Policy shifts mar textile exports

December 02, 2019

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With its share fluctuating between 55 per cent and 60pc in the country’s exports for several decades, the textile and clothing industry is the dominant source of foreign exchange earnings.

There are examples where the textile and clothing sector was used as a ‘starter’ industry by countries pursuing export-oriented industrialisation. However, Pakistan has utterly failed to use this opportunity for sustained economic growth because of ineffective and inconsistent government policies, which are required to build on this investment. Another reason is the unwillingness of investors to become more efficient and diversify their products to meet demand.

In comparison, other low-income countries like Bangladesh, Cambodia and Vietnam have successfully developed their textile and clothing industries to create jobs and rapidly increase their export receipts. For instance, Pakistan’s textile and clothing exports have stagnated at $13-13.5bn as opposed to Bangladesh’s $37bn although the latter has a relatively young industry. Bangladesh, in fact, is targeting $50bn in textile and clothing exports over the next few years.

‘We are far ahead of Chinese companies in technology. We have more efficient European and Japanese machines. Chinese companies depend on huge subsidies for survival’

Why is Pakistan left far behind in the race? “The reason is very simple: inconsistent government policies that pull investments away from the manufacturing industry into the real estate sector and stock exchange, regional political and security situation that keeps our foreign buyers from visiting Pakistan, energy shortages for the industry in the past and so on. On top of that, the people who have never exported anything are called to advise the government to formulate policies to boost value-added exports,” says Umer Mansha, chief executive of Nishat Mills Ltd (NML), the country’s largest textile and clothing — exporting company.

NML Executive Director Ahmed Jahangir adds that value addition requires a lot of effort. “When you move from basic textiles into value-added textiles, you feel returns are not commensurate with the kind of effort you have to put in. But once you are in value-added manufacturing, you realise you can get much high returns with a better strategy and efficiency.”

The Nishat Group has invested heavily in value-added textiles — fashion apparel, home textiles and technical textiles, which form a big portion of its $341 million textile and clothing exports — for top American and European brands. The continuous upgrade of technology has allowed the group to cut its labour cost by 20-30pc and electricity expense by 30-40pc.

Mr Mansha points out that only the large groups that have been in the textile business for a long period are investing in capacity expansion and increasing their footprints in the downstream, value-added textile industry.

“Such companies learned the tricks of trade because of the textile quota protection and were able to establish close, enduring relationships with their foreign buyers. New investors are reluctant to invest in the value-added segments because they are scared of competition with larger companies already in this business.

“The Sept 11 terror attacks and the ensuing war on terror in our region further deteriorated the environment for our value-added industry and made it difficult for new players to enter into it. Buyers don’t visit Pakistan and feel more comfortable to deal with companies with whom they have worked in the past. How can you expect a buyer to do business with a supplier whose factory he hasn’t ever visited or seen?” Mr Mansha says.

Mr Mansha is not very optimistic about the promised Chinese investment in Pakistan’s textile and clothing industry. “I don’t see Chinese firms relocating their manufacturing units to Pakistan. If they wanted to relocate here, what could possibly have stopped them until now? And why would they invest in Pakistan? What do we have to offer them? On top of that, there are cultural and social differences, political unrest etc. Then we do not have enough quality raw material or variety. We are far ahead of Chinese companies in technology. We have European and Japanese machines, which more efficient. They sell volumes and depend on huge subsidies from their government for survival.”

China went to Vietnam and Bangladesh to take advantage of cheaper labour and market access these countries enjoyed in the United States, according to Mr Jahangir.

“China invested in Vietnam in the hope of taking advantage of the now defunct Trans-Pacific Partnership (TPP) agreement. Then there’s also the factor of close proximity and cultural and social similarities.”

He believes the Chinese are successful because of massive subsidies they enjoy. “Their objective is to create jobs; exports are the by-product of that policy. In Pakistan, on the other hand, we have to work in an uncertain business environment. For example, the government gave us subsidised power and gas but withdrew the zero-rating regime for export-oriented units and imposed sales tax. If the refunds are not disbursed quickly, most of our liquidity will remain stuck with the government. What will be the use of cheaper energy then?

“Because of tax issues, exporters are diverting their businesses to the domestic market. This is why local textile and clothing market has grown so fast in recent years. I see a 30pc loss in exports by February if we don’t fix our export refund system. Much of our time is spent on fulfilling unnecessary documentation, which adds to our costs and affects our competitiveness. If the government wants to boost exports, it should get out of the way of exporters.”

Published in Dawn, The Business and Finance Weekly, December 2nd, 2019