Moving in the right direction
Nov 04 - 10, 2002
Over the years, Pakistan is said to be the single crop economy i.e. cotton and textile that claims the lion's share in terms of the contribution in the national economy of Pakistan.
Despite efforts to bring in diversification in country's overall economic get-up the textile sector continues to be the most important segment of the national economy. Its share in the economy, in terms of GDP, exports, employment, foreign exchange earnings, investment and revenue generation altogether placed the textile industry as the single largest determinant of the economic growth of the country.
According to Nadeem Maqbool, the outgoing Chairman of All Pakistan Textile Mills Association (APTMA), despite harsh and hard international economic conditions, Pakistan's textile industry has weathered the storm by coming out of the international crisis in a very positive manner. During the year exports were controlled from falling and significant investment was made in value-added expansion and in Balancing-Modernization- Replacement (BMR).
Nadeem Maqbool said that besides fall out of the events of September 11, the implementation of WTO's agreement, various bilateral agreements have been signed and implemented. As a result global scenario has changed. Government and the corporate textile sector adjusted their policies to achieve maximum benefits of free trade. So, local structure of the corporate culture, investment pattern and fiscal and monetary policies were significantly changed.
The textile sector expects that the volume of investment in different segments of textile industry will exceed $500 million by the year-end. The import of the textile machinery in Pakistan has increased considerably in the year 2001-2002 to expand spinning and weaving capacity. The rise in import of textile machinery is due to higher demand for Pakistani textile items including yarn, fabrics, bed-wear and garments despite economic slowdown worldwide. The production of cotton cloth in Pakistan has increased by 15 per cent while cotton yarn went up by 4.5 per cent. The spinning sector witnesses boom in the last three years and the industry re-invested its profit for new equipment. Besides revival of sitck units, 150,000 spindles had also been added to the working capacity during last three years. An investment of Rs40 billion had been made by the textile industry last one and a half year under Textile Vision Program being monitored by the State Bank of Pakistan. An investment of Rs23 billion in textile spinning sector, Rs.5 billion in weaving, Rs4 billion in polyester fiber, Rs3 billion in processing and Rs.4 billion in knitting and garment sectors have been made.
Actually, the investment in the textile sector was estimated at Rs40.353 billion in the last one and a half-year against an investment of $775 million (Rs46.5 billion envisaged in Textile Vision 2005).
The textile industry imported $405 million worth of machinery in 2001-2002 and $370 million 2000-01. The industry spent over Rs50 billion on the expansion of their units in the last two years. However, increase in import duty on the textile plant and machinery for spinning, weaving and finishing industry in the 2002-03 budget by 5 per cent adversely affected the BMR plans of the textile sector.
After suffering stagnation for the last 5 years, the textile exports started improving; especially the value-added products performed well in the export market in spite of lower demand and depressed prices in the international market.
During the year, the textile industry acquired the most modern technology to produce quality and competitive products to meet the global change. Recent installation of two dying plants by Nishat Textile in Kasur and Kohinoor Weaving on Raiwind Road besides expansion in a number of other factories in Faisalabad, Sheikhupura and Lahore where about 1,000 new air jet looms have been installed would ultimately prove helpful in achieving value-addition in different categories. The industry has been expanding rapidly to increase the export and achieve the targets of Textile Vision 2005.
The export target emphasized by the Textile Vision 2005 is to enhance textile exports from current level to at least $13 billion during next three years.
The investment in textile sector is in line with the market demand; there was a demand for Pakistani yarn in the world market that prompted spinners to increase capacity. However, no new investment should be expected in these sectors until the present capacity is utilized because the spinning mills are running to capacity in Pakistan.
Import of textile machinery and equipment has picked up since 1997-98 when a bumper cotton crop was harvested and the Textile Industry reaped massive profits due to lower input cost. In the last five years more than Rs9 billion have been invested for the import of spinning machinery. It is expected that an additional Rs10 billion would be required for Balancing, Modernization and Replacement (BMR) in the spinning sector during the next three years for producing superior quality yarn besides several units are in various stages of installation in Karachi also. These facilities would improve value-addition in fabrics, besides increasing the volume of fabrics and quality garments exports from the country.
Textile is the only sector where investment has been substantial and regular during past three years. The most encouraging factor of this investment is diversity. The entrepreneurs, who earlier concentrated on Spinning and Weaving, have now established compact units adding state-of-the-art finishing units and knitting machines to add value to their products. The latest addition to this is the setting up of denim cloth producing units.
At present, the export competitiveness of the textile industry can be improved by aggressive marketing techniques and quality improvements which have to be taken care of micro-level that is each textile unit should make its own independent efforts to sell its products in different international markets. All the individual textile units should implement the ISO 9001 program for quality standard and ISO 14000 for environmental standards to counter the threat of globalization.
The banks disbursed a sum of Rs29 billion during the current year to the industry. More than half of the funds disbursed-Rs16 billion — went to the spinning mills and Rs4 billion to weaving mills. On the other hand, only Rs3 billion and Rs2 billion have been claimed by polyester fiber and apparel sectors respectively.
The government sees its historically high reserves built-up and the strengthening of the rupee against the US dollar, as a measure of success of its economic policies. However, the exporters have been repeatedly expressing their need for maintaining the dollar at a level of around Rs60 a dollar. Nevertheless, the Minister for Finance and the Governor, State Bank of Pakistan have cautioned that the government will not be able to support the dollar for long as it puts enormous pressure on the financial resources of the SBP. As such in months to come the dollar could fall to rupee parity of Rs56-57 dollar.
To expand credit facility for the development of the Industry, the State Bank has decided to provide relaxation to banks regarding the credit limit under the Export Finance Scheme so that no exporter is deprived of financing for exports. The banks are now eligible to utilize the sanctioned limit under either part without restriction of any sub ceiling. The banks may now determine re-allocations of their limit within their overall refinance limit sanctioned, so that exporter's request for finance is not refused for want of sufficient limit under any part. The export finance rate has also reduced up to 8 per cent as the State Bank has told banks that it would provide them export refinance at 6.5 per cent. As usual banks are free to charge 1.5 per cent margin while offering export finance to the exporters.
The textile industry in the United States, a major business partner of Pakistan, is currently passing through a phase of economic recession due to various reasons.
Although the US textile sector is pressing the government for an increased market accesses to Pakistan textile products yet the share of Pakistan textiles and other textile producing countries would increase manifold in the days to come as the US is now getting out of the textiles industry.
According to APTMA, the US is the biggest trading partner of Pakistan and in the last year the volume of two-way trade stood at $2.43 billion, followed by EU states with annual trade volume of around $2.4 billion. Pakistan currently exports a total of $1.9 billion worth of apparel and textiles annually to the United States and is the fourth largest supplier of these goods. The US government has been working on several propositions for providing economic assistance to Pakistan. The textile sector in Pakistan is still looking for the expected incentives including enhanced market accessibility for Pakistan Textile products in the US market. However, the industry is pinning hopes that the promised concessions are expected to be approved by the new US senate to be elected in the first week of the current month.
It may be mentioned that the Federal Minister for Finance Shaukat Aziz in a recent meeting with Richard Hass, Director for Policy Planning for the United States has urged the US authorities to increase market access for Pakistan textile exports.
Pakistan looking forward to high market accesses for the country's textiles as higher quotas would generate economic activity and create jobs, which will reduce deprivation. Pakistan has a very competitive textile industry producing world-class textile goods, which have an attractive market in the US, provided the quota facility is further enhanced.
Responding to the suggestion, Richard Hass assured Pakistan that the US government would endorse $1 billion write off and consider greater market accessibility for Pakistan textile products.
The US Senate elections are due on November 5 and the new senate would most likely approve the bill for the write off as well as enhanced accessibility for Pakistan textiles in the US market.
During the year, about 200 textile mills have been closed down in the US which is emerging as a big source of supply of the reconditioned textile machinery and equipment. It is estimated that about $100 billion export opportunity will be created in the US for the counties like Pakistan, when Americans quit textile business in next few years. Pakistan can get benefit through this opportunity.
Pakistan's textile exports, which mainly depend on the gray fabrics and yarn, can also fetch a higher per unit price through having an interface with the latest technology.
The Minister for Industries and Commerce, Abdul Razak Dawood, has said that Pakistan's textile sector has now grown up to the stage where it would be in a position to face the challenges of 2005 when quotas would be abolished.
Textile Vision 2005 is aimed at capturing 10 per cent of world textile market, which amounted to $20 billion exports.
Similarly, through Engineering Vision, the industry was gearing to capture its due share in the $6 trillion total global trade of engineering goods and chemicals which is presently only $274 in Pakistan.
Ginners in Pakistan have finally been made to realize the need for quality processing of seed cotton so as to produce quality and contamination-free lint. The recent drive launched by the government to produce contamination free lint cotton has forced most progressive among the ginners to opt for the new ginning techniques to add value to their final products.
In order to achieve this goal, Small and Medium Enterprise Development Authority (SMEDA) with the assistance of French Experts have undertaken the task of up-gradation of ginning industry.
Currently, each pound of Pakistan's cotton loses 5 cents which meant that on 10 million bales the net loss came to half billion dollars.
Initially, two ginning units each in Khanpur and Bhawalpur have been selected as pilot project for the up-gradation and modification, but all the ginning factories had to be modified by the year 2003, because under the time frame the federal government would promulgate amended Cotton Control Act by the year 2004.
Once the Act is promulgated, the provincial governments would have to ensure that ginning factories were meeting the technical standards and conditions lay down under the Act.
Besides producing quality clean cotton the objective of up-gradation of ginning units, having 40 to 50 years old technology and machinery, was to make them visible and efficient.
At present the total number of the ginning units is 1,221, however out of them 900 ginning units are operative in the country. One of the important objectives of the upgradation of the ginning sector is to revive the maximum number of the ginning units. Otherwise the scraping of these units may cost about Rs12 billion to the economy.
Before going to up-gradation process of the ginning units, another US company was consulted but the advice given by that company that all the installations, machinery and equipment should be thrown and new machinery costing $150,000 each units be installed. For replacement of the machinery in 1221 units means draining huge size of foreign exchange out of the country.
Under the on-going up-gradation process of the ginning factories, the Balancing, Modernization and Replacement (BMR) of each unit would cost around Rs1.5 million and once pilot projects were successful the cost may be further lowered by placing large scale order with any reputed engineering company to manufacture the components of up-gradation based on proto-type machinery.
Similarly, under the financial plan several banks had already shown keen interest and the Asian Development Bank had already allocated technology up-gradation fund, which might be released next year.
Ginning industry was the weakest link in the entire cotton textile economy and needed urgent improvement if quality and clean cotton had to be produced to meet the textile industry's requirement.
The ginners will be financing the up-gradation program and Pakistan Cotton Ginning Association is cooperating with SEMDA in achieving the desired results.
The benchmark set for achieving quality cotton through up-gradation was at energy consumption or cost would come down from 26kwh to 18kwh per bale per hour. Similarly trash will reduce from 8 per cent to 4 per cent and floating fibre from 20 per cent to below 15 per cent.
The Central Board of Revenue (CBR) has finalized comprehensive changes in ginning industry rules 1996, replacing them with the new rules 2002. The rules cover vigilant measures to check tax evasion/false declaration through harsh penalties and prompt recovery under the Sales Tax Act. For the first time, the supply of ginned cotton will be made under Duty and Tax Remission for Exports (DTRE) scheme.
These rules would be notified soon after consultation with the All Pakistan Textile Mills Association. CBR has framed two new forms pertaining to the details of supplies of ginned cotton and supplies under the DTRE scheme.
As per new procedure, the ginners would be required to pay sales tax, additional tax and penalties in case of supplies of ginned cotton on the basis of any fake, bogus or fabricated documents under DTRE scheme.
Forthcoming rules envisage if the ginning unit supplies ginned cotton to any spinning unit or export without issuing the delivery note or gate pass or the tax invoice, the unit would be liable to penalty under the relevant clauses. Where a spinner or exporter claims input tax adjustment or refund prior to the payment of sales tax on purchase of ginned cotton, besides any other action which may be taken against him under the Act, that unit would be liable to the penalty. A spinning unit or exporter fails to pay tax on the cotton purchased by him, the concerned assistant collector may initiate recovery of such unpaid or short paid amount of tax in accordance with the provision of the Act.
Despite sluggish trends in the international markets, exports of textile manufactures increased from $5.75 billion in 2000-2001 to $5.8 billion in 2001-02. The encouraging factor was the increase in the exports of value-added items. The share of value-added products in total textile exports from Pakistan this year was 57.13 per cent as compared to 54 per cent last year. Cotton cloth export also increased to $1.13 billion during this period as compared to $1.03 billion in 2000-01, indicating an increase of 9.7 per cent. The exports of bed-wear fetched $918 million against $745 million, showing growth of 23 per cent, while towels exports increased by 12 per cent to $270 million against 242 million. Readymade Garments improved by 7 per cent to $882 million from$827 million, whereas Made-up articles increased by 6 per cent to $351 million as compared to $331 million.
The exports of five sub-groups i.e. Cotton Yarn, knitwear, Tents, Canvas/Tarpaulin, Art, Silk/ Synthetic Textile and other manufactures declined during the period. Cotton yarn, which earned $1.1 billion during 2000-2001, earned $ $911 million. The exports of Art, Silk and Synthetic textile declined by 25 per cent to $409 million from $545 million.
The textile quota exports to the United States, European Union, Canada and Turkey grew by over 18 per cent with nominal increase in value during the first seven months of the calendar year 2002 compared to the same period last year. The highest amount of increase of 55 per cent in quota exports followed by US 29 per cent and EU 12 per cent. Exports to Canada declined by 21 per cent in quantity.
In terms of value, exports grew by 30 per cent to Turkey and 13 per cent to the EU. Exports declined in case of Canada by 29 per cent and 9 per for the US. The total exports to the US were 420 million square meters worth $481 million; European Union imported 1058-million square meter worth $509 million. Canada imported 16 million square meters worth $18 million and Turkey, 101 million square meters worth $28 million.
The average unit price of Pakistan's textile quota exports dropped considerably i.e. 30 per cent in case of US, 9.6 per cent for the EU and 16 per cent in case of Turkey. The only increase 0.21 per cent was recorded in average unit price of exports to EU. The WTO agreement provides for making textile trade completely free from 2005.
The textile export figures for the first ten months of the current year released by the Export Promotion Bureau revealed that the textile quota exports to the US improved by 24 per cent while the increase in exports to EU countries at the end of October 2002 registered an increase of 16.6 per cent in terms of value and 13 per cent in terms of quantity.
To get maximum benefit from quota free regime, all out efforts are needed to boost textile exports and increase access to the international markets. To boost the exports, the State Bank of Pakistan has introduced three facilitating schemes for the exporters namely, Foreign Currency Export Financing Scheme (FCEFS), Political Risk Guarantee Scheme (PRGS) and the Export Guarantee Scheme (EGS). The bank would provide 210 days credit facility to exporters for South America as compared to 120 days credit facility to other markets.
PROBLEMS IN TRADE WITH USA
Although the US officials at every stage appreciated Pakistan's stand and extended verbal cooperation against terrorism, but there was a general message from the US officials that at this juncture, when US economy itself had slowed down, it was difficult to offer significant concessions to Pakistan exports. The US textile industry urged the Bush administration to refrain from granting Pakistan additional access to the US textile market, as it would cripple domestic industry already hit by widespread plant closings and layoffs. The US administration pointed out that the US textile industry itself was at a decline. There were also pressures from the textile lobby on the US government congress.
TRADE WITH EU
The European Union (EU) has repeatedly offered complete removal of quota restrictions on Pakistan's textiles, subject to reciprocal relaxation in tariff restrictions on imports of textiles from the EU countries.
Pakistan has, however, asked for special preferred tariff regime for its products as provided to Bangladesh, Egypt and turkey, besides a two-year moratorium on anti-dumping duties. After several meetings at government level, late last year, the federal cabinet approved a Memorandum of Understanding between Pakistan and the European Community (EC) for enhancing by 15 per cent textile and clothing products' quota from January 2001 which would be further increased to 60 per cent by 2004. Pakistan-EC textile trade is regulated through a bilateral agreement under which export of certain textile categories to the EU are under quota restrictions.
Under the said agreement, the EU removed duty on many Pakistani value-added products, besides allowing 15 per cent increase in quota with effect from January 2002. While EU duty on yarn, clothe (gray and printed) remained, duty on finished clothe, garments, knitwear became zero-rated. Basic reason for not reducing duty on yarn and fabrics is that Pakistan already has a significant market share in the EU market. The government is adjusting its export strategy for the member countries of the EU. The Textile Associations in Pakistan have decided to establish a textile export-zone. The objective of the zone is to avail maximum advantage of 15 per cent reduction in the duty by the EU. The EU has added Pakistan to the list of counties eligible for special trade preferences, praising its efforts to curb drug production and trafficking. Under the new arrangement, the EU has eliminated a 7 per cent duty on import of clothing from Pakistan which means scrapping 150 million Euro duties a year. To reciprocate the gesture, Pakistan also reduced duties on EU textile and clothing imports.
Lifting of curbs by EU of textile goods from Pakistan by removing duty and increase of quota was an encouraging development which provided Pakistan textile exports greater access to the EU market and an edge over competitors. Pakistan's textile exports to EU thus rose to $1.2 billion are expected to increase by $400 million per annum.
After China joined the WTO, Chinese business showed keen interest in joint ventures with private sector in Pakistan, particularly in the textile industry. The geographic and political linkage between the two counties is an apparent advantage. Exim Bank of China has agreed to extent $200 million credit to the textile industry of Pakistan for import of Chinese textile machinery.
The Finance Ministry is working on a development package for the textile industry for import of Chinese machinery. This loans particularly focus on the large-scale manufacturing sector. It is expected that Chinese loan would be utilized for the import of textile machinery from China. The government of China is also willing to extend its support to initiate joint venture with Pakistan entrepreneurs in the textile sector. APTMA members were also advised to take advantage of Chinese offer for joint ventures for export of relevant textile categories to EU in which Pakistan has exhausted its quota while the other had underutilized quota. The Chinese textile companies have shown interest in linkage with their Pakistani counter parts to jointly explore the potential of world textile market that has risen to 1.8 trillion dollars per annum.