After the expiry of the three-year moratorium on debt repayment, it has been proposed that the industry’s long-term loans and lease finance be rescheduled for another seven years. Besides, the industry’s term loans and lease finance (other than ERF) be transferred to long-term finance on a fixed interest rate of five per cent.

Further, the report calls for amendments in prudential regulations to allow banks finance garment units on more liberal terms. This proposal has primarily been put forward in order to encourage banks, and other financial institutions, to continue to finance the garments units.

To cut the cost of finance for garment units, it is proposed that interest rate on export refinance (part I & II), including foreign currency finance, may be scaled down to three per cent and on short- and long-term funds (other than ERF)) slashed to five per cent for three years. Further, it is proposed that the collection of turnover tax be also suspended for three years.

Together knitwear ($1.626 billion) and woven ($1.109 billion) garment exports of $2.73 billion contributed 30.29 per cent to the nation’s textile exports of $9.030 billion and 18.9 per cent to the entire export revenue of $14.400 billion in 2004-05.

For the current fiscal export, target for woven garments has been upped to $1.314 billion and for knitwear to $1.938 billion, raising their share in the country’s export target of $17 billion for the year to 19.12 per cent.

The industry sources, however, insist that it will be difficult, if not impossible, for them to attain the target if their financial problems are not taken care of as recommended by the committee at the earliest.

This view is substantiated by the provisional export figures for the first month of the current financial year, that is July. As against the target of $177 million for knitwear and $133 million for woven garments for the month, the knitwear exports stood at just $150 million and woven garments at $115 million.

Though the committee’s proposals are considered by federal government and central bank officials as “too radical and unenforceable”, the exporters maintain that implementation of the recommendations is the only solution to their problems.

The garment industry, especially knitwear sector, took the first hit when the foreign buyers stopped looking at Pakistan as a source for procuring textile goods after 9/11. “Before that the future of the knitwear exports looked so bright that most manufacturers set up new units and expanded their existing production capacities in view of the phasing out of quota restrictions from January 1, 2005,” says Mr Agha.

Garment sector’s problems were compounded by an appreciation in the value of the rupee against the dollar that hit its profitability, phasing out of rebate in the shape of duty drawback, and unprecedented 45 per cent rise in cotton rates. “At a time when we direly needed government support to sustain ourselves, it was taken away from us,” he says. Since 9/11, the knitwear industry has not been able to stand on its feet despite the fact that orders improved.

“Though fresh orders began to pour in, we had to agree with our buyers to slash our prices. Most exporters, who were making 12-14 per cent profit before 9/11 started to incur 10 per cent loss. However, we were glad that buyers were coming back to us. Duty-free access to its market and 15 per cent additional quota allowed by the EU also helped increase export volumes, but only for a couple of years,” says Mr Agha.

To cover their losses and neutralize the impact of the plunging unit prices, the knitwear producers expanded their capacities. “We knew that the impact of the declining unit prices could be offset by raising production capacities. Moreover, we were also looking at the elimination of quota restrictions as an opportunity for our exports,” he says. It’s another story that exports failed to register the desired increase even after phasing out of quota restrictions.

As the country’s macro-economic indicators improved, the banks lowered their interest rates. The reduction in the cost of funds helped the knitwear producers expand. “In the last three years or more we have invested billions of rupees in fixed assets,” he says. “During the last four years the only saving grace for the industry has come in the form of lower interest rates,” says Mr Agha.

While the garment industry was still struggling to compete with its main competitors – China and India – in a quota-free world, the interest rates began to surge early this year owing to inflationary pressures.

“In the given circumstances when our export volumes are shrinking, unit prices plunging, and inflation and interest rates going up, we are expected compete with China and India where garment exporters are getting 13 per cent and 10 per cent subsidy, respectively, or with Bangladesh and Sri Lanka whose garment exports have duty-free access to the US and the EU markets,” he says.

The exporters consider rebate allowed to the clothing sector in the form of six per cent R&D allowance as inadequate. “It is too little, too late,” they say. “The help came only when the exports (of knitwear) declined (by 4.37 per cent),” they add.

“The average interest rates have more than doubled and cost of export refinance gone up to nine per cent from three per cent. You can well imagine the burden put on the manufacturers by the rising interest rates.

In the existing circumstances when the government does not want to devalue the currency or subsidize the industry, what mechanism do we have to hedge against inflation and rising cost of funds,” asks Mr Agha. “The solution lies in the implementation of the committee’s recommendations.”