Sep 8 - 14, 2008

The textile industry of Pakistan has been the mainstay of exports, with more than 60% contribution towards the total exports of the country. The industry also represents the major employment-generation avenue in the organized and large scale industrial segment. The performance of the sector, therefore, has strong impact on the national economy. Historically, the performance of textile sector had been tremendous, also reflected in the economic fundamentals. However, subsequent to the dismantling of quotas, Pakistani textile sector faced stiff competition from the regional countries. While the quota free regime provided lot of opportunities, it brought up more challenges to the local industry. Unlike, previous pattern where the performance of the sector used to be dependent upon the cotton crop the volume and thus the prices trends it has now become more of the quality matter. The post quota scenario has actually provided the level playing field to the export oriented countries of the entire world. This has not been sudden or unexpected development, as the countdown to this new phase was predictable and known. Therefore, textile exporting countries have gone through a process of preparing themselves to reap maximum benefits from this scenario.

Although Pakistan also prepared itself by investing into BMRE, yet the overall quantum of this investment was not sufficient enough to withstand the competitive pressures. The neighboring countries, like India, China and Bangladesh really pose intensified competition to Pakistan. According to manufacturers in the country, they are not getting the sufficient benefits/subsidies in line with the ones neighboring countries are getting. Here in our country, the major cause of concern is cost of doing business, which is substantially high. If we analyze the price of industrial land, it is simply touching the skies, and acquiring land is a nightmare. Also, energy cost is something which contributes the bulk part of the total cost of manufacturing. The misery upon this is continuous electricity shutdowns, which has actually caused many factories to close their operations.

Further to these issues, mill owners are also of the view that the financial benefits, which government is providing to the textile industry, are not enough. The government responded by allowing some specific concession like removal of sales tax on all textile products, reduction in export refinance rate, introduction of long terms financing for export oriented projects and 3-6% Research & Development rebate for various textile exports. According to a report by SBP, the State Bank of Pakistan and various commercial banks have provided PKR 273bln under Export Refinance Scheme (EFS) to all eligible export-oriented sectors during the first three quarters of the financial year 2008. The interest rate on all financing to the sector has been substantially lower than even the benchmark KIBOR.

In an effort to provide comfort to the textile industry, the government announced certain measures in the Budget FY09. The GoP has focused on improving cotton yields with the formal introduction of BT cotton seed that is expected to help in reducing the dependence on imported cotton and add to the availability of cotton going forward. While the trade policy FY09 unveiled initiatives by the government to curb with the mounting trade deficit, it couldn't address the key issues of the textile industry. Also, the fundamental issues related to the entire chain of the textile industry can not be addressed by the measures taken on legislative fronts. While Pakistan is ranked as the fourth largest producer of cotton, the major production is of a type and quality that is suitable primarily for producing low-to-medium count cotton yarn. The quality is further impaired by traditional cotton picking practices and reliance on unskilled and seasonal labor. Again, the first stage of processing, that is, ginning, further impairs product quality owing to lack of modernization in this vital primary processing stage. The quality of ginned cotton obviously affects the quality of yarn.

While a number of spinning mills can boast of state-of-the-art manufacturing facilities, deficiencies in the skill level of textile workers impact the final quality of yarn as well as the cost of production. As a consequence, while labor wages in Pakistan continue to be low, the low skill levels result in lower productivity. The cost of production is also affected adversely because of lack of economies of scale as compared to spinning operations in competing countries. Further up the chain in terms of manufacture of grey cloth, and even more importantly, in finished fabric and garment manufacture, skill deficiencies play a greater role in producing value added textile products of international standard at competitive rates. Pakistan textile sector is also characterized by segmentation of production facilities and lack of effective marketing infrastructure, which is a pre-requisite of success in the current international competitive environment.

Also, if we observe the overall scenario with a little bit of more depth we shall see that despite all the financial concessions, the mill owners still feel that the industry is not being taken care well by the government. Here, it seems as if there is some problem with the business attitude of the people also. In Pakistan, most business owners have deep pockets, and they typically use the factory as cash cow, extracting money and investing it into the property or any where else outside Pakistan in their personal account. These kinds of malpractices have actually strengthened their personal net worth, but have weakened the industry significantly. So, in this kind of business environments, no matter how extensive the government rebates would be, the industry crises can not be addressed properly. There is a need to correct the eccentric trends from the grass root level.

Owing to the issues discussed in above paragraphs and competition from regional countries, Pakistan's textile export dampened substantially, though still forming the major part. Also, the overall profit margins had significant hit, leading to lower level of bottom line for most companies. However, the companies having diversified business operations along with having benefits of economies of scales had been able to withstand in the competitive environment, and the dent on their profitability was minimal.

It would be difficult to foresee that when this adverse trend in our textile industry is going to be corrected. Survival will only be for those companies which have come to terms with changing scenario, put in place the requisite infrastructure and also identified an appropriate product range and mix while identifying their niche market. Thus in the entire textile landscape, the attributes of potential winners and losers are clearly identifiable. Further, in the absence of redressing the fundamental structural issues, Pakistan's bulk of textile exports would remain confined to the lower end of the international market.