Is the textile industry — which accounts for more than 8pc of gross domestic product and is the largest employer of the country’s workforce outside agriculture — losing its lure? Apparently, it is.
The trend when everyone with capital wanted to invest in textile manufacturing because it promised easy profit and clout is reversing fast. There are signs that many factory owners in Punjab are taking money out of their textile business and investing in the fast growing retail markets to cash in on the booming consumption: real estate, education, entertainment, ready-to-wear garments, etc.
This is in spite of an array of budgetary measures for this financial year to support investment in the textile industry to boost falling exports. Few consider these decisions enough to save collapsing industry, revive the closed production capacity, and encourage investment at least in the short to medium term.
“Though the government has in theory declared our exports zero-rated by removing 3pc sales tax, it has done nothing about local and innovative taxes that form almost 8-9pc of our cost,” said a textile producer from Faisalabad who was forced to close down 50,000 spindles in last two years because viability issues.
He, like others, did not want to give his name because it would make his recoveries from domestic buyers difficult and unleash creditor banks on him.
“If you look at property market, it has doubled in Punjab cities in one year. Which business gives you such margins? Textile certainly does not. So why shouldn’t we invest in this kind of business where we don’t have to pay taxes, or worry about raw materials and energy supply and prices, etc,” he added.
A major factor driving investment out of textile industry is the losses suffered by manufacturers including major textile groups over the last three years on the back of declining exports.
A major factor driving investment out of the textile industry is the losses suffered by manufacturers including major textile groups over the last three years on the back of declining exports
“A large number of textile factories in Punjab are closed and in some cases the owners just do not have money to pay the salaries to their workers,” Amena Cheema, chief executive officer of the Punjab Board of Investment and Trade, told Dawn.
Overall, Pakistan’s exports are down 12pc or $2.7bn in the first 11 months of the last fiscal from a year ago. The textiles, which form almost three-fifth of export revenues, have declined by 7pc or $909m due to the sluggish yarn demand from China and subdued international cotton prices.
The government’s lack of attention to the matter and a strong rupee relative to other currencies have been key reasons behind dismal export performance, a JS Research report said in June.
Consequently, India and Vietnam have successfully penetrated the Chinese market, replacing Pakistan as the largest cotton yarn supplier. According to JS Research, three-fifths of the decline in textile exports are because of lower quantity sold whereas the remaining two-fifth is owing to lower product prices.
“The textile manufacturers are expanding into retail markets because textile manufacturing and exports have become unviable owing to a steep rise in the cost of doing business mainly on account of sharp increase in energy prices and shortages in the last three years,” said Aptma leader Gohar Ejaz.
A vocal critic of the government’s ‘anti-industry bias’ and export policies, he said India and China had stolen Pakistan’s share in the international market because their governments had helped their industries keep their cost down to protect jobs and foreign exchange revenues. “While our competitors are pushing their exports to create jobs, our government is relying on foreign borrowing to build its reserves leaving exports in a lurch even if it means shifting our jobs to our rivals.”
India has recently announced an incentive package for the textile industry to create 10m new jobs in three years, attract investment of $11bn and generate $30bn in exports.
“At the moment we require this kind of encouragement from our government to revive our industry and exports. The competition is big; so should the actions needed to trounce our rivals,” the Faisalabad-based exporter said.
JS Research report expects budgetary measures to push textile exports by 10pc this year if average Arab Light crude price stays at $40/bbl and machinery imports increase by 15pc on the back of China Pakistan Economic Corridor.
With textile industry going under, a State Bank report last week said further worsening of the textile industry could hit stability of its creditor banks.
The textile sector’s infection ratio — the relationship between non-performing portfolios and the total loan portfolio — is also at elevated level, said SBP’s Financial Stability Review.
As of September 2015, it said, the gross non-performing loans of the textile sector stood at 29pc; most of the bad debts were placed in the loss category.
Gohar pointed out that the chances of closures and defaults in the textile industry are increasing as three quarters of textiles produced in the country are exported in one form or the other. “Unless the manufacturers are able to export our products, the chances of further increase in losses and closures cannot be ruled out. And the industry cannot boost exports unless the government helps it slash cost of doing business to make our exports competitive in the global markets,” he added.
“If the government thinks we can export myriad of innovative taxes like infrastructure tax on gas or various surcharges on electricity including the one levied to recover the cost of power theft and losses from honest consumers, it is mistaken. Reduce our cost of doing business and we will boost exports by $3-5bn in no time.”
Published in Dawn, Business & Finance weekly, July 4th, 2016