Pakistan’s textile industry expects the Economic Coordination Committee (ECC) to approve the new five-year textile policy, the country’s third, carrying unprecedented cash and energy price subsidies to increase the country’s textile and clothing exports to $20.8 billion in five years, this week.
The approval of the policy was delayed for a week because the finance ministry wanted the Federal Board of Revenue (FBR) to examine the revenue implications of the suggested incentives including unprecedented cash and energy price subsidy and restoration of the zero-rated status of the exporters.
According to the published reports, the textile policy 2025 pledges interventions totalling more than Rs950bn or almost $6bn, including cash subsidy of Rs400bn and energy price subsidies of Rs350bn over five years to boost the textile and clothing exports.
Textiles make up almost 60 per cent of Pakistan’s exports but have lost market share to regional competitors like Bangladesh, India and Vietnam in recent years owing to energy shortages and underinvestment in machinery. In the last few months, the industry has been operating at its full capacity as the American and European buyers are diverting their orders to Pakistan since it lifted the virus restrictions with Bangladesh and India keeping their economies closed.
Exporters claim that the industry has had its order books full for much of 2020-21. Pakistan’s outbound textile and clothing shipments topped $6bn in the first five months of the current fiscal year to November, or 62pc of the total exports of $9.7bn and almost 5pc higher compared to last year.
‘We need to invest $7bn to enhance production capacity and double our textile and clothing exports in five years’
Khurram Mukhtar, former Pakistan Textile Exporters Association chairman, listed five key reforms that had helped the industry turn around: reduction in energy tariffs for exporters, decrease in the interest rates, payment of sales tax and other refunds, market-based exchange rate, and availability of subsidised working capital and long-term financing. “The entire textile value chain is running at full capacity and this is unprecedented.”
He believes that the early approval of the new policy would give clarity to the industry for next five years and attract investments in capacity expansion and in new products to not only maintain its current market share but also enhance it. “We need to invest $7bn to enhance production capacity and double our textile and clothing exports in five years. Currently, new investments of more than Rs100bn are already in the pipeline across the value chain from spinning and weaving to finishing to knitting and garments,” he said.
The new policy proposes the provision of energy price subsidies of Rs350bn by supplying electricity to the industry at $0.09 per unit and gas at $6.5MMBtu (one million British Thermal Units) in addition to allocating Rs400bn for payment of Drawback of Local Taxes and Levies (DLTL).
Mr Mukhtar sought to dispel the impression that the finance ministry or any other stakeholders were opposed to the incentives for the industry. “All the stakeholders are on board. Even the International Monetary (IMF) Fund is also on board. The policy will be approved by the ECC in its next meeting.”
However, he agreed that the government may not implement the suggestion of restoring the zero-rated status of the industry, which was withdrawn in 2019 after the government got a $6bn loan deal from the IMF to support the country’s deteriorating balance-of-payments situation. Besides, the government may also not agree to the demand to reduce the power tariffs for the exporters to $0.09 a unit from $0.75 a unit. “We want the government to give us what it can for five years so that we work and invest accordingly with peace of mind,” he concluded.
The previous two textile policies 2009-14 and 2014-19 had allocated incentives worth Rs188bn and Rs65bn to achieve the export targets of $25bn and $26bn. Both the policies failed to raise the exports as only a fraction of the amount set aside for interventions was actually spent.
The textile industry, which comprises 46pc of the manufacturing, employs around 38pc of the non-farm labour and contributes 8.5pc to GDP, is often considered by successive governments as a low-hanging fruit as they try to boost exports. However, none of the efforts has succeeded as yet and the textile and clothing exports remain stuck at around $13bn a year for almost the last one decade with Bangladesh, Vietnam and India having increased their market share much more rapidly than Pakistan.
Textile exports remain stuck at around $ 13 bn a year for the last one decade
The industry sources say the policy gave a comprehensive framework from developing quality cotton seed to boosting value-added textile and clothing exports to creating jobs — especially for women in garment stitching — to developing international brands to boosting e-commerce to make the country part of the global value chain. The government says the policy is focusing on market and product/fibre diversification both.
M I Khurram, former Pakistan Hosiery Manufacturers Association chairman and a leading knitwear exporter from Lahore, said the government should implement the policy at the earliest. “The cost (of the proposed subsidies) may appear to some as steep but it is not. The benefits that the country would accrue in terms of new investment, technology transfer, automation, job creation and above all enhanced exports will be tremendous. How long can we live on borrowed money? It is time the government provides us with a level playing field so we can earn dollars for it.”
He said the government should also start payment of outstanding DLTL refunds to exporters. “With the repayment of the wage loans obtained by the industry now starting and imported cotton prices jumping from $0.70 per pound to $0.88 per pound, the exporters have already started to feel liquidity crunch. The early release of the DLTL refunds on the pattern of sales tax claims should go a long way helping the exporters.”
Mr Mukhtar added that the value-added sector was facing yarn shortages, which had spiked its prices in the local market. He was of the view that the government should declare cotton and yarn as essential commodities and allow import from India. “If the shortages persist it will become difficult for us to manage our export orders and the buyers will go back to their previous suppliers.”
Published in Dawn, The Business and Finance Weekly, January 11th, 2021