Needs to be prepared for WTO

Dec 29 - Jan 04, 2003

Textile could be expressed as the backbone of Pakistan as it has become an integrated part of industrial wing of the country, presenting a prominent element of the economy. Not only the textile sector provides billion of dollars in terms of exports proceeds yearly but hoists Pakistan's name in the international markets due to quality and standards. It provides employment of 45% of overall labor force of the country and accounts 27% of value addition in the manufacturing sector. It represents the largest industry in the country and the greatest source of foreign exchange earnings in Pakistan.

On the basis of these facts, if we rate textile sector as an important element of the country's trade that would fit in this phenomenon that the textile sector is a pillar of the local economy. We can compare textile's importance by virtue of this fact that it contributes 46% in the manufacturing division, sharing 65% in total exports, generating 9% in Domestic Gross Product (GDP), providing jobs to million last but not least contributes 31% in foreign direct investments. Among the other underlying factors, it spends approx. PRs40bn in terms of salaries and wages.

Since the textile sector is a critically dependent on the supply of raw material from agriculture sector and, therefore, whatever happens to cotton crop it affects the performance of the textile sector. The fluctuation in prices prevalent throughout the year coupled with shortfall in international market have created conducive environment for investment in BMR of the existing units and expansion of the capacity. The government has announced a "Cotton Policy" in the year 2000 and textile vision 2005 to ensure the availability of cotton in the future and promotion of textile as an important industry.

In textile sector, the cloth sector generates 20% share in terms of industrial growth. The textile sector generates approx. 8% revenues in terms of direct and indirect taxes. The textile industry has a distinguished status as a backbone of overall developments in industrialization of Pakistan that is a sign of proud of all Pakistanis. At the time of independence, Pakistan did produce low quality cloth and yarn, now the situation has become in favor of Pakistan on the back of continued struggle to promote textile, fetching a big chunk of foreign currency as Pakistan has a separate status of supplying of cloth and yarn related products in the world. Pakistan ranks third after China and USA in producing cotton in the world. However, Pakistan lags behind to export textile products in Asia and takes the eight positions among the regional export oriented countries.

Unfortunately, textile industry remained lagged behind if we compare with other industrial developments in the country as it fetches 80% export proceeds by exporting only ten major items. On the other hand, it is quite interesting that country, till now, is able to export only to ten states around the world out of the total number of countries of 189. If our government and marketing managers get access to other markets then our exports proceeds would improve by five times in terms of foreign currency. At current, approx. 500 textile units existing in the country, fetching over US$6bn as a foreign currency by exporting million tones of yarn and raw material of textile goods for end products. In international trade, the export figures have breached the historical barrier of US$6 trillion.

According to the international trade figures, the total exports have reached at US$6 trillion while textile exports contribute approx. US$4.5 trillion. In international markets, Pakistan gets hold of only 0.17% share out of total trade in the international exports. Going by international export figures, the portion of exports figures among the international exporters is much less than the comparable size of cotton crop production and cotton related products in the world as Pakistan has a prestigious name in supplying textile goods. Among the major nations, Pakistan exports, yarn, raw cotton and related products to USA, UAE, UK, Germany, Hong Kong, Saudi Arabia, Italy, France, Netherlands, Iran and China. Besides these activities in textile industry, the volumes of exports are interestingly very low as much as we compare with any other export-oriented nation in the world.

This point is important to discuss here that the total textile exports contributes only 27% through value-added products, indicating weak performance. According to the statistics, the hosiery demand has increased in USA as Pakistan exported 65% hosiery products to USA. Besides this likeness of hosiery demand other than USA, the European Union has also emerged as a big market of textile products. Going by the exports of hosiery products to international markets, the country was able to fetch only US$60m by exporting 94% of hosiery products to ten countries, translating into an acute weakness. There is a big need to find out the new market as the hosiery exports are limited in ten countries. On the other hand, rest of the hosiery products exports to thirty fives states. Since the cotton demand has increased in international markets due to shortage of cotton production and increase in cotton consumption, the readymade garments demand has increased by 90% during last decade, arresting the sizeable amount of exports proceeds of US$195bn globally as compared to US$108bn previous year all over the world. Besides these developments, the Russian markets have also appeared to be a big market place due to increasing demand in textile products that would also play a crucial role for the export-oriented states.

European Union is a biggest readymade garments exporter, generating approx. US$47bn followed by China US$37bn having second position in this segment. In other garments export-oriented countries including Hong Kong US$9.3bn, Mexico US$8bn, Turkey US$6.6bn, India US$6.5bn, USA US$6bn and Pakistan ranked last as it was able to fetch approx. US$2.1bn. According to the statistics, during last decade, textile products witnessed a 90% growth on account of continued enhancement in textile sector as the number of textile units have increased to 445 from 277 in the country. Consequently, the exports of textile products have increased by 64% followed by a sizeable increase in yarn by 8.7% during last couple of years.

Our reliance on textile sector is evident from the fact that this sector alone account for 65% of our exports, but the portfolio of our textile exports is not well diversified. We are heavily reliant on a few categories for a major share of our textile exports and have left many potential segments untapped. The band wagon mentality of our exporters has resulted in high pricing of quotas, when a price is paid to export under a quota-restricted category. There is a need to shift the focus towards untapped markets.

On average, Pakistan produces approx. 10m bales of cotton yearly. This point is pertinent to discuss here that the raw cotton export has declined by 50% on account of dramatic increase in local consumption in the wake of continued effort by textile sector to enhance their capacities for BMR to compete the international standards. Though, the raw cotton exports are less than from
any cotton exporting countries, causing huge losses by smuggling from Chinese and Indian products have put dangerous effects on local textile industry that ultimately proves to be intense losses in government revenues of millions of dollars.

Another set back for Pakistan exports has been the fact that it never utilized its full quota of exports due to lack of government's interest and exporters inefficiency as the country was able to avail its granted quota by just 37.9% during 2HFY03 as compared to 33% during 2HFY02 same period last year. Though, the utilization rate of export quota depicted a growth of 4.7% coupled with a sizeable increase of 18.56% in exports, it remained lower than the allocated quota as Pakistan never utilized more than 70% quota allocation despite special quota allocation to Pakistan during the Afghanistan war as a front line partner led by US-led coalition and continued BMR process in textile industry in the country.

According to the statistics maintained by Export Promotion Bureau (EPB), the utilization rate of quota allocation increased to 63.3% in FY01 and 66% in FY02 through EPB. Pakistan enjoys the total allocated quota including 65.2% for EU, 23.7% for US, 9.8% for Canada and 1.1% for Turkey. Going by all these factors, all stakeholders from textile industry have been raising the negative impact of implementation of WTO regime where entire globe will become a single market, reducing product's prices in the range of 10-15%. In this scenario, it would be quite difficult to get the international market access where the local productís price would become cheaper than exported product's price. In order to meet the challenges beyond the WTO regime, the government has constituted various starring committees to strive the challenges ahead. In this regard, the government has designed a plan 'Textile Vision 2005' to counter the negative impacts before joining the WTO regime.

According to the Textile Vision 2005, the China will sign joint ventures in textile industry and to provide funding as investment of US$6bn coupled with transfer of computerized machinery with latest features, helping to boost the export. At present, the government has focused to increase textile exports to Asian countries as Indian exporters have managed to capture a major chunk of market share in Bangladesh, Japan, Hong Kong and Sri Lanka by keeping low prices. Besides these developments made by India to meet the future challenges, the Indian authority has made a strategy to set an export target of US$50bn for 2010 vision. According to the Indian population statistics, the workforce in textile industry has crossed the historical mark of 30m and expected to increase parallel with future strategy.

Inversely, our basic input costs of production including electricity, gas and oil have increased considerably that have increased the cost of end product, making it difficult for the exporters to explore new markets in different region. In addition, our exports are facing stiff competition due to cheap prices of different brand of products made by other countries as there basic input cost of production is much less than from our unfavorable cost of production. On the other hand, the elimination of quota system from WTO regime has also created question marks for local textile mills; If proper planning is not done to meet the challenges ahead, however, otherwise, our textile exports would not be able to maintain the current growth rate. The present government has provided incentives for foreign investment, creating a greater opportunity in textile industry for further investment and BMR drive. During last four years, the textile industry depicted a huge investment of PRs250bn, translating into an approx. worth of US$4bn. The textile sector spent approx. US$1.8bn for spinning sector, US$864m for import of machinery and spare parts, US$37m for building and infrastructure and rest of the amount spent in purchasing local machinery and spare parts. Going by the huge investment in textile industry, textile industry continued to expand its capacities to meet the international requirement, pointing out the distinct indications about the seriousness of textile industry. The strong textile industry would play a crucial role to sustain the growth in exports that could lead to earn a sizeable amount of foreign currency in years to come.

During FY02, the total export figures touched the US$11.3bn vis-a-vis total import of US$12.18, translating into a trade deficit of US$1.5bn. In our conclusion point, if the government desires to enhance its exports and cut down the trade deficit then the government should take appropriate steps to promote textile sector.

Agreement on Textiles and Clothing (ATC), if implemented in spirit, will largely affect the textile sector of Pakistan. A quota-free trade era calls for structural and operational adjustments in the textile sector, to enable our exporters to be globally competitive, as guaranteed quotas are to disappear. The new era will give a push to our exports in categories that have a potential for greater exports but are limited by the quota constraints. But at the same time, it will take away the exports that we merely get because of the quota allocated and not because of our competitiveness. The new era is to set in January 2005 and we are left with nearly four and a half years to take care of upcoming developments.

Implementation of ATC is of interest for developing countries as they are the textiles exporting countries. Developed countries are least interested in its implementation, as they remain artificially competitive in the quota regime. The developed countries are blamed to take shelter under misinterpretation of ATC and hence postponing the implementation of the Agreement. The Agreement on Textiles and Clothing was formulated in such a way that developed countries could essentially postpone the elimination of restrictions until 2005 since half of the products are to be liberalized only on the last day of the Agreement. They fulfill the requirement of liberalization in word but not in spirit. Little real liberalization has taken place to date.

Developed nations are going to get maximum benefit out of global trade expansion resulting from WTO agreement implementation. But even then they are taking every possible care to avoid any negative developments out of such agreements. Because of this reason, EU and US have postponed the integration of "import sensitive" textile products until the last day of the agreement. This extended protectionism is giving them enough time to make their industry globally competitive by modernization and introducing efficient processes. By January 2005, when ATC is fully implemented, they want to become as competitive as the third world textile exporting countries are.

A short-term task would be to review our quota policy that promotes quantity driven exports. It needs to be based on unit price realization to put an emphasis on quality. Incentives like a lower export refinance rate, liberal financing of working capital needs etc. should be offered for exports in under-utilized or unutilized categories. We need to be proactive to adjust to the inclusion of China and many Russian states in WTO. This development will have potential effect on our textile exports, as these countries include both the importers and exporters of textiles. A medium term task would be to ensure our global competitiveness in the years to come such that we would be able to export even in absence of quotas, when ATC is fully implemented. A long run strategy calls for measures to make our industry compliant with international quality standards, switching to efficient processes and production methods and bringing built-in responsiveness to global trends in our production and exports. A timely flow of information between government and textile exporters and prompt actions based on this information is the key to keep our exporters globally competitive. The fact remains that the textile sector of Pakistan has a lot of potential. However, we have not been able to make an optimum use of this potential because of the short-term ad-hoc policies that have governed this sector.

The author is Manager Research, Live Securities (Pvt.) Limited — A project of Khanani & Kalia Group