Pakistan: The textile story

Pakistan's textiles industry, oneof the biggest employers in that country, is at cross-roads. On one hand, ithas the chance to make the best of the preferential plus status accorded to itby the European Union's Generalised System of Preferences (GSP). And on theother, it is being pulled back by a debilitating power shortage. Shahram Haqstitches together the bigger picture.

Pakistan's textiles industry hasbeen surviving in the face of immense and continuing hardships. There areinnumerable reasons why Pakistan's largest employment and revenue generatingindustry is underperforming; but what industrialists are now describing as themother of all troubles, is essentially an energy crisis. The other reasons thathave been harming the industry are the high cost of doing business, the law andorder situation due to the war against terrorism, obsolete technologies, nozero rating, marketing disadvantages, absence of institutional support,currency fluctuations, numerous taxes on exports, influx of smuggled textilesand clothing, and a policy-and-implementation divide.

These have resulted in decliningexports for the industry, besides losing share in their own domestic market.The lack of policy implementation and strict government action is paving theway for textiles imports from other countries, large chunks of which make theirway in via smuggling mainly through Afghan transit trade. Around 20 per cent ofPakistan's textiles units have closed down and another 20 per cent are in atroubled state, according to the All-Pakistan Textile Mills Association(APTMA).

There have been no new investmentsin the industry, and there have been no technology upgradations either. Theindustry has been unable to provide fresh employment, impacting the overalleconomy of the country. This is vital since the textiles industry contributes20.9 per cent to the large-scale manufacturing sector of Pakistan, and providesemployment opportunities for around 15 million people. "We are losing thegame with our regional competitors as we cannot compete with governments whoprovide our competitors their full support," rues Gohar Ejaz, a leadingtextiles industrialist. But this doesn't mean that we cannot recover; all weneed is a level-playing field, he adds.

Looking for a level-playing field

The textiles industries in India,Bangladesh and China are shielded by their respective governments throughindustry-friendly policies, low tax ratios, subsidies, rebates, besidesaffordable and round-the-clock energy. For instance, a little comparison oftextiles policies of India and Pakistan and their implementations is fairenough to describe the approach of both governments towards their industries.

Pakistan's textiles policy for2009-14 allocated $2.3billion (PKR188 billion), but only 15 per cent of thiswas spent/ implemented. The policy also resulted in zero per cent growth in thetextiles industry, with no direct new jobs created. The new textiles policy for2014-19 outlays only PKR 64 billion ($640 million).

"These figures spell out why we are being squeezed out of the competition; in a $800 billion global textiles market, our share has dropped from 2.2 per cent to 1.8 per cent," says SM Tanveer, chairman of the APTMA, the apex trade body of the textiles industry. Pakistan's textiles and clothing exports which stood at $13.8 billion in 2010-11 is expected to remain at the same level in 2014-15, he adds.

The textiles industry in this country picked up momentum only in 2001. From 1947 till 2001, textiles exports grew to around $6 billion. By 2005, exports had jumped to $10 billion and was growing at 8 per cent at the time. The industry had also attracted $5 billion new investments in different textile sub-sectors, but after 2005-6 things started changing with the end of the quota regime.

In 2006-7, the industry started feeling the heat of the growing energy crisis, resulting in exports stagnating at around $10 billion till 2010. This was also the time when small-scale textiles units started losing ground. However, the industry managed to increase its exports 2010 onwards, despite operating in a tough environment where the energy shortfall was at its peak and the Generalised System of Preferences (GSP) plus status of the European Union was also not available. In 2013-14, textiles exports touched a record $13.8 billion.

Note: Indirect employment around 15,000,000

Individual efforts of different textiles associations to increase export volumes have proven futile; Pakistan posted the lowest growth in the region. Between 2008 and 2013, Pakistan's textiles and clothing sector grew 22 per cent, according to the World Trade Organization (WTO). Bangladesh posted a growth of 160 per cent, India 94 per cent and China 97 per cent during the same period. Even the global average growth was 45 per cent between 2008 and 2013.

"The exponential growth of our competitors was due to their (respective) government's support which helped them to lower their costs of doing business and product diversification. We too need the same kind of support to recuperate," asserts Gohar.

Cost of doing business

Pakistan's textiles industry faces a higher cost of doing business compared with regional competitors. Electricity and gas, especially for Punjab-based textile mills which account for 70 per cent of the total textile industry of Pakistan is not available round the clock. The industry faced 260 days of gas supply disruption in 2014; this year it has been getting only 25 per cent of its gas quota, according to data compiled by the textiles industry based on Pakistan Electric Power Company and electricity distribution companies, and Sui Northern Gas Pipelines Limited statistics. The industry faced 122 days of load-shedding (average 8 hours per day) in 2014. Matters are just as bad this year.

Apart from energy constraints (i.e. shortfall), the energy tariff for the Pakistan textiles industry is 14 cents/kwh, whereas it is 9 cents/kwh in India, 8.5 cents/kwh in China and 7.3 cents/kwh in Bangladesh, according to comparative regional statistics compiled by the APTMA. The interest rate in Pakistan has recently been reduced to 7 per cent, slightly better than India, which has a 7.5 per cent interest rate. However, the China and Bangladesh discount rates are 5.4 per cent and 5 per cent respectively. The minimum wage rate in Pakistan is $120 per month, compared with India, China and Bangladesh where the minimum wage rates are $95, $300 and $68 respectively.

The exchange rate fluctuation is another issue which has been hurting Pakistan textile exporters. Between December 2013 and April 2015, the Bangladesh taka, Chinese Yuan and Indian rupee have witnessed 0.25 per cent, -0.43 per cent and -1.20 per cent changes, whereas the Pakistani currency has seen an appreciation of 5 per cent, costing Pakistani textile exporters around PKR80 billion.

All these discouraging factors have resulted in little or no new investment in machinery. For instance, between 2008 and 2013, only one million new spindles and 1,319 shuttle-less looms were added in Pakistan's textiles sector, according to the International Textiles Manufacturers Federation (ITMF) and consultancy firm Gherzi. In the same period, India added over 14 million spindles and 36,410 new shuttle-less looms. Another 5 million spindles are in the pipeline for India. Bangladesh, which produces zero cotton, added nearly 2 million spindles and 22,370 new shuttle-less looms in the same period.

Caught between the devil and the deep sea

The compliance of all 27 international conventions to ensure the effective implementation of labour, environmental laws and social standards in a bid to come up with GSP Plus conditionalities has also increased the cost of production. International buyers are not willing to adjust this increased cost in their pricing structure due to which exporters are constrained to squeeze their profit margins. In an open auction of export orders, Pakistani exporters now have to fight for each penny. The sector is now desperately trying to implement the Generalised System of Preferences (GSP); stakeholders believe textiles exports can double under GSP concessions, which currently are hovering around $13 billion.

The industry is also being hit by smuggled fibre and yarn. According to studies conducted by Gherzi, the per capita consumption of fibre in Pakistan is 10kg, out of which only 2.80kg is locally produced. Out of the remaining 7.20kg/capita consumption, only 1.4kg/capita or 252 million kg equivalent of clothing is officially imported into Pakistan - the rest is smuggled. It is expected that by strengthening domestic commerce, the domestic industry can produce additional 7kg/capita valued at $7 billion for domestic consumption. Pakistan has a 28 per cent share in its own domestic market; the larger chunk being dominated by China and India. The impact of smuggling is estimated to be about $3.3billion annually.

The value-added sector growth too, which had been stagnant for a while, has started to decline. Pakistan Hosiery Manufactures and Exporters Association chairman Usman Jawwad says this is not due to the lack of orders. "We have plenty of orders because of our quality, but we are not in a position to execute those orders due to energy constraints and increased cost of doing business."

Can the EU's Generalised Scheme of Preferences (GSP) help Pakistan

The Generalised System of Preferences, or GSP, is a preferential tariff system which provides for a formal system of exemption from the more general rules of the World Trade Organization (WTO). It is a system of exemption from the most favoured nation principle (MFN) that obliges WTO member countries to treat the imports of all other WTO member countries no worse than they treat the imports of their "most favoured" trading partner. MFN requires WTO member countries to treat imports coming from all other WTO member countries equally, that is, by imposing equal tariffs on them, etc. GSP, on the other hand, exempts WTO member countries from MFN for the purpose of lowering tariffs for the least developed countries, without also lowering tariffs for rich countries.

The European Union adopted a reformed GSP law on October 31, 2012. In order to allow ample time for economic operators to adapt smoothly to the new scheme, it was decided that the new preferences would apply as of January 1, 2014. Pakistan was granted EU's GSP Plus status from January 2014. The results were seen immediately. Pakistan's textile exports to the EU increased to $3.512 billion in the first eight months of 2014, up 21.4 per cent compared to $2.894 billion in the same period of previous year, according to government data. This $600-million jump meant that Pakistan could achieve its target of adding $1 billion every year to total exports to the EU that it set after receiving the GSP Plus status.

The energy crisis and its effect on textiles

The ongoing energy crisis in Pakistan has had a negative impact on overall growth of the industry in general, and the textiles industry in particular. The latter is considered to be the backbone of the country since it contributes more than 60 per cent in exports. The textiles sector of Punjab which accounts for 70 per cent in Pakistan is the biggest victim in current scenario, due to the 18th Amendment passed by the National Assembly of Pakistan back in 2009 in a bid to give provincial autonomy. After the amendment, provinces have a right to utilise their natural reserves first according to their needs before passing on surplus resources to other provinces.

Sindh and Khyber-Pakhtunkhwa (KPK) provinces have huge natural gas reserves, while Punjab has almost zero. The textiles industries operating in Sindh and KPK ensure round-the-clock natural gas for their captive power plants, where as those in Punjab are facing gas curtailment. According to Sui Northern Gas Pipelines Limited, a utility company responsible for distributing natural gas to Punjab and KPK, the Punjab textiles industry faced 100 days of gas curtailment in the year 2010, 150 days in 2011, 165 days in 2012, 240 days in 2013, 260 days in 2014, and 75 per cent curtailment till April 2015.

The natural gas tariff is uniform for captive power plants across the country and is much cheaper than the electricity tariff, i.e. $5.63 per MMBTU if compared with electricity tariff which is around 0.14 cents per kwh. Even this natural gas tariff is quite high if compared with India ($4.66/MMBTU) and Bangladesh ($1.86/ MMBTU); still Pakistani textile gurus believe they can compete in EU with the current gas tariff.

In this backdrop, the textiles industry of Punjab is bound to rely more on electricity, which too is in short supply. According to the Pakistan Electric Power Company (PEPCO), the Punjab textiles industry faced 37 days of load-shedding in the year 2011, 66 days in 2012, 96 days in 2013, 122 days in 2014, and is currently facing 25 per cent of load shedding (till April 2015).

The difference in tariff between natural gas and electricity has been creating hurdles for the Punjab textiles industry to compete even within Pakistan. The capacity of a majority of Punjab-based mills are currently at halt, and since Punjab houses some 70 per cent of the total industrial load of the country right from basic to value-added textile units, the negative impact has started hurting export figures.

"It is not that we are in love with natural gas. We are repeatedly demanding gas for our captive power plants in order to be cost-effective and to save our textile units which are designed to operate round the clock," says SM Tanveer, chairman APTMA. "We are forced to curtail our shifts which result in layoffs across the province," he adds.

Similarly, Tanveer points out, the textiles industry has been burdened with an expenditure of PKR120 billion in terms of electricity tariff rises since August 2013. The Punjab-based textiles industry, which consumes 80 per cent of the entire PEPCO industrial load, has been primary victim.

The upshot is that Pakistani industry is losing out both on competitive advantage as well as export revenues.

Products from this particular sector are in demand in European countries, and Pakistani manufacturers also have the access to those markets. "The plan of doubling textile exports to the European Union after GSP Plus is not more than a dream. But is there enough energy supply and a level-playing field for us which could lead us to a higher exports target?" asks Jawwad.

The bottom-line, however is clear: for Pakistan to make the best of the benefits that can accrue from EU's GSP Plus status, it will first have to tide over its energy crisis.