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Old Thursday, July 13, 2006
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Default A breakthrough in textiles

A breakthrough in textiles


By Sultan Ahmed

PAKISTAN’S premier export industry is in a crisis. Although textiles which form about 66 per cent of Pakistan’s total exports rose by 18 per cent in the first 11 months of the last financial year, they face a tough, competitive future in view of the proposed rapid expansion of the industry in Bangladesh, India and China.

So Pakistan’s textile industry had come up with a demand for a Rs50 billion package in tax concessions, reduced interest rates, subsidised utilities etc. But the government has not accepted that demand. Prime Minister Shaukat Aziz has instead come up with a demand to provide him with proof of verified concessions enjoyed by the industry in the major competitor countries.

The prime minister has told the newly constituted export promotion board at its inaugural session that its function was to formulate an export policy and not seek tax relief and other monetary concessions. Providing proof of the better fiscal and other concessions enjoyed by Pakistan’s competitors and their vast expansion plans, the committee of textile mill owners headed by Mirza Ikhtiar Baig says the verified data which the government seeks is available on the websites of those countries.

The prime minister might have agreed to some significant concessions but the tight financial situation the country faces has prevented him from doing so. He has also expressed dissatisfaction over the commerce ministry’s export performance. He wants the markets to be properly targeted. Because of certain problems the commerce ministry faces, it has not been able to announce the export policy for the year that began on July 1 so far.

If large concessions are given to the textile sector, the other export sectors are bound to clamour for the same on the pretext of facing the same kind of challenges or handicaps.

The fact is that the total exports in the last financial year could not touch the target of $17 billion while President Musharraf was confident of the exports touching the figure of $18 billion, in spite of the large trade deficit of $11 billion. Nevertheless the exports of rice and leather products exceeded one billion dollars each for the first time in our export history and the engineering industry did far better than before. But while the rice in total exports in the first 11 months was 18 per cent, it was actually 23 per cent in the first six months of the year and nine per cent in the next five months.

That means urgent remedial measures are needed to boost exports and diversify them. Such urgency is all the more imperative in view of the vast expansion and modernisation of the textile industry in India, China and Bangladesh. While Pakistan’s exports of textiles a year is worth $9 billion, India’s is $14.5 billion, China’s $11 billion and Bangladesh’s is $6.60 billion. But all of these competitors have drawn up plans to expand their textiles industry in a big way in the next five years. Bangladesh has fixed a target of $14.5 billion, while India’s target is $50 billion a year and China’s is $220 billion.

And Pakistan’s target is $14 billion. It is in this context that the prime minister has asked the planning commission to revise the target of exports overall from 13 per cent of the GDP to 15 per cent which may not be too difficult to achieve.

And that means tremendous effort to expand and update the industry, diversify the products and their target markets. And that presupposes large investment of additional capital and equipment. Above all the sustained emphasis has to be on the value-added products instead of feeling too happy that the export of bed sheets and towels last year had fetched $4 billion. The value-added garment sector has to form a large part for the export sector as our exports tend to exceed the cotton we produce.

In the garment sector we are in competition with Bangladesh, which does not produce any cotton and we struggling to produce pest-free and dust free cotton.

Instead of facing the problems of the present and the future bravely and finding solutions, the first textile minister of the country Mushtaq Ali Cheema wants to resign as he has not been able to convince the government to meet the textile industry’s legitimate needs. He is himself a textile millowner from Faisalabad and popular among his fellow mill owners. He wants to meet their legitimate demands, but as he could not, despite his best efforts, he prefers to quit.

But an analytical report on the subsidies hitherto enjoyed by the industry shows that from the years of the bonus voucher in the 1960s all the subsidies given to the textile sector have ended up in lowering the export prices than improving the quality of the products and business practices. The government wants the industry to improve the quality of its products and diversify its products and adopt more efficient business practices. It also wants fewer complains from the importers of Pakistani goods abroad.

The industry had earlier said it had invested $5 billion on its expansion and needs to invest another $5 billion. So it wanted Rs50 billion relief and varied concessions as an incentive. But now it says it needs to invest $7.5 billion within next four years period and the millowners’ tax relief, subsidised bank loans and a package of concessions and facilities to enable them to invest so much. By making such an investment, they hope to raise Pakistan’s textiles exports to $14 billion a year and provide direct and indirect employment to 6.2 million people.

The prime minister says the government is trying to help the private sector in many ways. It is seeking preferential trade agreements and free trade area agreements with many countries including Malaysia and Singapore. And since negotiating an FTA is a long process, the government is seeking early harvest agreements so that they could trade on the agreed items earlier. It is also in the process of finalizing the reconstruction opportunity zones wherein the goods produced will have access to the US market on a preferential basis. The prime minister also seeks vast scope for exports of agricultural products.

The $14 billion is a great textile export target with prospects of direct and indirect employment to 6.2 million people, but it would take a great deal of collective effort to achieve that and obtain the promised results.

The textile committee’s report says the industry could have made remarkable progress in recent years as the inflation rate has remained low, the interest rates were affordable and other economic factors were supportive, but now the inflation rate is on the rise, the bank interest rates are spiralling to new heights, the utility costs are high and the labour costs are higher as compared with the countries with whom Pakistan is competing.

The high wages may not be in terms of rupees but in terms of low productivity. Hence the demand for omnibus concessions including reduction in the cost of energy and the overall cost of production. The textile industry had been doing too little of market research, relies more on the PR and the dinners and lunches it gives and awards export trophies to the businessmen in very large numbers. They have shown no interest in having foreign consultants, although the government has offered to share the cost.

The reformulated demands of the industry now include a cut in interest rates including lower export refinance rates, subsidy on gas rate and finally a devaluation of the rupee. The rupee is, in fact, already devalued. The Indian rupee now goes for 46.4 a dollar compared to 60-61 Pakistani rupees for a dollar. Further devaluation of the rupee will make all imports more costly beginning with oil which is now selling above 70 dollars a barrel and threatening to rise further. That will aggravate the inflation, including enhancing the price of oil manufactures using imported raw materials. And if instead of floating the rupee, the government resorts to formal devaluation, there will be time and again demand for further devaluation.

If gas for the textile industry is to be subsidised to bring it close to the Bangladesh level, other industries would clamour for the same concessions. If as the rupee is devalued, the gas price will rise almost automatically and that too will be passed on to the consumers as we have an agreement to pay international price for the gas and oil found by foreign companies in Pakistan.

It appears the government is not contemplating to accede to the many demands of the textile industry. But a meeting will be held soon between the governor of the State Bank and the textile mill owners which may reduce the export refinance rate by one percent to 8 per cent. But the millowners will not be satisfied with that margin of concession, not even the textile minister will be satisfied. So the prime minister is well advised to ask the planning commission to look at the problems of the textile industry as a whole and the competitive advantages of their competitors in India, Bangladesh and China.

The textile industry in Pakistan should be based on a stronger foundation as a world class industry and rely more on research than on PR. A great deal of importance has to be given to exporting the value-added garments instead of attaching overwhelming importance to exporting bedsheets and towels. Far more has to be earned through the high-priced garments which can provide employment to an increasing number of women and also opportunities to them to use their rich talent.

And the concessions given should be utilised to improve the products and diversify the exports both in terms of items and markets, instead of enlarging the profits.
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