Poor policy response makes Pakistan’s textile industry uncompetitive

By Shahid Sattar and Hira Tanweer
Published in The News International on January 03, 2018

There is no denying the fact that Pakistan’s textile industry has become regionally uncompetitive, but it is not because of the industry’s inefficiency. Actually, businessmen who were efficiently running their businesses might become naïve and forget how to manage businesses post-2013. Consequently, more than 100 textile mills were closed due to various reasons.

Power outages started in 2007/08 and kept on increasing. The power crisis adversely impacted the textile industry as well as the economy as a whole.

Estimates by the World Bank and eminent economists have estimated that electricity load shedding shears GDP by at least 2 percent a year.

Various governments did not give textile industry priority, which should have been a logical policy response if the industry of Pakistan was to be protected. When the textile industry as a response to load shedding started installing their own captive gas-based power generation plants, domestic gas started to get rationed with forced outages.

Despite the shortage, domestic connections were being doled out at the rate of 500,000 per year, constraining gas availability even further.

As a policy response, the present government started importing LNG in 2015. The regasified LNG was only provided to industry in Punjab, which constitutes 70 percent of the total installed industrial production capacity, at unaffordable rates. There is a discrepancy in rates at which gas is provided to provinces.

LNG supplied to industry in Punjab is at Rs1,100/million metric British thermal unit (MMBtu). In contrast, gas is available to industry in Sindh and Khyber Pakhtunkhwa at Rs600/MMBtu.

Textile is a processing industry and outage of electricity or gas even for an hour or two disrupts the whole eight-hour working shift in a factory. Six to eight hours of load shedding a day remained normal for almost a decade in Pakistan. And, when load shedding was coupled with higher tariffs industrialists started making losses and there was no surplus created to invest in innovation and technology upgradation. When there is a do or die situation, the only fight is for survival. Industrialists tried to survive utilising all their resources and credit lines just to keep their factories running.

Inevitably, investments are only made in good times and when businesses flourish and surpluses are made. Unfortunately, post-2008 were years of severe energy crisis and during the period even keeping the factory running was the best that could have been done.

After 2014, when the government started giving industry priority, it increased the price through electricity surcharges which are fundamentally because of the system’s inefficiencies. Power sector’s regulator National Electric Power Regulatory Authority doesn’t consider the cost as prudent, yet it still constitutes 35 percent of electricity bill. Cost of doing business, which substantially increased after 2013, is another challenge facing the textile companies. Labor wage floors are much higher in Pakistan than India or even Bangladesh.

In Pakistani rupee terms, minimum wage in India is little above Rs7,000 as compared to Rs11, 000 in Bangladesh, Rs12,500 in Vietnam and Rs15,000 in Pakistan.

Energy price in Pakistan is also much higher than the regional competitors. Indian Punjab has frozen electricity price for industry at Rs5/kilowatt hour for the next five years. In times of crisis, this is how governments support their industries.

In January last year, the Prime Minister’s Trade Enhancement Package announced incentives worth Rs180 billion in a bid to boost Pakistan’s sagging exports. This package was to be implemented over 18 months and also included duty free imports of cotton. The package was, however, reneged upon when duty got imposed just a few months later and after a passage of nearly 12 months the government has only released a total of Rs16.5 billion in financial rebates.

Overvalued currency for the last two years has badly hurt export sector, including textile exports. The policy of pegging rupee to a fixed 100/US dollar made industry uncompetitive internationally as well as domestically as imported products were artificially kept cheaper. This is evidenced in an immense increase in imports to more than $50 billion, while exports fell to $20 billion. Pakistan’s exports grew only 27.3 percent from 2005 to 2016, while Bangladesh, Vietnam and India have posted 276 percent, 445 percent and 165 percent growth in exports, respectively, during the same period.

In Pakistan, indirect taxes increased from about 14 percent of inputs in 2012/13 to 19 percent of inputs in 2017. The taxes when carried forward in the value chain multiply their impact and eventually render exports uncompetitive in international market.

Delay in sales tax refunds to export sector has become a norm. Working capital for the textile sector remains blocked in stuck refunds, custom duty drawback and income tax refunds, squeezing the financial streams and compelling export sector to limit production.

In contrast, progressive policies in China, India, Bangladesh and Vietnam have yielded very substantial results. In Pakistan, inadequate government’s response can be gauged from lack of implementation of the current textile policy.

China’s Xinjiang Uygur Autonomous Region announced multiple incentives for industry especially textiles in order to take advantage of China-Pakistan Economic Corridor projects.

The Chinese government allowed rent-free factories in industrial parks and Xinjiang’s less-developed southern area, interest-free loans, electricity at six cents per kilowatt hour, transportation subsidies and maximum tax rate of 15 percent.

In Pakistan, cotton, which is the basic input to textile, has five percent import duty and four percent sales tax in addition to non-tariff barriers, like quarantine inspection permit and phytosanitary certificates required for cotton import.

Systemic inefficiencies, administrative delays, ever increasing cost of doing business in the country has led to downfall of once most efficient textile industry, which still contributes 60 percent of total exports and almost eight percent to GDP and provided employment to around 15 million people.

Textile industry has $11.9 billion export potential with prudent policies and administrative support. Textile industry can create three million more new jobs.

Implementation of prime minister’s export-led growth package in letter and spirit, immediate payment of drawback of taxes on realisation of export proceeds, withdrawal of surcharges to bring electricity tariff at par with region at Rs7/kilowatt hour and provision of gas at Rs600/million metric British thermal unit can help textile industry to regain its momentum.

Shahid Sattar is ex-member Planning Commission and Hira Tanweer is research analyst.