While the European Union is expected to open up its markets to duty-free imports from Pakistan next year, the country’s garment industry remains far from ready to grab the opportunity.
Garment manufacturers claim the government’s restrictive import policies are blocking their access to new raw materials, which they require to diversify their product lines to take full advantage of the duty-free access under the EU’s Generalised Scheme of Preferences (GSP) Plus scheme.
According to the Pakistan Readymade Garments Manufacturers and Exporters Association (PRGMEA), the country could utilise only three textile categories out of the total of 73 that it was given duty-free access to under the EU’s limited, unilateral trade concessions from November last year.
“This is because we do not have access to finer, synthetic fabrics used to make products like ladies’ garments, sportswear, etc., which involve high value addition to fetch higher prices. Our garment industry is still forced to produce low value added garments,” said Ijaz Khokhar, a leading exporter from Sialkot and former chairman of the PRGMEA.
“The government must relax the import policy to allow the value added textile industry to get the maximum benefit from the GSP Plus scheme, as the country has no raw material, except for cotton. Producing garments of generation III and IV is still a major challenge, as we are currently making just generation I or II garments, mainly because of the lack of raw material on account of high taxes on import,” he said.
“On the other hand, our rivals in Bangladesh are enjoying duty-free import of every raw material and, hence, have increased their value added textile exports to $26 billion, compared with Pakistan’s garment exports of $4.5 billion,” he argued.
Khokhar said he had interacted with many Chinese investors who were interested in relocating their manufacturing facilities to Pakistan because of rising labour and other costs in China. “Nonetheless, the Chinese investors too feel impeded by restrictive fabric import regime.”
Garment exporters say the local garment industry comprises small to medium-sized units. Such manufacturers are unable to import the raw material required to diversify their product lines because of their small scale. “We cannot afford to import raw materials even under the duty and tax remission for exporters (DTRE) scheme because of our size. The scheme, like many other such policies, has benefited only the big exporters,” said another garment exporter from Lahore.
He said the duty-free import of synthetic blends and cotton fabrics could double the country’s apparel and sportswear exports, as both raw materials are not manufactured domestically. Small trims, carrying no commercial value, should also be made duty-free to reduce delays, and the removal of import duties on raw materials would make our products competitive under the EU’s GSP Plus scheme, he added.
Khokhar was of the view that it was imperative for the government to give the value added textile industry across-the-board duty-free access to raw materials.
“The government should allow a free import mechanism for raw materials for the apparel sector. Even if a part of the imported duty-free raw materials winds up in the domestic market, as is feared by policymakers, it will not hurt any one. The government allows its duty-free fabric import under the DTRE scheme, but it is not feasible for SMEs to avail the scheme.”
He said the duty-free import of fabrics was also of crucial importance for value added exporters because of limited dyeing facilities in the country, and the energy, especially of gas, shortages for the industry.
Many garment exporters are also disappointed over the delay in the processing of their refunds. “Billions of rupees stuck in sales tax and other refunds have caused a cash flow problem for the industry,” said Pakistan Textile Exporters Association Chairman Sheikh Illyas. He added that few exporters could afford to bear the delay in the release of the refunds.
No exporter has received refunds for two per cent sales tax on purchases of raw material for export since February 2013, while claims from 2010 are still pending as well. Many say the Federal Board of Revenue (FBR) is delaying refunds to show higher tax collection.
Meanwhile, FBR officials say the board is releasing refunds pertaining to the current financial year. Claims from previous years will be cleared only when the government decides to do so, they say.
“There are a lot of discrepancies in the refund claims, which we are sorting out. But where genuine claims have been established, we are releasing the refunds,” said an FBR official in Lahore.
Khokhar was of the opinion that the bank guarantee system, which was in vogue before the introduction of DTRE, should be revived, at least for the small to medium scale exporters.
“This will ensure that exporters are able to import the required fabrics and that they do not face a cash crunch because of stuck up tax refund claims. If any one doesn’t convert duty-free imported fabric into garments for export, the FBR can get his bank guarantee encased.”