REHABILITATING THE TEXTILE SECTOR

NUSRAT KHURSHEDI
(feedback@pgeconomist.com)

July 23 - 29, 20
12

Pakistan has earned $ 425 million from export of cotton during last fiscal year 2011-12. The target set for cotton for 2011-12 was 15 million bales. Although floods took a toll of about 2 to 2.5 million bales yet the country managed to sustain a reasonably good cotton production.

However, in contrast of cotton, government failed to achieve the target of $15 billion set for textile exports for 2011-12, like the previous year when government had set the export target of $10 billion and surpassed by $4 billion. According to Commerce Minister Makhdoom Amin Fahim major reasons which hindered achieving the textile export target are non-availability of gas to textile units and shortage of electricity.

According to APTMA, as many as 57 textile mills prime users of electricity on independent feeders having hardly 135MW load, have been subjected to six to eight hours industry load shedding causing to one shift layoffs since last 60 days. The severe shortage of electricity has forced textile industries to cut down on shift, and as a result 150,000 workers have been laid off.

Along this, textile industries are being deprived of two days gas supply a week and continuous facing 500 million cubic feet per day (mmcfd) gas shortfall and will face gas load management till September 2012. During the present fiscal year this shortfall will increase from 500 mmcfd to 700 mmcfd for the textile sector, as per Sui Northern Gas Pipelines Limited (SNGPL) Managing Director Arif Hameed, industries will face serious gas shortages in the upcoming winter and gas tariff would also be revised upward to speed up exploration work.

In these circumstances, the textile sector in Pakistan has been waiting on the sideline of energy crisis especially in the absence of textile policy initiatives by the government and the government, in view of the severe electricity shortage, had asked APTMA to cooperate, which it did at the cost of layoff of 150,000 workers.

In 2004-05, all creditable textile experts termed Pakistan as the most lucrative place for investment in textiles and now investment has completely dried up. Policy makers should do some soul searching as to why this country failed to attain its true potential in the textile sector, which is the back bone of the economy of Pakistan. Still textile industry exports contribute about 9% of the Gross Domestic Product (GDP) and employs 46% of the total labour force of the manufacturing sector. Textile and clothing exports are about 58% of the total exports from Pakistan, but due to severe power and gas shortages, textile sector in declining position.

Pakistan's textiles and clothing exports have grown at the slowest pace as compared to Bangladesh, China and India. Bangladesh led the textile trade growth, posting an increase of 215 percent between 2004-05 and 2010-11 while Pakistan's exports grew at 56.52 percent during the same period. In 2004-05, which were the last year of global textile quota regime, Bangladesh's textiles and clothing exports stood at 6.42 billion dollars that increased in 2010-11 to 20.221 billion dollars; six years ago Pakistan's exports of textiles were much higher than that of Bangladesh, which currently is way ahead of Pakistan; by a margin of about 7 billion dollars.

China was exporting textiles worth 95.13 billion dollars in 2004-05, which surged to 206.53 billion dollars in 2010-11. During the same period, textiles and clothing exports from India increased from 13.51 billion dollars to 23.31 billion dollars. Meanwhile, Pakistan's exports of the same items went up from 8.82 billion dollars to a mere 13.80 billion dollars.

Conversely, now, there is an upside of the flight of capital from Pakistan to Bangladesh as the export of fabric and cotton yarn from Pakistan to Bangladesh has appreciably increased in the last two years. Official data reveals that Pakistan exported cotton fabric worth $13.88 million in 2007-8 to $19.76 million in 2009-2010 and to $28.25 million in 2010- 11. Experts expect these exports to double when the figures for 2011-12 are released. Similarly, the export of cotton yarn to Bangladesh has increased from $8.2 million in 2007-08 to $19.2 million in 2010-11.

Energy shortage, lack of government support, high duty, and higher labour costs have forced many

Pakistani value added textile entrepreneurs to locate their manufacturing facilities in Bangladesh. No doubt, wages in Bangladesh are 30- 40 percent less than those in Pakistan and the labour force are better skilled and more efficient. Moreover, the goods exported from Bangladesh are exempt from duty in the European Union that reduces the cost of the buyer by 10-17 percent.

Leave aside Bangladesh, which enjoys special market access in the developed world but China and

India has increased their textile exports with the same market access issues as being faced by Pakistan, whether it was the far sightedness of Indian and Chinese planners or the short-sightedness of Pakistani planners and the failure of local entrepreneurs.

Government planners in Bangladesh, India and China shielded their industries from meltdown by announcing various concessions to their textile exporters.

In Bangladesh, government had increased Cash Support Fund from 5 percent to 10 percent. Whereas Bangladesh government had provided for a long time to the exporters 15 percent cash incentive on use of yarn and cloth produced in the country, which has now been reduced to 5 percent. Home textile is an emerging export sector in Bangladesh, its exporters' get 10 percent cash refund. Government of Bangladesh provides a cash incentive of five percent on clothing exports and 15 percent on home textiles exports. Moreover, all textile units in Bangladesh are on self generation as the government assures them natural gas at one-third the gas price in Pakistan.

India spent Rs 35 billion on restructuring with a focus on cotton spinning mills, extending a moratorium for two years on bank loans. Indian government had also offered five-year working capital facility on account of price volatility in global markets and slowdown in Europe. The Indian government had instituted a technology up gradation fund under which the government subsidised mark up on import of textile machines up to 5 percent. Moreover, duty drawback has given on inputs like textile accessories and dyes manufactured inside India.

By this, textile exports of Bangladesh and India crossed $25 billion and $32 billion, respectively, in the same year thanks to enabling environment created by their governments. In Pakistan, it seemed the government was acting against the industry. Fact and figures clearly indicated that the situation seems to be getting worse with each passing year. Earlier, Pakistan was in a comfortable position at the turn of the century with a high growth rate of 8%. Industry was in a buoyant mood for investment in anticipation of the quota free trade in 2005 and now local investor shifted from here to other states due to various reasons.

No doubt these countries didn't faced the same challenges like Pakistan faces, as bank mark up in Pakistan remained the highest during this period, which in some years was double than that in competing economies. The banks have tightened the noose on the textile industry. It seems that the State Bank of Pakistan has no control over banking spread, ranging between six to seven percent against two percent in India. The regional competitors enjoy lower and preferential interest rates in these countries, but in Pakistan the discount rate was in double digit, which was extra burden on already ailing industry.

Along this, Credit Control Advisory committee has also become ineffective, as the government uses 90 percent of the credit. The industry non-performing loans, on the other hand, have crossed 50 percent of the total loans. Political rivalry can also witness as the mill owners in the Sindh zone were not ready to share energy resources with the Punjab zone.

Last year the industry was provided gas for only 180 days, as current gas reserves were depleting fast and it would become insufficient to meet the national demand in future. Investment in gas exploration and extraction was seriously lagging behind demand trends, as a result the country continued to rely heavily on fuel oil.

Without proper planning for gas utilization, government issued licensed for CNG station and now Pakistan comes in highest number of CNG refilling stations in the world. Pakistan has also become the third country in the list of countries with the most natural gas vehicles, as over 26 percent of the vehicles on the roads consume natural gas. While From 2005-06 to 2010-11, CNG consumption increased at the rate of 24 percent, the highest increase witnessed in any sector. With gas production facing a decline, this growth is at the expense of other value-added sectors like fertilizers, the general industry and the power sector.

Rehabilitation of textile sector, which is largest export earner, one of largest employment provider and largest investor in the country, is need of the hour. The government should take some urgent measures like rescheduling and restructuring of outstanding loans, relaxation of Prudential Regulations, bring discount rate in the single digit otherwise portfolio of non performing loans will increase, the industry will doom and the precious assets will be lost and the hard earned export markets will be taken over by our regional competitors where the government along with Central Bank are pursuing the policy of incentives and have realized thoroughly difficulties faced by their exporting industries specially textile.

The government should realise the gravity of the situation and take measures to reduce the cost of doing business. The textile industry being export-oriented cannot export inflation, thus require a sector specific intervention for its growth. APTMA has proposed that either the government should reduce interest rate to 8 percent or extend the facility of 100 percent Export Refinance to the industry ahead.

Side by side, government try to restructure its gas sector to make it more efficient and to attract private sector investments. At present the gas production was around 4,000 millions cubic feet per day (mmcfd) and there was a gap of around 800 mmcfd. Gas was available in various fields but government was not tapping it to add into the system.

The reserves at Kunar Peshaki near Hyderabad could produce 280mcf of gas per day. These reserves could be vital to improve the supply position and bridge the present shortfall. There are known gas reserves at Kohlu as well. This huge reserve cannot be put on the back burner and needs to be explored immediately, as it is sufficient to meet Pakistan's energy requirements for several years.

Even, Pak-Iran Gas Pipeline Project could rescue industry from those crises. The work on construction of 785 km gas pipeline should be accelerated on emergent basis.

Moreover, gas used in the steam units should be diverted to combined-cycle plants that operate at an efficiency of 48 percent, compared with around 30 percent for the existing steam units.

The prices of LNG must be brought down to provide alternate fuel to the general public. Besides, LNG filling stations must be introduced which would help in reducing the demand for natural gas to some extent.

Unaccounted for gas (UFG) is also the biggest problem in Pakistan, right now, UFG is hovering around 12.1 percent and if half of the UFG was controlled some 200 mmcfd gas could be saved.

Grossly negligent planning and the lack of it on part of consecutive governments are largely responsible for this malaise. Refusal to address this crucial issue in time has resulted in the current untenable situation. However, due to timely investments and planning, the textile sector is able to retain its competitive edge over the competitors as the primary raw material cotton is abundant, Pakistan being the 4th largest producer of cotton in the world. Before the situation gets out of control, sincere measures and planning to address the crisis from all ends is the need of the hour.