to the strengths that we already have. This means ensuring competitiveness in our current exportable mix that is largely dependent on three inputs: Electricity, Gas, Financial Cost and levies like Sales tax.

Now electricity in Bangladesh to the exporting sector is today available at $6cents, in India 8c, Myanmar 0.44c and in Europe itself at 1.80c, whereas, in Pakistan a big uncertainty looms, where the companies still do not know whether or not the previous tariff of 7.5c will be maintained or not and if increased, then to what. Why would the western markets pay for our power inefficiencies?

Similarly, gas in Bangladesh to the exporting industry is costing around $4.93/MMBtu, in India $3.23/MMBtu, in Myanmar $1/MMBtu and in Europe itself at $1.6/MMBtu – again the same question. Sales tax slab in Bangladesh is 15% with a guaranteed 30 days refund through the auspices of the central bank, in Vietnam 10%, in Taiwan 5%, and in Myanmar it is simply zero rating.

Read more: Govt. should step up to increase textile export

Cotton prices today in India are on average 15/20% less than what are prevalent here in Pakistan. The comparisons in labor costs  (after accounting for productivity) and finance costs tell a similar story.

To conclude, no one is saying that the Pakistani government should dole out cash to the exporting firms, but merely that it should resort to prudent policy measures that create an enabling environment for the Pakistani export manufacturers to survive during these extremely challenging times.

One totally understands and perhaps even sympathizes with the constraints the government faces due to Covid-19, but make no mistake that is not the time to resort to coercive revenue collections, otherwise policymakers will just be playing with the very future of Pakistani exports!

Dr Kamal Monnoo is a political analyst. He is honorary consul general of the Czech Republic in Punjab, Pakistan, and a member Board of Governors of Islamabad Policy Research Institute. He is the author of two books ‘A Study of WTO’, and ‘Economic Management in Pakistan.’ He can be reached at: kamal.monnoo@gmail.com. The views expressed in this article are the author’s own and do not necessarily reflect the editorial policy of Global Village Space.