ACHIEVING THE EXPORT TARGETS
Textiles and clothing, rice and leather can play a major role in boosting exports
By SHABBIR H. KAZMI
July 24 - 30, 2006
The government has unveiled the trade policy for 2006-07, which seeks further liberalization of foreign trade and sets an export target of US$ 18.6 billion and import bill of US$ 28 billion, leaving a yawning trade deficit of US $9.4 billion. The policy offers incentives for diversification of exports and seeks increased market access. The major focus is to expand trade with regional Muslim countries, particularly Iran, Afghanistan and Central Asian republics, and establishing meat and poultry export zones in six cities to increase market share in Halal products. The freight subsidy has been extended with modification.
The Export Promotion Bureau (EPB) will be replaced with Trade Development Authority of Pakistan (TDAP) which will be an autonomous body equipped with resources to effectively exploit opportunities for increasing exports. The first phase of transition from EPB to TDAP will be completed in six to 12 months.
The focus will also be on enhancing exports of identified sectors to over one billion dollars each within three years. The identified sectors include leather products, engineering goods, chemical and pharmaceutical products, towel and denim and services sector. In order to facilitate and promote exports to Afghanistan, Iran and CARs, it has been decided to establish expo centres and warehouses at Peshawar and Quetta, and an export centre at Islamabad.
The business community offered a mixed reaction to the policy. Some saw the export target of US$18.6 billion positively within reach owing to the incentives announced for non-traditional sectors. Others were disappointed with rising cost of utilities (gas and power) and felt that the incentives announced were not attractive enough to neutralize the impact of the rising cost of doing business and, therefore, export target may prove to be too ambitious.
The immediate reaction was that the policy offers more incentives as compared to the last policy. This year focus seems to have shifted away from textiles to agro-based non-traditional items. The government aims at achieving export-led growth. The 13% increase in export target for 2006-07 seems within reach because the policy is studded with new measures and incentives for a number of sectors. Though the policy is not sector-specific, it covers a large number of areas that needed urgent attention.
The initiatives like skill development program in textile sector, facilitation to SME exports, warehouse city, incentives for boosting fruits and vegetables exports, border infrastructure, national trade corridor improvement program, incentives for freight forwarding sectors, setting up carpet cities, dazzle park, expo centres in Islamabad, Quetta and Peshawar, freight subsidy schemes and promotion of meat exports are aimed at boosting exports through products diversification as well as exploring new markets.
Haroon Farooki, President of Karachi Chamber of Commerce and Industry (KCCI), has termed the policy as export-oriented in view of the incentives offered to various sectors, which fall in the category of non- traditional items. He was of the view that the policy is not sector-specific but offers incentives to those sectors, which have the potential but were neglected in the past. It looks that the government has finally realized the importance of these sectors and export-oriented industries, which have enormous potential and play an important role in boosting the country's exports.
Haroon said that all the policies took few years to show results. The government should have changed the system and announce the trade policy for at least three years so that it could produce fruitful results as implementation of the policy eats up at least first six months and the remaining six months are not enough to get optimum results. He was of the opinion that the export target was quite achievable but much depends on the power and gas rates as further increase would enhance the already high cost of production. It would erode the competitiveness of the local exporters and ultimately create hurdles in achieving the desired export target.
Former Chairman of Site Association of Industry, Majyd Aziz, described the policy loaded with too many long-term measures instead of any short-term measures. Like last year, the vision may be clear but a lot depends on the implementation. Ironically in Pakistan by the time the policy starts yielding results the next policy becomes due. He said that the new policy was "a non-textile policy" as some package was announced for the textile sector two days earlier. However, the new policy has addressed those non-conventional sectors, which can do wonders in creating new markets abroad and enhance foreign exchange earnings. He was of the view that the export target would not be achieved as the textile sector is likely to remain under pressure for one more year owing to domestic and global issues.
Majyd Aziz is not the only critic, the apparel industry has also rejected the Textile Package announced by the government.
It feels that incentives announced in the form of research and development (R&D) allocations do not support to the level and magnitude of the crisis being faced by the sector. Textile industry leaders expressed their disappointment over the package and felt that it offered too little, which could not be of any consequence for the crisis-ridden industry. Industry leaders were of the opinion that after the quota phase out the industry faced two issues. On the one hand prices in the international markets have gone down due to severe competition and on the other hand cost of doing business has also gone up.
Pakistan is the third largest player in Asia with a total of 5% spinning capacity of the world. The overall exports increased to US$ 14.962 billion during 11 months of 2005-06 over the corresponding period a year ago. Of this increase, 66% has come from textile manufacturers. Pakistan is gradually moving towards higher value added exports. The shares of bed linen, knitwear and towels have increased while those of cotton yarn and synthetic textiles declined during past few years. Textile industry has made an investment of about US$ 6 billion during the last six years. The breakup of US$ 6 billion is 47% in spinning, 27% in weaving, 11% in textile processing, 8% in made-ups, 5% in synthetic textiles and 5% in knitwear and garments. This investment includes both investments through bank loans as well as own sources. This investment has been made in the form of BMR activities and capacity expansions.
During July-May period textile exports increased by US$1.39 billion, rice by US$ 178 million, leather products by US$152.5 million, petroleum products by US$ 242 million, chemicals by US$ 23.1 million and miscellaneous items by US$ 888 million. The share of textile sector overshadows other sectors. That means it has better potential than other sectors. Nevertheless the government is continuously trying to diversify range products being exported, which is resulting in higher export of non-textile products. These exports, for the first time in history, have exceeded US$ 6 billion.
Bilal Mulla, Chairman Pakistan Readymade Garments Manufacturers and Exporters Association (PRGMEA), said the package carried nothing for the value-added garment industry, adding that the 3% subsidy on fabric exports would result in an increase in prices in the domestic market. This tantamount to giving subsidy to Pakistan's competitors. It would make Pakistan a source of raw material source for apparel industries rather than enabling Pakistan to enhance its value added exports. As a result, apparel industries of India and Bangladesh will get an advantage over Pakistan. The PRGMEA chief pointed out that the domestic price level was determined on the basis of international supply factors, as exporters of fabrics would charge an additional amount equivalent to the subsidy which would increase fabric prices in the domestic market.
Mulla was also of the opinion that the most-affected readymade sector was totally ignored and the textile package in its present form would further bring the apparel industry under pressure. It would make Pakistan a source of raw material and discourage value-addition because 'made in Pakistan' products have been rendered totally unviable and uncompetitive in the global market.
Textile exports contribute about 60% to Pakistan's total exports. If the policy planners wish to enhance country's exports and also curb the mounting trade deficit due attention has to be paid to the textile sector. Over the last ten years Pakistan's textile exports have been growing around 20% per annum. Trying to analyze the major factors behind this strong growth Alfalah Securities has correlated Pakistan textile exports with variables such as textile machinery imports, rupee devaluation and cotton production over the period 1980-2005.
The data shows that the strongest correlation of exports is to textile machinery, with a correlation of above 0.95 for all the decades. This explains that if textile machinery imports go up or down then 95% of the times export growth figures moves in the same direction. In the past 5 years with the massive investment in textile machinery the exports have followed the suit. However, with no major expansion plans ahead and with rising credit cost, import of machinery has already started to decrease and could result in slowing down of textile export growth, presenting a serious threat in the government's efforts to meet its export target.
The correlation between exports and devaluation has also been quite strong, above 0.9 for the 1980's and 1990's. However, post-2000 correlation is seen to be only 0.44 showing that although the two have moved together, once devaluation was controlled after 2000 exports still managed to grow. This implies that the level of machinery imports is a stronger determinant in export growth as compared to devaluation. Once the rupee is made cheaper the imports of machinery become more expensive and so the government should look to move towards reducing credit cost for textile manufacturers.
The third correlation function between exports and cotton production offers the lowest linkage, 0.50 in 1990's and 0.10 in post 2000. So even if a good cotton crop is witnessed the impact on exports growth is minimal as the manufacturers tend not to pass most of the benefit or burden to the final consumer, as can be seen by the cyclical trend in cotton production and profits of textile companies.
Lately, rice export has also joined one billion dollar club. The Rice Exporters Association of Pakistan is seeking help of the government to further enhance the exports. For years a rather embarrassing situation has existed for Pakistan, whereby Pakistani Basmati has been sold around the globe under some Indian trade mark. While Pakistan has not been able to convince the world that Basmati is a Pakistani product now a strategy is being considered to register Basmati as a joint trade mark of India and Pakistan. Apparently the move has been made by India because if the trade mark is registered in Pakistan's name it would be the biggest loser. However, it is beyond comprehension that why Pakistani authorities are backing such a move?
According to some experts Basmati rice produced in Pakistan is unique and no other variety can beat it or even come closer to this. Export of rice by the public sector corporation has been the reason for the current situation. During those days no attention was paid to quality, packing or delivery schedule. The largest quantity was exported in bulk packing, which gave the Indian entrepreneurs a chance to buy Pakistani rice in bulk and market it in retail packs with proper branding. As these indigenous brands got popular and also attained substantial market share in various countries, these brands were patented in importing countries. In most of these brands the Indian exporters ensured to include the word Basmati. The result is that now Pakistani exporters cannot sell Basmati rice in many countries around the globe.
Pakistan has also enjoyed major share in leather and leather products in the past. However, with the passage of time India has eroded Pakistan's share in many countries. While Pakistan continues to export leather, Indian exporters have captured substantial share in leather garments, footwear and handicrafts made from leather. One of the reasons for the state of affairs is that Pakistani exporters have always preferred to export leather rather than going for value-addition. Another reason is that Pakistani tanners often do not get superior quality hides and skins and the ultimate product is also of the inferior quality.
In the past Pakistan used export leather in wet blue condition because of limited tanning capacity. However, with the expansion in tanning capacity now Pakistan imported raw hides and skins and leather in wet blue condition. Yet another reason for the slower growth in leather export is inconsistency in government policy. According to some analysts unless livestock (cows, goats and sheep) position improves in the country, export of leather and leather products cannot be increased.
One of the factors becoming a threat to Pakistan's export of leather and leather products to developed countries is the growing emphasis on compliance to laws pertaining to environment and social compliance. Developed countries do not allow import of leather and leather products, where certain types of dyes have been used.
This year the government has fixed a less ambitious target. Certain groups have already started saying that it would be difficult to achieve this, due to growing competition, growing cost of utilities and cost of doing business. However, some of the experts are of the view that the government has deliberately fixed a lower target because it has failed to meet the target fixed for he financial year 2005-06.
Experts are also of the view that Pakistan has the potential to earn foreign exchange worth US$ 20 billion if it follows a clearly defined and unprejudiced policy. Ironically in Pakistan, the tilt of various policies has often been towards spinners as they enjoy access to power corridors. Spinners have also expressed their dissatisfaction over textile package as well as the trade policy. Ironically, the statements of spinners also make headlines, whereas the real industry, producing garments and made-ups fails to attract government's attention.
Prior to the establishment of separate ministry for textiles, presence of anomalies in the budget and/or tilt towards a particular stakeholder was understandable. However, now it is believed that the Textile Ministry will give the due weightage to each stakeholder, be it small or big.
Till recently Pakistan has not succeeded in attracting any substantial foreign direct investment in textiles and clothing industry. It has also failed in becoming a destination for 'out sourcing' jobs. One may wonder that if Pakistani exporters can compete in the global market, why can't they get production jobs from outside? Apparently, when a foreign company selects a local manufacturer it also specifies quality and performance standards. Perhaps it is because Pakistani manufacturers are not ready to comply with stringent conditions.