TEXTILE SECTOR IN TROUBLE
May 21 - 27, 2012
Textile and clothing industry has been the main driver of the economy for the last 50 years in terms of foreign currency earnings and jobs creation. The contribution of this industry to the total GDP is 8.5 per cent. It provides employment to about 15 million people, 30 per cent of the country workforce of about 49 million. It accounts for over 50 per cent of total exports, which stood at nearly $25 billion in fiscal year 2010-11. Unfortunately, Pakistan's once-thriving textiles industry is in the clutches of regression presently. Pakistan is the world's 4th largest producer and 3rd largest consumer of cotton. Nevertheless, owing to lack of political will, bad governance administrative inabilities and dearth of vital inputs i.e. electricity, gas, credit and market access, this sector has not attained its full potential and there has been a gradual decline. The annual volume of total world textile trade is US$18 trillion, which is growing at 2.5 per cent. Pakistan's share is less than one percent.
Textile industry encompasses cotton spinning, cotton cloth, cotton yarn, cotton fabric, fabric processing, home textiles, towels, hosiery and knitwear and readymade garments. These components are being produced both in the large-scale organized sector as well as in unorganized cottage/small and medium units.
At present, there are approximately 1,221 ginning units, 442 spinning units, 124 large spinning units, and 425 small units, which produce textile products.
Textile exports are not registering favorable trends. In terms of quantity, the total textile exports registered a decline of 15.37 per cent in January 2012 vis-a-vis January 2011. During 2010-2011, exports rose 35 per cent and crossed the $14 billion mark. But, that was mainly because of high cotton prices which are expected to come off.
Continuing global recession also cut demand from key markets like Europe and the United States. There was a negative growth in export of cotton yarn, cotton cloth, cotton carded, tents, art and silk, made-up articles in January this year over last year. A similar dip was witnessed in exports of knitwear, bed-wear, towels, and value-added products. Despite depreciation of rupee against the dollar in the past few months, there has been a decline in exports indicating that the fall in the value of rupee did not support Pakistani textile and clothing products to penetrate in the international markets.
It is being apprehended that export target of $16 billion projected for textile and clothing for the current year would not be achieved. Even things are so worse that their exports will remain below $12 billion mark by the end of June 2012. Local manufacturers have projected a 25 per cent drop this year alone to Europe due to the euro zone debt crisis. They fear that shrinking export proceeds in the sector may also result in layoffs.
Crippling energy crisis and rocketing inflation are suffocating the economy. Incessant power and gas outages have deteriorated capacity utilization in textile. Most of the time, there is no power to run the looms, so people are selling them to the metal dealers who buy looms from closing factories and sell them as scrap.
Almost 800 units of a total of around 2,000 factories in Punjab province have closed down and many more are likely to be shut, Around 500,000 workers lost their jobs in the province. Work in the remaining factories is closed for three days a week due to gas load shedding, because of which the industry is working at 30-40 per cent of its capacity.
Electricity and gas tariffs have been enhanced manifold but still there is no respite from its load shedding. The energy crisis has increased the cost of doing business. Buyers are still there but the domestic industry is not in a position to honor their orders because of high cost of production.
On the other hand, yarn prices have become unaffordable. The increase in prices of cotton yarn for exporters of garments, knitwear, and home textile has made them unviable. The existing capacity in the spinning sector is more than local demand, and hence moderate quantities of yarn are exported each year. With excessive exports during the year, the downstream industry has started facing severe shortages of yarn. Consequently, the downstream industry is closing down. The government should take notice of these issues. Otherwise, it would lead to collapse of the industry.
In addition to the perennial energy crisis, there are security concerns too in a country plagued by militancy and political violence. These menaces have taken a heavy toll on the economy.
The government is taking away all incentives from the textile sector, making it impossible for the industry to compete with regional suppliers. First duty drawback of local levies and taxes was discontinued and now export finance scheme (EFS) rates are being squeezed.
EFS rates of the State Bank of Pakistan have not been lowered since January 2011 while interest rates are going down. Currently, the EFS rate is 10 per cent (with maximum one per cent commercial banks' spread), while key interest rate is 12 per cent. Therefore, there is no incentive for exporters to avail this facility. Historically, there was a difference of approximately 3-5 per cent between EFS and T-Bills yield but presently it has now narrowed down to 1.8 per cent. As a result, ratio of nonperforming loans of the textile industry has increased to 31.5 per cent from 24 per cent in June 2011.
The Pakistan textile industry is facing tough competition from the Indian, Bangladeshi, and Chinese textile industries. China is the biggest producer and consumer of cotton in the world and the fiercest competitor of Pakistan in the world market. Bangladesh is also making a strong play to lure Pakistani textile businesses to relocate or expand to Dhaka. It has more investor-friendly policies, cheaper skilled labor and, crucially, tax-free access to 37 countries including the European Union, Canada and Australia. Bangladesh and Vietnam are offering competitive prices of value added products, making it difficult for Pakistan to compete in the EU market.
Textile industry, the backbone of Pakistan's economy, is on the verge of collapse. There is no alternative industry or service sector that has the potential to benefit the economy with foreign currency earnings and new job creation. Government has to take steps and support the private sector in its efforts to modernize itself, increase the productivity and competitiveness of textile products. Government must provide the textile industry uninterrupted supply of gas and electricity and restructure its debt at sustainable interest rate to salvage the situation.