Pakistan’s textile exports have dropped to their 17-month low since May 2021, according to official trade data for October. The revenues of $1.36 billion fetched home by the textile and clothing exporters last month are down by 11 per cent compared with $1.53bn for September.
On a year-over-year basis, the fall has been even steeper, with the dollar value of the textile shipments from the country declining by 15.2pc from $1.60bn the same month last year.
This was long expected due to harsh international economic conditions such as historically high inflation and interest rates and soaring energy prices on the back of the Russian invasion of Ukraine.
The monthly foreign trade numbers evidently indicate that the country’s textile exports are beginning to reflect the global slowdown in the textile and clothing demand in Europe, the UK and the US amid elevated price inflation, growing energy expenditure, surging credit costs, and so on in the West, especially Europe.
Though the four-month decline of 1.4pc to $5.94bn in textile exports between July and October from $6bn in the corresponding months last year isn’t worrisome, the next few months can be very tough for exporters.
Comfort Knitwear chairman M. I. Khurram forecasts that the drop in textile shipments will continue this month, with November’s monthly flow shrinking from $1.2bn to $1.3bn.
“The monthly textile exports will depress by an estimated 25pc-30pc in January on a year-over-year basis,” said the textile exporter with vertically integrated production, starting from yarn to knitwear.
The monthly foreign trade numbers are beginning to indicate the slowdown in demand in the US, UK and Europe
“The build-up of their inventories means that our buyers must stagger their import orders thin over a longer period,” Mr Khurram says.
“This means that the buyers are lifting their October shipments over a three-month period to December. The exporters’ warehouses are stocked with the goods ready to be delivered and their factories across the value chain operating just at a fraction of their capacity.”
Fahad Rauf, head of research at Ismail Iqbal Securities, says the effect of the global economic slowdown and high inventory levels held with the retailers is becoming more visible. The fall in export value has mainly come from volumetric decline as prices of almost all categories have either increased or stayed flat, he adds.
Among the value-added items, the published data shows bedwear has witnessed the largest decline of 19pc on a month-on-month basis. Knitwear was also on a downward journey in October and declined by 10pc. Cotton yarn has shown the largest decline of 35pc.
Going forward, Mr Rauf wrote in a note, the textile exports will likely remain under pressure owing to the lack of new orders amid the global economic downturn and the high inventory level held by the retailers.
“On the domestic front, the gas supply to the textile industry has and will further decrease during the winter as the fuel will be diverted to residential consumers who remain the government’s top priority. This has forced the industry to switch towards the grid, which is likely to hurt Sindh-based exporters as the province enjoys significantly lower gas rates compared to Punjab.”
The textile industry has enjoyed unprecedented profitability in the last couple of years as its export in the last financial year soared to the historic high of $19.35bn, with an increase of over 25pc from $15.4bn in the previous fiscal year.
Mr Khurram says last year was very good for the industry and exporters made a lot of profit. “This year many, who have imported cotton at $1.3-1.5 a pound on reports of damage to domestic crop in floods, are facing losses as the fibre prices have plunged to $0.85 a pound and demand for textile and clothing is falling. Moreover, those who had borrowed from banks are also facing tough times due to increase in interest rates.”
In addition to this, according to him, local and foreign customers are delaying payment because of the global downturn and reduction in sales. That means many exporters are stuck in a liquidity crisis, which will take some time to settle.
Mr Khurram says the textile downturn isn’t specific to Pakistan. Other textile producing and exporting nations like Bangladesh and India are also experiencing the same issues and facing capacity closures like Pakistan. “These are tough times for the industry and will continue for some time,” he says.
Pakistan Textile Exporters Association (PTEA) secretary Azizullah Gohir agreed that all textile producing nations are under stress due to demand destruction in Europe and America where consumers are more concerned about putting food on the table for their families and paying their heating bills in winter than changing their bedsheets, shirts and denim.
However, he claims, the Pakistani industry is suffering disproportionately. “Some domestic issues have only compounded the impact of the international reduction in demand on our industry and exporters. Other countries are still in a better position to cope with the situation,” he argues.
According to him, the rising cost of production is on the back of an increase in electricity and gas prices as well as in the rates of concessionary financing, bringing the industry under pressure.
“This is happening at a time when the government is causing undue delay in payment of exporters’ sales tax refunds against approved Refund Payment Orders (RPOs). This adversely impacts the export cycle as exporters’ liquidity has already taken a strong hit from the global recession.
“RPOs amounting to Rs30bn are pending payments, and exporters are facing severe financial hardship leading to a disruption in export production. Then the discontinuation of duty drawbacks on local taxes and levies (DLTL) by the government has also created liquidity issues for the export sector. Around Rs55bn are also pending under the previous DLTL scheme.”
Furthermore, production is also suffering due to restrictions by the State Bank on the import of plants and machinery under chapters 84 and 85 of the Pakistan Customs Tariff because of shrinking reserves. This move has severely affected the production cycle of the textile industry as the import of plants and machinery has been halted.
“On top of everything, we also have to factor in the country’s political instability. The ongoing political turmoil is hurting business sentiments and causing an uncertain business environment, a major reason foreign buyers are reluctant to place orders with our industry. It is time politicians learnt to tackle their differences in a decent manner without affecting the business environment and the economy,” says Mr Gohir.
Published in Dawn, The Business and Finance Weekly, November 21st, 2022