KARACHI, July 28: A Swiss-based internationally known consultancy firm — Gherzi — has proposed to ensure that the 6 per cent research and development rebate on textile exports should be given only to the manufacturing companies so that it could be used only for the purpose it was intended for and that textile industry has little R&D including new product development.
This proposal has apparently been made after it was found that the commercial textile exporters have grabbed the lion share of more than Rs 20 billion R&D rebate given by the government at the rate of 6 per cent, 5 per cent and 3 per cent on export of garments and home textile, respectively, for last two years while the manufacturing companies got a very small share.
Gherzi observes that in all probability the R&D rebate is passed on to the buyers as discounts to get sales. It is unlikely that the subsidy is used for the R&D purpose. “Can the rules be changed?,” the study raises a pertinent question.
The report observed Pakistan’s performance in clothing export as “disappointing”. With so much to offer in terms of local cotton and competitive labour, the export performance is poor.
A sad reflection of Gherzi’s report is Pakistan’s textile export performance in the year 2006-07, which has decelerated to hardly 5 per cent plus from 14 per cent annual growth a few years ago. Latest trade figures for the year 2006-07 shows that import of textile machinery is down by more than 38 per cent to about $503 million indicating that the allocation of about Rs50 billion bank loans on concession rate of 7.5 per cent since May 2004 has failed to motivate textile barons to invest for improving their production capacities.
Under this scheme, the textile tycoons swapped Rs34 billion loans they had obtained on 12 to 14 per cent rate to 7.5 per cent. Fresh financing of Rs15 billion to textile industry under long-term financing for export- oriented projects (LTF-EOP) were provided according to the information given by the Federal Commerce Minister Humayun Akhtar Khan in his budget speech on July 18, 2007.
No firm figures are available but a rough estimate shows that conversion of Rs34 billion bank loans from 12 per cent to 7.5 per cent interest bank loans and grant of fresh Rs15 billion loans to the textile industry would cost anywhere from Rs1.5 billion to Rs2 billion to the State Bank of Pakistan. Add to this, the cost on export refinance, which too is being offered on 7.5 per cent interest.
Gherzi was asked by the textile ministry to give an assessment of the situation that has emerged after the quota phase-out in terms of countries that have gained and those who have suffered with special reference to Pakistan. The report was given in March this year.
The textile companies - that export directly - are found to be more attractive and reliable by the foreign buyers as suppliers than those manufacturing companies that depend on commercial exporters.
However, in spite of having a direct involvement in the markets, many Pakistani companies are seem contented to serve the lower, highly price sensitive price segment of the market with basic products,” the report notes.
As for those textile manufacturing companies that depend on commercial exporters for market access, the report declares in clear words: “These companies are unlikely to be in control of their destinies as they are beholden to the commercial exporters.”
They are unlikely to have correct management structures and modern equipment. They are certain to be under persistent price pressures and without product development that enable them to become direct exporters.
Pakistan’s share in world textile exports is observed to have been increased from 2.58 per cent in 1990 to 3.45 per cent in 2005. On the face of it, this appears to be a positive growth.
However, the report says the growth in Pakistan’s textile exports have come mainly from increased sales of cotton yarn and woven grey fabrics, which are intermediary products of minimal value addition, that are imported by companies in other countries to convert into products of higher value addition.Similarly, in world’s clothing trade, Pakistan’s share has increased from 0.94 per cent in 1990 to 1.31 per cent in 2005 by value. Clothing and home textiles are key, labour intensive sectors where Pakistan should have comparative advantages. These advantages have not been exploited to the full potential.
Gherzi suggests setting in place a clearly identified comprehensive strategy for the industry on which all stakeholders should agree to ensure its smooth implementation.