IMPACT OF SAFTA ON PAKISTAN TEXTILE INDUSTRY
TAUQIR HAIDER, Financial Consultant (firstname.lastname@example.org)
(Visiting Faculty Member of: UMT, PU, UCP, GCU, LUMS & ICMAP)
Aug 27 - Sep 02, 2007
Pakistan's exports are heavily dependent on the textile sector and this is clearly evident from the fact that 68% of our exports are textile related products, but ironically we are dependent on a few categories of textile products which form our share of textile exports. We have left many potential segments untapped which has resulted in under development of that particular sector of the textile industry. The South Asian Free Trade Area (SAFTA) agreement 'rings bells of hope as well as fear' depending upon the advantages and disadvantages in each sector.
Being the largest industrial sector of the country it will have a major role to play within the framework of SAFTA with other contracting states. Pakistan's textile industry under SAFTA could benefit from trade rationalization and flow of raw materials. Nevertheless, the industry feels that SAFTA could be an opportunity as well as a possible threat.
While looking at the impacts of SAFTA on Pakistan's Textile Industry, there exists a difference of opinion in Pakistan. Some people are of the view that Pakistan, India and Bangladesh are going to be the major players in textile sector of the region. Others believe that Pakistan's Textile Industry is going to have competition with India only. But crux of the issue is that the net impact (positive or negative) of SAFTA on Pakistan's Textile can only be suggested once following points have been taken into consideration:
1. Availability of Raw Material 2. Tariff Structure 3. Quality of Textile Products 4. Economies of Scale 5. Competitive Prices and Marketing 6. Market Access
1. AVAILABILITY OF RAW MATERIAL: From among seven members of SAARC only two - Pakistan and India - are cotton producers and will be enjoying an edge of local raw material over other countries of the region. However, it is equally encouraging that cotton yield per acre in Pakistan is double than India and with little more efforts on the part of growers and the government control over the supply of spurious fertilizer and pesticides could mean a lot for much higher production per acre. So this is one area where Pakistan will be having an advantage of local raw material i.e. cotton over the other countries.
2. TARIFF STRUCTURE: The most encouraging aspect of the situation is that the tariff structure of Pakistan had already been rationalized and is presently lower than the competitive countries of the region. Therefore, it would not be that difficult for Pakistan's business and industry to compete with the products of other SAARC member state.
3. QUALITY OF TEXTILE PRODUCTS: Today, another rising issue is that the people as well as the government of the developed countries are becoming more conscious about the quality of the products and their environmental impact. This consciousness is playing a very important role and expected to gain more and more attention in the coming years. All these developments have resulted in the creation of quality and environment standards that the developed world is now asking the developing countries to adhere to. Unfortunately we are on lower end of the quality and unit prices for almost all textile and clothing exports But instead of taking it as a drawback or a threat we can take it as a opportunity for us to improve our quality standards with respect to processes and environment. If our government and a business community extend due consideration to this new era of international trade regime then we have every reason to say that we will become a country with good export figure especially among SAARC member countries.
4. ECONOMIES OF SCALE: The economies of scale play a major role in an industry's growth it can be one of the biggest determinants of success or failure for any country. With reference to Pakistan (as our textile industry has prime importance for our economy) achieving economies of scale should be the goal. Until and unless we produce textile products at huge quantities our profits and foreign exchange earnings not increase. India on the other hand produces large quantities of textile because of large population.
5. COMPETITIVE PRICES AND MARKETING: The most fearing factor would be that in case cotton crop fails in one part of the region it could have a snowball effect on the prices of other SAARC member states. So, pricing and marketing strategy is going to play a major role in determining the success or failure for any member country.
6. MARKET ACCESS: Market access is an umbrella term for a number of measures that a country may use to restrict imports, the most common form of such restrictions are tariffs on imported goods. Non tariff barriers to market also exist for goods such as standards, anti dumping suits, import quotas, import licensing and variable levies. Market access also concerns regulation of imported services. Since WTO is coming ahead of SAFTA, so Pakistan has greater chances to widen its market access because of elimination of all the quotas and restrictions
PAKISTAN TEXTILE INDUSTRY: VISION 2005-2010
The textile industry in Pakistan has tremendous potential to grow, provided its comparative advantages are maintained. Pakistan has gradually emerged as world's largest supplier of yarn, with China as one of the major buyers. The domestic consumption of yarn in weaving, knitting and towels industry is rapidly growing as is evident from 14 percent per annum increase in export of value-added textile for last five years.
Pakistan has become one of the largest consumers of US variety Pima cotton for manufacturing fine count value-added yarns to make sophisticated fabrics for use in made-ups for high end of the market.
INVESTMENT POLICY AND INCENTIVES
> Whole of textile sector is included in the list of value added industries.
> 5% customs duty on imported machinery if not manufactured locally.
> Tax relief: Initial Depreciation Allowance (IDA) @50% of machinery & equipment cost.
> Above incentives are also available if 50% of annual production is exported.
ENVIRONMENT AND THE TEXTILE INDUSTRY OF PAKISTAN
The processing industry in the textile value chain holds an important position as far as value addition is concerned. Garments and made-ups comprising the downstream industry rely heavily on the processing sector for the provision of value added fabrics and materials. Unfortunately the processing segment also is the most susceptible area that can be affected by global environmental regulations regime. More than 650 units are in operations majority of which operate at a small and medium sized scale. These units carry out processes including:
> Bleaching of Fabric
> Dyeing and finishing of fabric
> Printing and finishing of fabric
IMPACT OF ENVIRONMENTAL REGULATIONS ON THE TEXTILE SECTOR OF PAKISTAN
The major area of concern for the textile processing sector is waste water. Textile processing is a water intensive process. Almost 1.08-0.15 m3 of water is consumed to produce one kilogram of finished fabric, translating into 1,000-3,000 m3 of waste water generation per day against a production of 12-20 ton/day of finished fabric. Currently the waste water generated by the industry is discharged into the local environment without any treatment that serious negative effect on the environment.
A wide range of chemicals are used by the processing industry for dyeing and printing operations. These include bleaching agents, vat dyes, azo dyes, sulphur dyes, disperse dyes and colour pigments, which are manufactured by using chemicals such as formaldehydes, hydrochloric acid, ammonia, chromium salt, soda ash, caustic soda, sodium sulphate, sulphuric acid, etc. Extensive usage of these chemicals by the processing industry results in discharge of toxic elements as effluents, which if not treated properly have the potential to cause significant environmental degradation.
The above mentioned table clearly depicts the status of existing effluents discharged by the textile processing industry. The prevalent ranges of almost all the parameters exceed the limits prescribed in the National Environment Quality Standards (NEQS). In certain cases the minimum prevalent limits, such as BOD and COD, are much higher than the maximum limits prescribed in the NEQS. 1 The Textile Sector, Environmental Report by Environment Technology Programmed for Industry
COMPARISON WITH OTHER DEVELOPING COUNTRIES
The small share of Pakistan's textile exports in the world total is the result of increasing world competition. Their performance is in sharp contrast to that of other Asian exporters particularly in Southeast Asia, advanced textile exporters like, China, South Korea and Hong Kong 3. What is remarkable for these countries is the increase in their world market share in the presence of institutional restraints like, MFA (multi-fiber arrangements). It can be seen that from 1980 to 1997, Pakistan's share in world textile trade has increased by 1.1 percent. Compared to it, the share of countries like Hong Kong, China, and South Korea has increased quite substantially, by 5.6, 3.5, and 3.8 percent respectively. At the same time, a noticeable feature is the decreasing share of Japan, U.S.A, France, U.K., Netherlands and Germany. In other words, decrease in the world share of textile exports from the developed countries as suggested in the standard theory of trade and development 4. In clothing Pakistan's share has increased from 0.3 to only 1.0 percent from 1980 to 1997. On the other hand, China's share has increased from 4.0 to 16.7 percent. At the same time Mexico's share has increased from 0.9 in 1993 to 2.9 percent in 1997. In recent years Pakistan's performance is even poor rather than increasing its share has fallen from 1.2 in 1993 to only 1 percent in 1997. The share of developed countries (except for USA and Netherlands) in the clothing exports (just like textile exports) has decreased, indicating the shift in comparative advantage.
What lead these countries (South East Asian) to achieve the position in the world market is their resourcefulness (in terms of efficient methods of production, capital intensive technology, and well-trained manpower); adaptability-to the changing conditions i.e., changes in the patterns of world demand, changes in technology; and also the favorable government policies.
These countries have diversified their product range and gone in for highly automated capital-intensive technology. As a result they are producing goods close substitutes to the DCs capital-intensive products. But the exports of Pakistan are not even the close substitutes to these countries products
TEXTILE VISION (RECOMMENDATIONS)
MEASURES FOR THE TEXTILE SECTOR:
*The concerned Government agencies like EPB and BOI should make a concerted effort to uplift the country image.
*A Textile Board (TB) should be established to continuously monitor the policy implementation and coordinate all the Government-related affairs in textile sector.
*Constitute TB by nominating members from public and private sector and providing the legal framework to define its role.
*To improve the country image as a quality textile product supplier and to facilitate the international buyers in Pakistan, Textile cities should be established in Karachi and Lahore.
*Initiate a study for establishment of textile cities.
*Steps should be taken to ensure dissemination of information to the exporters.
*Set up help desks in concerned Government departments for the purpose.
*Ministry of Commerce should develop its strength for dealing with the listed issues.
*Ginning research institute should be established to support the ginning industry.
*Ensure free availability of inputs for exporters.
*Revamp temporary import schemes.
*Involvement of commercial banks in monitoring temporary imports.
*Cotton should be allowed to be trade freely.
FISCAL & MONETARY:
*The rate of export refinance should be reduced keeping in view the recent reduction in interest rates in the country.
*The hurdles towards those cash awards on better export performance should be removed and awards should be given to the deserving exporters.
*Rebates and duty drawback rates should be calculated on the basis of input output coefficients.
*Timely revision in the rates should be made in case of increased input cost.
*Sales tax on cotton lint and oil cake at the ginning stage should be abolished.
*Exempt the duty on import of manmade fibers not produced in Pakistan.
*Phase out the import duty on manmade fibers produced in Pakistan.
*Product and market diversification should be promoted through quota incentives.
*Quota to be allocated on the basis of value not on performance alone.
*Ensure consistency in the quota policy. Policy once formulated in the best interest of the country should not be altered before the completion of its designated period.
*Provision should be made in the quota policy to facilitate the new exporters.
*Imports of textile machinery older than ten years should be banned.
*Provide subsidized credit to textile manufacturers to upgrade their technology through a 'Technology Up gradation fund'. (TUF).
*Import of textile machinery for these sectors be allowed duty free.
*Top priority should be given to stitching industry that leads to highest value addition and employment generation.
*Provision of funds should be made through TUF.
*Import of hand-held ultra low volume spraying equipment should be exempted from import duty and sales tax.
*Promote air jet weaving technology for cotton and blended fabrics also promote water jet technology for weaving of synthetic fabric.
*Upgrade smaller units of power looms (up to 50 looms) to auto looms and power loom units larger than 50 looms to air jet looms.
*Develop special incentive package for promoting growth of processing industry in Pakistan.
*Establish a separate training wing within proposed Textile Board.
*Standardize courses, faculty and facilities in each subsection of textile. 'Introduce training courses of shorter duration.
*Initiate national textile curriculum development task. The exercise shall cover all sub sectors of the textile value chain.
*Evaluate possibility of hiring foreign consultants for short fixed duration to train the trainers.
*Institute for training the trainers.
*Utilization of EDF for equipping Vocational Training Institutions.
*Put manufacturers and exporters on the board of all Vocational Training Institutions and Government should discontinue funding after a specific grace period.