Spearheading the economy

SHABBIR H. KAZMI, Special Correspondent
Aug 27 - Sep 02, 2007

The government of Pakistan has fixed an export target of US$ 19.2 billion for the current financial year. The enhanced target has been fixed despite failure in achieving the target last year. The government has also announced various measures in the federal Budget and a supporting Trade Policy to achieve the proposed target. Though, achieving the target seems a remote possibility, July exports provide some consolation.

Historically, textiles and clothing sector has been the largest foreign exchanger earner and still contribute about 60% to the total export proceeds. It is the largest industry, thriving on Pakistan's largest cash crop, cotton. The industry also employs a very significant percentage of the total workforce.

Though, spinners claim to have invested the largest amount, a spinning unit of 14,400 spindles employs around 100 persons. The largest employment is in made-ups manufacturing units producing woven and knitwear contributing the largest value addition.

The least developed sector is weaving, which mostly comprises of smaller, fragmented and inefficient units. The reason for calling these units inefficient is that these units mostly use power looms, which are capable of producing narrower width fabrics and mostly use coarse counts of yarn. Therefore, the quality is much inferior to fabrics produced on shuttleless looms.

The reason for slow technological improvement of the weaving sector is that for decades the government continued to charge import duty at fabulous rates on shuttleless looms. The other reason was that income from power looms was tax exempt but income of units using shuttleless looms was taxable.

Before developing any strategy to boost export of textiles and clothing it is necessary to understand the strengths and weaknesses of the industry. However, it must be kept in mind that the industry having enjoyed the best protection for nearly five decades is not ready to operate under 'free market' phenomenon.

To begin with, one has to examine the composition of Pakistan's exports in detail, major buyers and their diplomatic relationship with Pakistan. Then the factors affecting competitiveness of local manufacturers has to be explored to come up with an appropriate strategy for boosting country's exports.

Living on crutches of highest protection, government support, subsidized price of cotton, SRO based lending at concessional interest rates, rebates and above all textile quota regime has created many distortions. The worst fallout has been proliferation of inefficiency, mismanagement and desire for support from the government because the industry boosted to be the largest foreign exchange earner. However, the industry hardly acknowledges the government support but often tries to pressurize the government for soliciting more and more concessions.

Key textile exports of Pakistan have been yarn, fabrics, made-ups, knitwear, bed linen, towels and miscellaneous products. Yarn remained the largest foreign exchange earner because government policies were heavily tilted towards the spinners. With the passage of time export of un-processed fabrics grew.

However, this mostly comprised of the narrow width fabrics mostly produced on power looms. Specialized fabrics produced on power looms and handlooms are still the favorites.

Then comes the growth in made-ups exports. These could be divided into woven and knitwear, each enjoying its own niche market. Knitwear export registered exponential growth due to robust demand from overseas buyers. Bed linen export grew due to quality and competitive price but also remained under textile quota regime. Even towel export was under the quota management. The other miscellaneous items included ynthetic textiles and clothing, mainly due to being outside the textile quota regime.

Key markets of 'Made in Pakistan' textiles and clothing are the USA, European Union, Far East and the Middle East. Within the European Union the major importing countries are United Kingdom, Germany and France. Among the far Eastern countries Japan, South Korea and Hong Kong have been the major buyers. Saudi Arabia and United Arab Emirates are the major buyers in the Middle East.

At one time Japan was the largest buyer of yarn, importing more than 50% of its requirement from Pakistan. This was due to 'pay as you earn' scheme. Under this arrangement manufacturers of textile machinery from Japan had arranged soft-term financing and Japanese trading companies became major buyer of yarn. This arrangement was mutually beneficial but faced serious impediments. Pakistani borrowers started defaulting after the Japanese buyers stopped importing yarn from Pakistan.

The growth of textiles and clothing sector was due to competitive advantage enjoyed by the country. Pakistan is among the top five cotton producing countries. Cotton price and its trade were under strict government control. For decades government continued to fix support price of cotton and its export was allowed through public sector entity, Cotton Export Corporation. Similarly, another public sector entity was authorized to import cotton. These measures were said to be aimed at protecting the cotton growers but in fact facilitated supply of cotton at subsidized rates.

After the nationalization of key industries, banks and insurance companies, industrialists started establishing their offices and industries outside Pakistan and there was massive outflow of capital. In order to reverse the process the government offered lucrative incentives and SRO based lending.

In response to these two industries, spinning and sugar manufacturing, enhanced their installed capacities. A specialized zone was established in Chunian and spinning units were exempted from paying import duty, sales tax and income tax. This may have helped in adding new capacities but also created problems for the units operating in the tariff areas.

However, economic fundamentals for the industry changed with the abolishing of textile quota regime. Though, the system was abolished in phases and ample time was given to the importing and exporting countries of textiles and clothing, Pakistan was the slowest mover compared to its traditional competitors. The result is that most of the sub sectors are facing very tough time.

The two sub sectors facing the toughest time are bed linen and knitwear. The gravity of the situation can be gauged from the fact that during last financial year the export target was US$ 2.3 billion but actual exports remained at US$ 1.9 billion. For the current financial year export target has been fixed at US$ 2.6 billion but probability of achieving this is very slim.

According to Shabir Ahmed, Chairman, Pakistan Bedwear Exporters Association, "The sector faces internal as well external pressures. An antidumping of 5.8% has been imposed by the European Union. This renders us uncompetitive compared to our traditional competitors i.e. China and India. On top of this our cost of production is on the rise. Electricity tariff, interest rates and cost of doing business is on the rise. This further erodes our competitiveness. Unless appropriate policies are not introduced, it will be difficult to retain our market share."

As regards knitwear segment it faces even worse situation. The sector has thrived mainly on the textile quota regime. Since the importing countries were obliged to import specific quantities of various categories from Pakistan the sector was booming. On top of this the basis of allocation of quota was volume least attention was paid to quality and price.

According to an analyst, "The knitwear segment of Pakistan has always focused on achieving higher volume rather than concentrating on quality, price and terms of delivery. Though, some of the global brands are being produced in Pakistan it is only due to a few entrepreneurs. This could be gauged from the fact that a dozen pieces of a specific category were being exported at prices ranging from US$ 10 to US$ 40. After phasing out of quota the buyers are not obliged to buy even one piece from Pakistan. The deal could be entered on the basis of quality, price and terms of delivery. This is the reason knitwear sector is plunging deeper in problems. If the declining trend has to be revered all the stakeholders have to formulate a joint strategy."


Though, textiles and clothing industry is termed backbone of Pakistan's economy various ministries played the decisive role in the formulation of policies for it. It was only recent that a separate Textile Ministry was established. However, various other ministries and authorities continue to overrule suggestions put forward by it. Lately, there was a report stating that the Textile Ministry had told Ministry of Commerce not to interfere in the affairs.

The governments stated stance also losses credibility due to its own acts. In mid nineties 'Textile Vision' was created. However, no specific measures and/or policies were announced to achieve the stated objectives. Now there has been a lot of talk about 'Textile Policy' but no one knows when it will be announced.

The Government seems to be engrossed with other pressing issues causing further delay in the announcement of the Policy. However, many analysts are of the view that the Policy may not be announced for months. According to some experts the industry has submitted such a long list of incentives, which if accepted, could create distortions for other industries operating in the country.

According to an analyst, "It is time the government should follow a holistic approach. The top priority should be to create conducive working environment, rationalizing cost of production and achieving greater access in the traditional markets."

It is time to prioritize the sectors, which need specific attention. The cardinal principal should be higher the value addition greater the incentives. However, no sector should be allowed to prevail on another. Spinning is the backbone of the industry but it adds the lowest value. The incentives given to the sector in the past have already resulted in many distortions.

Now it is the time to discourage export of yarn and facilitate export of value added goods. The producers of value added products should have the preemptive right on locally produced yarn. The reason for discouraging export of yarn is that buyers of Pakistani yarn ultimately become its competitor.

Historically, spinning sector has been the biggest beneficiary of subsidized loans, exemption from payment of duty and taxes. However, most of the mills continue to produce coarse counts of yarn and value addition is negative or marginal, at the best. To begin with no subsidized credit should be available for mills producing less than 30 counts yarn. Along with this effort should also be made to discourage export of unprocessed cloth. However, appropriate measures should also be taken to address the issues being faced by bleaching, dying and printing units.

The issues facing the processors are very basic and easy to address. These are 1) poor quality of water used for processing, 2) higher energy cost and interruptions in electricity supply. All these factors adversely affect quality and enhance cost of processing.

To facilitate higher value addition duty free import of industrial stitching machines and circular knitting machines should be allowed. Soft-term credit should also be offered for setting up made-ups manufacturing (woven and knitted) units. This will help in achieving two objectives 1) enhanced production of value-added made ups and 2) higher employment opportunities.

Specific attention should also be given to the manufacturers of bed linen. With the manifold increase of bed linen export, some of the importing countries have imposed antidumping duty. It is necessary to pinpoint that importing often initiate dumping proceedings against those countries with whom they do not enjoy cordial relationships.

The Government of Pakistan must talk with the European Union and convince it that Pakistani bed linen neither falls in the category of identical products nor has caused material injury to the domestic industry of the importing country.

The delay in the announcement of Textile Policy raises the suspicions that the stronger lobbies are busy in pressurizing the policy planners. The doubts are not baseless because if the prime minister has approved the Policy, what factors are responsible for the delay in its announcement.