State of the textile industry (Business Recorder (Pakistan))

Pakistan’s premier industry, textiles, appears to be in trouble. The APTMA has threatened to go on a strike if corrective measures are not taken by the government by the 31st of August. This is unprecedented as, despite a business-friendly government, APTMA is out in the cold perhaps for the first time. Historically, it has had privileged access to the corridors of power and enjoyed special treatment.

The strength of APTMA lies in its body of members who contribute to more than half the exports, 30 percent of value added in large-scale manufacturing and 40 percent of the employment in the sector. Therefore, how the textile sector performs has a vital bearing on the growth of the industrial sector, GDP, exports and employment.

The basic question is whether there a crisis in the textile sector today? If so, why has APTMA failed to convince the Government or for the Government to voluntarily take steps to revive the industry? There is a full-fledged Ministry of Textiles and a Textile Policy has been announced for the period, 2014 to 2019. Despite all this, the industry appears to be languishing due to benign neglect and lack of implementation of the Policy.

What are the indicators of an ongoing or potential crisis? Over 60 percent of the output of the textile sector is exported. Exports of textiles showed high growth of 10 percent annually from 2001-02 to 2010-11. Since then they have stagnated at under $14 billion. This is despite cumulative depreciation of 19 percent in the value of the Pak rupee and, more recently, the granting of GSP+ status by the EU. The latter has led to some diversion to exports, without raising substantially the global volume of exports.

During the last four years, Pakistan has steadily been losing market share to competitors. In textiles, countries like India, Turkey and Vietnam have achieved significant growth in exports. In clothing, in addition, other countries like Bangladesh, Cambodia, Indonesia, Sri Lanka and Thailand have edged out Pakistani exports. China, of course, continues to be the dominant exporter, with exports of textiles and clothing approaching $300 billion, compared to Pakistan’s $ 13.5 billion.

The overall growth of the textile industry in 2014-15 is under 1 percent, while it was just over 1 percent in 2013-14. This explains partly the relatively slow growth of the large-scale manufacturing sector. In 2014-15, the big drop is in exports of cotton cloth and yarn of 11 percent and 8 percent respectively. Fortunately, value-added textiles have shown positive growth of 3 percent, primarily because of GSP plus. Overall, there has been a 2 percent decline in the value of exports, due to a 4 percent decline in average quantity exported and 2 percent rise in prices. Pakistani exporters have found it difficult to reduce prices and be more competitive.

There are a number of structural factors which have adversely impacted on the industry. First, there is the persistent energy shortage. Frequent outages have limited the effective capacity and raised cost due to the resort to some self-generation. Second, there has been inadequate investment in technology upgrading and replacement by the industry. Import of textile machinery reached a peak of almost one billion dollars in 2004-05. Since then, it has fallen to less than $ 500 million annually.

The strong protest by APTMA has been triggered by some more recent developments. First, there is the introduction of various surcharges on the electricity tariff, especially the so-called ‘tariff rationalisation surcharge’ of Rs 2 per Kwh on industry. Second, the Gas Infrastructure Development Cess (GIDC) has been levied at the rate of Rs 200 per MMbtu on supply to captive power. This increases the cost of gas to industry by over 40 percent. Third, large refunds, against zero-rating of exports, have been held up, thereby affecting the liquidity of exporters.

Why have all these measures been taken which hurt industry in general and textiles in particular? The answer lies in the steep reduction in the fiscal deficit that Pakistan has committed to the IMF as part of the on-going Extended Fund Facility. Consequently, Pakistan has had to target for big increases in revenue, through measures like introduction of the GIDC. In addition, the growth of current expenditure has to be curtailed. In the budget of 2015-16, the tariff differential subsidy to the power sector will be halved. This explains the introduction of the tariff surcharge, despite the relief provided by low oil prices. Overemphasis on stabilisation clearly impacts negatively on growth.

Key indicators of the loss of competitiveness of the textile sector of Pakistan are, first, the import of cotton yarn for the first time from India since 2013-14 of over $ 200 million. Second, almost 70 percent of Pakistan’s exports globally of yarn are to China. These fell by 20 percent in 2014-15, with the gain primarily to Vietnam.

The Pakistani rupee has remained, more or less nominally stable since January 2015. According to the SBP, the rupee is now overvalued to the extent of 18 percent. Meanwhile, other countries have devalued their currencies significantly last year; India by 6 percent, Indonesia by 15 percent, Thailand by 9 percent, Turkey by 30 percent and Vietnam by 3 percent. The mighty Chinese Yuan, backed by foreign exchange reserves of $3.9 trillion, has fallen in value by 3 percent in the last few days. Earlier, Japan depreciated the Yen by 22 percent. What our policy makers probably do not realise is that there is a low-intensity trade war going on in the face of slow growth in world trade, especially of imports by the EU, Japan and USA.

India has gone one step further. In its new Trade Policy, it has announced the merger of a number of old incentives into a new Merchandise Exports from India Scheme (MEIS). This scheme involves the issue of fully transferable scrips (bonus) to exporters against the value of exports. The rate of these scrips varies from 3 to 5 percent, depending on the destination, type of product and the extent of value added. This scheme was announced by the Modi Government, in the wake of the fall in exports in 2014-15 of 1 percent, as compared to an increase annually of over 15 percent in the previous four years.

What should Pakistan do to revive exports, including textiles? There are clearly two policy options. Either, the Government moves away from its stubborn policy of maintaining the nominal exchange rate and adjust it downwards, at least to the extent of rise in costs due to recent tax moves and pricing of electricity. For the textile industry, the rise in costs as a percentage of the value of output is 4 percent. This implies a depreciation in the value of the rupee of about 6 percent, after allowing for the rise in the cost of imported component of exports. Already, the mark up on export financing has been brought down to 4.5 percent.

Alternatively, if the government is unwilling to abandon its present exchange policy, then it may opt for an export rebate scheme covering most exports, similar to the issuance of scrips in India. The rate could be varied, depending on the extent of value added, with the average at 4 percent of the value of exports. The justification lies in the higher than world prices of energy in Pakistan.

There is urgency for the government to focus on the revival of exports. This is essential not only because of the impending strike by APTMA but also because exports have started plummeting. They fell by as much as 17 percent last month. We have to see exports as part of our lifeline not only for sustaining our external payments position but also for reviving the growth process in the economy.

The writer is the Managing Director of the Institute for Policy Reforms and a former Federal Minister