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Pakistan textile sector key beneficiary of government focus

Historically, textiles and clothing sector of Pakistan has been the biggest foreign exchange earner as the successive governments have been offering it incentives. While it may be true that the sector is the largest earner of foreign exchange, it is also a fact that the sector has not learnt to live without the crutches of government support. This could be best understood from a fact that Pakistan is among the top five largest cotton countries of the world, but its share in global textile trade has not gone beyond 3 percent. The prevailing situation demands complete refurbishing of obsolete/outdated plants and establishing plants based on state-of-the-art-technology as the country has been losing competitive advantage at a very fast pace.

Textiles and clothing sector is all set to benefit from new government’s export led policies and depreciation of rupee value by more than 22 percent against the dollar since December 2017. Even though sector’s market cap has improved by 12 percent FY19TD, analysts believe the following positive developments have yet to be priced in: 1) Government aggressive focus on exports, 2) reduction in RLNG tariff to US$6.5/mmbtu, 3) rupee depreciation, 4) US-China trade war and 5) Pak China Free Trade Agreement (FTA) Phase II.

Government of Pakistan had no option but to focus on boosting textiles and clothing exports to overcome ballooning current account deficit. To achieve this objective the government is striving to increase exports among other options, by reducing energy tariffs, providing incentives like drawback duties, and cheaper financing under Long Term Financing Facility (LTFF) and Export Refinance Facility (ERF). Further, the government is negotiating Free Trade Agreements (FTAs) with countries like China to enhance exports. Reportedly, under Strategic Trade Policy Framework (STPF), the government is aiming export target of US$46 billion by 2023. After the recent visit of Pakistan officials to China, doubling of exports to China in one year is being worked upon. Analysts believe, aforementioned measures/steps are likely to help Pakistan textile sector to achieve its ambitious export target.

In the recent past it was reiterated that one of the factors, eroding competitiveness of textile industry is the rising cost of energy. Reduction in energy tariff for textile industry should be made in line with regional countries. The incumbent government has substantially reduced energy (RLNG) tariff for Punjab based 5 export oriented sectors (including textile) to US$6.5/mmbtu. With this move, Pakistan’s energy tariff comes in line with its regional countries, which will help Pakistan in competing with these countries.

 

While some analysts say that the recent depreciation of rupee bodes well for Pakistan others don’t agree with this. The first group believes that rupee depreciation by 22% since 2017, after 3 years of no exchange rate flexibility is likely to restore the lost competency of textile companies. The other group strongly believes that depreciation of rupee alone just can’t boost Pakistan exports. The country suffers from cost pushed inflation and depreciation of rupee spikes cost of doing business.

Some analysts are of the view that US-China trade war offers an opportunity for players who are already present in US. Due to the ongoing trade war between world’s two largest economies, the US has imposed tariff on Chinese goods worth US$250billion and has threatened to impose further US$267billion in tariff. Reportedly, US imports from China are down 30% in August and September 2018. This provides an opportunity to countries like Pakistan, Vietnam, Bangladesh and India to expand their footprint in the US market.

Pakistan is in negotiation phase of FTA Phase II with China, which would be a breakthrough for Pakistan’s textile sector as currently Pakistan is paying tariff of 3.5% on yarn as compared to 0% on Bangladesh and ASEAN countries (Indonesia, Malaysia, Thailand, Philippines, Vietnam among others). Tariffs on Pakistan’s other textile products ranges from 4 to 9% as compared to 0% in ASEAN countries. Rationalization of these tariff rates in FTA Phase 2 would unlock potential of Pakistan’s textile exports to China.

Way forward

Historically, policies of the governments have remained tweaked towards spinners, which claim to be the backbone. However, many critics term this an illusion because the real foreign exchange earners have been the manufacturers of value added goods. Some critics even go to the extent of saying that export of raw cotton and coarse counts of yarn should be banned completely, because the buyers of these intermediate goods become the biggest competitors of Pakistani exporters of value added goods in the global markets.

Over the years Pakistan has been labeled as producer of ‘low quality and low priced products’, which is half-truth. This is mainly because the government policies have encouraged boosting volume rather than improving quality. Over the years, governments have been offering export refinance of coarse counts of yarn and unprocessed cloth. The time has come to focus on producers of value added goods, rather than yarn manufacturers.

Since Pakistan does not produce stitching and allied machines, China should be convinced to offer ‘suppliers credit’. In the past Pakistan had an arrangement with Japan under ‘Pay as You Earn’ scheme. This has contributed significantly in the growth of value-added units. It is believed that this scheme was terminated after the quantum of non-performing loans went out of control. Possibility of reviving this scheme should also be explored.

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