Covid-19 has forced lockdowns across much of Europe and South-East Asia, as well as in parts of the US, as countries scramble to contain the spread of the disease by ordering people to not leave their homes except in emergencies or to shop for necessities. People in most places — even in countries where strict lockdowns are yet not enforced — have stopped non-essential spending as the situation is still evolving. The lockdowns and falling sales have compelled a raft of global apparel brands and retailers to close their stores as part of social-distancing measures and delay or cancel imports.
The impact of the global slowdown has also started showing on Pakistan’s exports as a large majority of exporters of apparel and home textiles last week received emails from their European and American buyers to “stop all shipments and further production for them forthwith.” Some western importers have asked their Pakistani suppliers to suspend shipments for three weeks and others for even a longer period. The impact of disruption in export shipments has not only affected apparel and home textile exporters but is now rippling through the entire domestic textile supply chain, putting at risk the livelihood of thousands of factory workers.
“Many companies were already under pressure because of budgetary measures like the withdrawal of the zero-rated regime for exporters that the government had introduced from July and the delay in issuance of their sales tax and other refunds. But now we are being told by our foreign buyers to put their shipments on hold for a period that may range from a few weeks to an indefinite period,” MI Khurram, the chief executive of Comfort Knitwear, one of the leading exporters from Lahore, said.
“That is not all. Brands like H&M, Nike and Zara have also temporarily halted new orders for autumn as they are assessing the impact of the drop in demand and may change orders they have already placed,” he added. “As far as I know, no order has so far been cancelled, but you cannot rule out widespread cancellations if the current situation in Europe and America does not improve over the next few weeks.”
‘If the situation does not improve in the next few weeks, I see our textile exports decline by almost 50pc and closure of almost 40pc spinning capacity. Only those with financial muscle will survive’
The situation has led some firms like Interloop, Style and Shahkam to take extreme measures like temporarily shutting down their production partially or completely for the next two to four weeks to prevent inventory build-up as no exporter has enough storage capacity. In Faisalabad, the apparel and home textile manufacturers have cut their output by a fifth. Smaller manufacturers have gone as far as terminating most of their temporary workers and furloughing other staff.
“The small- and medium-sized exporters already operating on very thin margins are unable to pay workers or utility bills as they wait for new orders,” Azizullah Gohir, the secretary-general of the Pakistan Textile Exporters Association, said by telephone. “The impact of trade disruptions on the coronavirus spread is slowly but steadily overtaking the domestic textile supply chain. The production cuts in the downstream industry are already causing inventory build-up in the upstream industry.”
According to industry sources, large spinners like AA Textiles are drastically slashing their output and manufacturer of manmade fibre, Ibrahim Fibres, has shaved off its prices to reduce its stocks. “If the situation does not improve in the next few weeks, I see our apparel and home textile exports decline by almost 50 per cent in April and closure of almost 40pc spinning capacity over the next couple of months. Only those with big financial muscle will survive,” Khurram declared.
Khurram Mukhtar, the chief executive officer of Sadaqat Limited, said some exporters who were supplying their wares to large supermarkets like Target and Walmart were not as much affected as those selling their products to exclusive apparel brands and stores. “There is a decrease in the sale of textile and clothing products in supermarkets as well but people are still buying these goods. Hence, the impact on suppliers of such importers has been minimal thus far.”
The exporters are warning that the export disruptions could result in massive job cuts unless the government supports them. “Our foreign buyers are trying to save their sales and businesses. For us it, it is a matter of protecting jobs,” Ijaz Khokhar, the country’s largest exporter of martial arts uniforms from Sialkot, argued. “The widespread lockdown in Europe and elsewhere has affected the entire small- to medium-sized exporting industries — including sports goods and surgical instruments manufacturers — from Sialkot. However, the garment producers are affected the most,” he added.
Nabeel Hashmi, the chairman of the Punjab Industrial Estates, a government-owned company which develops and manages industrial and business parks in Punjab, says it has now become crystal clear the Covid-19 spread is going to take a huge toll on companies, especially on the small and medium enterprises (SME), because of both export disruptions as well as the decline in domestic demand.
“The pandemic has brought with it an extraordinary challenge for the economic policy planners and the central bank. This challenge requires an extraordinary response to mitigate its impact on the country’s struggling economy and people. The government should give comprehensive support of at least Rs100 billion to subsidise utility bills of tax-compliant SMEs with an annual turnover of up to Rs2bn and enable them to retain their employees and pay their salaries for at least next 120 days. The State Bank of Pakistan should waive all interest payments on industrial loans as long as the crisis lasts to protect the industry and jobs in these unprecedented times,” he underlined. “Without government support most SMEs will neither be able to pay salaries nor utility bills. If you save the industry now, it will be easier for the economy to rebound more quickly when the crisis is over.”
Local garments and home textiles retailers are also reporting a massive drop in their sales. “Our sales have dropped to just 20pc. Buyers have stopped spending on these items and our stores are without any customers for the better part of the day. We are furloughing most of our sales staff in view of the situation,” Kashif Ashfaque, the chief executive officer of ChenOne, a lifestyle store chain, said.
The evolving situation in the textile sector is not only worrying for the industry but also bankers. With potential loan defaults looming large as factories cut down their production on export disruptions and slowing domestic demand over coronavirus, bankers have also joined the chorus for an immediate, substantial reduction in the policy rate to protect the industry, jobs and banks alike from the impact of the pandemic. “It is time that the central bank cut its policy rate by 5pc to 7.5pc and instructs the banks to provide relief to all borrowers from payment of interest on their outstanding loans until September. Besides, the government should immediately release the sales tax and other refunds to improve the liquidity of the manufacturers,” a business tycoon with interests in textiles to financial services said on condition of anonymity.
Time to act is now.
Published in Dawn, The Business and Finance Weekly, March 23rd, 2020