Fm Project

Impact of Global Financial Crunch on Pakistan’s Te x til e Industry

Financial Crunch & Pakistan’s Textile Industry (Performance & Exports)

PRESENTED TO: Mr. Zeshan Anwar

PRESENTED BY: AADIL ALI KHAN MBA-SP8-01 ISHTIAQ BAQAR MBA-SP8-21 SAAD HASSAN MBASP8-56 ASIF CHOHAN

SAIMA IMDAD

Financial Crunch & Pakistan’s Textile Industry (Performance & Exports)

Department of Management Sciences COMSATS Institute of Information Technology Sahiwal

Oh God Open our Eyes. To see what is beautiful Our mind to know what is true, Our heart to love what is Good.

Dedicated to Holly Prophet Muhammad [PBUH] The Greatest Social Reformer

To …………………… Our Beloved Mother & Father Who taught us The first word to speak The first alphabet to write And First step to take.

To ………………… And Dedicated to Sir Zeshan Anwar

Financial Crunch & Pakistan’s Textile Industry (Performance & Exports)

Who always remains In our heart Throughout the whole span of our life And are nearest, dearest and deepest To us.

Financial Crunch & Pakistan’s Textile Industry (Performance & Exports)

TABLE OF CONTENTS

SERIAL NO.

1. 2.

TOPIC

Global Financial Crunch & Crisis of Capitalism -- Key Elements & Causes Impacts over Exports of Pakistan’s Textile Industry -- Significance of Textile Industry for Pakistan

PAGE NO.

1 2

Financial Crunch & Pakistan’s Textile Industry (Performance & Exports)

3.

An overview of impacts over Asian region

2

4.

Pakistan’s Textile Industry and Global Financial Crunch

3

5.

Other important consequences on Pakistan’s Textile Industry

3

6.

Banker in the office of Financial Advisor

4

7.

The US Aid

4

8.

Privatization of Leading Banks

5

9.

Scarcity of Funds & Mark-Up Rate

5

10.

Government’s Approach

5

11.

Our Industry – Being Conventional

5

12. 13.

Suggestions to revive & uphold the Growth Rate of Industry Performance and Exports References

5–6 6

Financial Crunch & Pakistan’s Textile Industry (Performance & Exports)

Pakistan Textile Industry Pakistan has a diverse economy that includes textiles, chemicals, leather products, food processing, financial services, telecommunications, retail, automobile manufacturing, light and heavy armaments, agriculture and other industries. It is the 45th largest economy in the world in terms of official exchange rates ($144b) and 25th largest based on purchasing power parity ($410b PPP). Its service sector accounts for more than half of its GDP. Pakistan’s textile industry is a major contributor to the national economy in terms of exports and employment. Pakistan holds the distinction of being the world’s 4th largest producer of cotton as well as being the 3rd largest consumer of the same. In the period July 2007 - June 2008, textile exports were US$ 10.62 Billion and accounted for 55% of the total exports. As the economies in the US and Europe slow down, Pakistan's key exports of textiles and leather products are experiencing a slow down in growth as well. According to APTMA, textile exports have declined by about 20 percent in 2008. The industry is bracing for more trouble ahead with continuing crises of electricity and gas, international market access, global economic slow-down, and adverse travel advisories. According to Pakistan textile industry association, 90 percent of Pakistan's textile industry is losing money losses and facing closure. More than two months of production has been lost due to power cuts and gas shortages. APTMA, Pakistan's textile industry Association established for the promotion and protection of the textile industry, says that the high cost of finance because of the nation's tight monetary policy has added to their continuing woes. In order to pave the way for the IMF bailout, Pakistan's central bank raised its bank lending rate in early November by 2 percentage points to 15 percent. Since 2004 interest rates have risen dramatically. Kibor (Karachi Inter-Bank Offered Rate) has surged 261 percent. Likewise, the bank spread, on a weighted average basis, rose from 2 percent to an excessive 7.75 percent. This size of bank spread is among the highest in the world. These high rates were allowed as a policy to restrict money supply to satisfy the IMF conditions. Federal Textile Adviser Dr Mirza Ikhtiar Baig told the News that Pakistan has a very low share of the international textile market. China tops the US market with a share of 36 per cent followed by Bangladesh 21 per cent, India 18 per cent, Morocco 19 per cent and Pakistan 13 per cent. South Korea has lost 20 per cent of the US market. In the European market, China tops again with a share of 29 per cent, Vietnam 28 per cent, India 19 per cent and Pakistan only 1.5 per cent while the Philippines had lost 11 per cent of the market. European buyers have told Baig that Pakistani garment manufacturers could cut their cost up to 45 per cent in sewing by improving efficiency. “Labor productivity is very low,” said Baig. “Our regional competitors take 75 minutes to complete and produce one piece of cloth whereas we take 133 minutes for the same work. We also waste 30 per cent in finishing and 12 per cent in washing.” According to a study of Pakistani textile and apparel sector conducted by Werner International, management consultants to the world textile, apparel & fashion industry, some of the garment units were over-staffed by 57 per cent. That was an internal negative factor whereas external factors included no duty-free market access to the EU and negative image and perception of Pakistan abroad. 1

Financial Crunch & Pakistan’s Textile Industry (Performance & Exports)

Baig has asked Werner to submit a proposal for presenting a better image of the textile industry to global brands for achieving collaboration with them. In response, Werner is working on a three-year plan to help Pakistan garment manufacturers. While Pakistan clearly needs to diversify and increase higher-value-added exports such as sophisticated machinery and high technology products and services, it is essential for it to maintain and enhance the current export levels of textiles, leather and other products for which there is an established export market. The export-oriented industries should get preferential treatment in getting access to necessary inputs of raw materials, financing and energy by government policies. Energy and communications infrastructure, in particular, need much greater focus to enable Pakistani exporters to continue to earn the much-needed hard currency. TEXTILE POLICY – A CRITICAL REVIEW. Textile Industry is the most important industrial sub-sector in Pakistan. It is based on locally available raw cotton, provides largest employment to Industrial labour force and also the largest foreign exchange earner in the country. It contributes nearly 68% of our total exports. During the last boom period Pakistan has emerged as the major supply source of cotton textiles in the world market confirming its competitive strength. Pakistan’s share in world yarn trade is about 30% and the share of cloth is 8%. The development of the Manufacturing Sector has been given the highest priority since Pakistan’s founding with major stress on Agro-Based Industries. For Pakistan which was one of the leading producer of cotton in the world, the development of a Textile Industry making full use of its abundant resources of cotton has been a priority area towards industrialization. At the time of independence there were only 6 Textile Units with 80,000 spindles and 3000 looms, which could only supply 8% of the domestic demand of its 76 Million population. The Government set the objective of promoting Textile Industry first as an import substitution industry and later as an export oriented industry. This showed positive results and spinning and weaving sector had rapid growth during 50’s & 60’s. It’s growth was such that by the end of 50’s Pakistan was virtually self sufficient in cloth requirement and then reached at the surplus stage to export yarn and cotton fabrics and had been progressing satisfactorily. During early seventies the Industry had set back of international recession resulting into large closures and sick units. The industry however, started improving in late seventies when market economy led Industrial Policy was introduced, promoting exports and rationalization of Import Tariffs and thereafter it had progressed with market demand. EVALUATION OF POLICY: The fifty years of history of growth of Textile Industry is the history of sporadic investment surges during boom periods when significant expansion in capacity was made, the industry has proved its strong presence in the International Market and establishment of a comparatively, small number of highly efficient firms which are internationally competitive. Investment surges have invariably been followed by “Textile Crisis” during which appeals are made for special sector-wide concessions and incentives. “new” textile policies are announced with depressing frequency and are invariable dismissed as ineffective in resolving the “Crises”. The industry larches out of such crisis usually in response to improvement in the supply/demand condition, fall in the 2

Financial Crunch & Pakistan’s Textile Industry (Performance & Exports)

price of cotton and lint and increased world orders, and partly as a consequence of the implementation of elements of the policy packages. We can evaluate the textile sector policy with reference to the following criteria: (a) Its success in reducing import dependence, strengthening domestic productions and employment linkages, and contributing towards an improvement in the net foreign exchange. (b) Its contribution towards the enhancement of marketing capacity, the development of links with retailer groups, participation in joint ventures and obtaining continuous access to market information and technological knowhow. (c) Its impact on financial performance. Since independence a large number of Textile Policy Packages have been announced from time to time to suit the sector specific needs and overcome the crisis by all the respective Government. How far these policy packages have been helpful or hinderant can be judged from the performance of the industry in the above three fields as discussed below. Current Situation: Presently the industry consists of a large scale organized sector and a highly fragmented cottage/small scale sector. The organized sector is essentially the integrated Textile Mills – large No of spinning units and a very small No. of shuttleless looms units. The downstream industry (Weaving – Finishing _ Garment – Towels & Hosiery) which has a great export potential is all in the un-organized sector. There are 504 Textile Mills (52 Composite Units, 420 Spinning Units & 32 Waste Units with 9.06 million spindles and 142312 Rotors installed in the Country of which 7.50 million spindles and 65683 rotors have worked (June-02). Capacity utilization had been 83% in spindles and 46% in rotors. The Spinning Sector had grown with export demand & growth in cotton production. Weaving & Processing Sector followed. The major concentration of industry is in Karachi, Hyderabad, Multan, Lahore and Faisalabad. Unlike Spinning Sector the Weaving Sector is comprising of large number of small units of power looms mainly clustering in Faisalabad – Hafizabad – Kasur and Multan. Recent trend is to set up Air-Jet loom units either as independent units are integrating it with spinning or processing units. Some of the clothing units are in process of backword integration while on the other spinning units are in the process of developing weaving finishing and making up facilities to complete the chain. However both clothing and textile sector are complementing each other and horizontally integrated either under same management or business wise tie-ups. The clothing sector both woven and knits are mainly clustering in Karachi – Lahore and Faisalabad where sufficient ladies labour is available. Unlike woven garment units the knitwear units are integrated (knitting + processing + making up facilities). Although Pakistan is blessed with abundant raw cotton and cheap labour, the industry has not been able to exploit the potentials in real terms and has failed to make real progress in the international markets and is under threat of being overtaken by its competitors and new entrants. The export have been stagnating during the last three years as detailed below:3

Financial Crunch & Pakistan’s Textile Industry (Performance & Exports)

Industrial Policy. Pakistan has shown appreciable progress in policy frame work. It has embarked on a bold experiment in market liberalization. It has committed itself to a more outward -4oriented development strategy. Appreciating the importance of Textile Industry and its contribution to the economy the Government announced Textile Packages and then launched its Economic Revival Programme backed by radical reforms in Textile RegimeIncentives for exports – Trade Policy Investment. Policy and Revival of Sick Mills with the sole objective to accelerate the production and exports. Efforts are in progress to pursue further structural changes in line with resources. The new ‘Industrial Policy’ lays emphasis on ‘Foreign Investment’ in ‘Value Added Textiles’ especially from developed countries who had been the major textile players and still hold larger market share in international market. Despite the changes in the operating environment, both in the manufacturing and demand stages, the strategy motivating the industry for adoption to the new era has become most important. Evidence shows that a sustainable textile industry base can exist, but through private, for-profit initiatives and investment based on economic self interest and genuine competitive advantages. So while subsidies might attract or jump-start an industry, it is the premise of profit and apportioning to be able to compete on international scale, that policies must be based upon. The situation demands a change in strategic approach to Industrial Policy with emphasis to higher value addition as well as consolidation of competitiveness. The Government Policy should set the appropriate goal – “PRODUCTIVITY” which underpins prosperity. It must strive for its true determinants, such as incentives, efforts and competition not the tempting but usually counterproductive choices such as subsidy, extensive collaboration and temporary protection that are often proposed. The Industrial Policy should stimulate dynamism and upgrading. Its aim should be to create an environment in which firms can upgrade competitive advantages by introducing more sophisticated technology and production processes and penetrate more advanced segments, Government Policy should however, support the ability to innovate and move into higher productivity areas. Innovation results from organizational learning as much as from formal research and development. It involves investment in developing skill and knowledge. The strategic objective is to upgrade Product Quality – Skill Levels – Productivity – Market Image – obtaining access to specific product market – developing ‘Technical Tie-ups’ and ‘Financing Links’ with major retailing groups.

4

Financial Crunch & Pakistan’s Textile Industry (Performance & Exports)

Role Of textile industry In Pakistan Economy Historically, Pakistan’s textile industry and clothing sector has always been a major contributor to the foreign exchange earner and still contributes about 55% to the total export proceeds.

The Economist reports that Pakistan is the 4th largest producer of cotton in the world and the 6th largest importer of raw cotton, the 3rd largest consumer of cotton, and the 1st largest exporter of cotton yarn. Over 1.3 million farmers, out of total of 5 million are involved in cultivation of this crop. Textile exports in 1999 were $5.2 billion and rose to become $10.5 billion by 2007. Textile exports managed to increase at a very decent growth of 16% in 2006. In the period July 2007 - June 2008, textile exports were US$ 10.62 Billion. Textile exports share in total export of Pakistan has declined from 67% in 1997 to 55% in 2008, as exports of other non-textile sectors grew. UN reports 102 countries import textile and apparel products and 104 countries export these products. Global trade in textile and apparel products account for an approximately $440 billion. Pakistan is bogged down in the 5% textile requirement of the world, by dedicating 62% of its GDP share for textile. An anti-dumping of 5.8% has been imposed by the European Union, which has put Pakistan in a desperate position to match competitiveness posed by Bangladesh, India, China, Sri-Lanka and Vietnam. The top buyers of Pakistani textile goods are: USA, EU, Gulf region, UK, Hong Kong, Japan, Korea, Saudi Arabia, Italy, Turkey, Germany, Norway, France, Canada, Sweden, Australia, etc. Government vision 2005-2010 To overcome global competition, the Pakistani government in 2006 approved a “Technology-based Industrial vision and strategy for socio-economic” which called for technology up-gradation, human resource development, and establishment of a fully integrated chemical industry in the country. 5

Financial Crunch & Pakistan’s Textile Industry (Performance & Exports)

Investment Policy & Incentives for Vision 2005-2010:  W h o le of textile sector is included in list of value added industries. 5% custom duty on imported machinery if not manufactured locally. Tax relief: Initial Depreciation allowance (IDA) at 50% of machinery & equipment cost. Export plan 2006-13 seeks to increase textile and garment’s sector exports to $24.36 billion. There is a need to engage young qualified generation as roving ambassadors of marketing caliber, diplomacy and professional approach. Pakistan commerce intelligence may chalk out plans to reach every region bloc with in-depth study of regional trade bloc.

2008-09 Performance According to data by Federal Bureau of Statistics, Textile exports during the first eight months of current financial registered negative growth of 5.6% as against the exports recorded corresponding period of the last financial year. Exports during July-February (2008-09) totaled $ 6.47 billion against the exports of $6.85 billion recorded during JulyFebruary (2007-08). [Link] During the time under review, the highest negative growth of 51.24 percent was recorded in the exports of yarn (other than cotton yarn) while exports of art, silk and synthetic textile were decreased by 23.45 percent. Similarly, exports of cotton yarn declined by 15.28 percent, cotton (carded or combed) by 13.81 percent, knitwear by 2.66 percent, bed wear by 10.44 percent, tents, canvas and tarpaulin by 21.18 percent, readymade garments by 12.43 percent, made up articles by 0.3 percent while the exports of other textile materials declined by 15.28 percent during the period. However, the exports of raw cotton witnessed increase of 154.5 percent during the time under review while exports of cotton cloth increase by 5.57 percent and towels by 10.02 percent. Textile Machinery Imports 6

Financial Crunch & Pakistan’s Textile Industry (Performance & Exports)

According to official statistics released by Federal Bureau of Statistics (FBS), country’s

total textile machinery imports declined to $438.270 million during the last fiscal year of 2008, over the import of $502.898 million in fiscal year 2007, depicting a decrease of $64.6 million in the fiscal year 2008. [Link]

Imports of textile machinery in the month of June 2008 alone also indicated a decline of 22 percent, as compared to the month June 2007. In June 2008, the industrialists and textile manufacturers have imported textile machinery worth $32.101 million as compared to $41.07 million during the corresponding period fiscal year 2007, which depicted a decrease of $9 million only in June 2008.

Industry - Spindles, Rotors and Looms In 1999-00: Units 443 and Spindles 8,477,000 and Rotors 149,780 and Looms 9944. In 2003-04: Units 456 and Spindles 9,590,000 and Rotors 146,640 and Looms 10,646. In 2005-06: Units 461 and Spindles 10,437,000 and Rotors 155,104 and Looms 8747. In 2006-07: Mills 567 and Spindles 11,809,000 and Rotors —– and Looms 9000. The least developed sector is weaving which mostly comprises of smaller, fragmented and inefficient units. These units are called inefficient as they mostly use power looms, which are capable of producing narrower width fabric s and mostly use coarse counts of yarn. Therefore, the quality is much inferior to fabrics produced on shuttle-less looms. For decades, the government continued to charge import duty at fabulous rates on shuttleless looms. Income from power looms was tax exempt but income of units using shuttleless looms was taxable. The knitwear segment of Pakistan has always focused on achieving higher volume rather than concentrating on quality, price and terms of delivery. A spinning unit of 14,400 spindles employs around 100 persons. 7

Financial Crunch & Pakistan’s Textile Industry (Performance & Exports)

Global financial crisis As the economies in the US and Europe slow down, Pakistan’s key exports of textiles and leather products are experiencing a slowdown in growth as well. According to APTMA, textile exports have declined by about 20 percent in 2008. The industry is bracing for more trouble ahead with continuing crises of electricity and gas, international market access, global economic slow-down, and adverse travel advisories. Pakistan’s share of the US textile market is dropping. China tops the US market with a share of 36 per cent followed by Bangladesh 21 per cent, India 18 per cent, Morocco 19 per cent and Pakistan 13 per cent. South Korea has lost 20 per cent of the US market. In the European market, China tops again with a share of 29 per cent, Vietnam 28 per cent, India 19 per cent and Pakistan only 1.5 per cent while the Philippines had lost 11 per cent of the market. WestPoint Stevens and Dan River were two American companies which were negotiating a $200 million deal with a Karachi-based textile group in Karachi. It has been put on halt.

Setbacks for Pakistan Textile Industry Recently, the government has also abolished research and development (RandD) support program for the textile sector from July 1 2008. [Link] The Pakistani government had recently proposed to implement 18 percent Value Added Tax (VAT) on the textile sector in the upcoming budget. [Link] Decline in the machinery imports, is also due to the enhanced interest rates on loans, which have not been decreased by the new State Bank governor. •

Recent substantial hike in gas tariff also hurt the growth of the textile industry.

Dye Process

8

Financial Crunch & Pakistan’s Textile Industry (Performance & Exports)

Textile Value Chain 9

Financial Crunch & Pakistan’s Textile Industry (Performance & Exports)

Global Financial Crunch & Crisis of Capitalism Key Causes and Elements The importance of the consumer to consume to the US economy was outlined by Richard Robbins expert in anthropology in his award wining book ‘global problem and the culture of capitalism,’ ‘a couple of days after the al Qaeda operatives crashed two planes into the world trade centre on September 11th US congress members met to plan a message to the stunned public. “We’ve got to give people confidence to go back outside and go to work, buy things, go back to the stores, get ready for thanksgiving, get ready for Christmas,” said one member of congress, echoing the message of the resident ‘get out’ he said “and be active members of our society.” (CNN 2001). ‘The fact that after one of the most shocking events in US history government officials were urging citizens above all to shop and work is ample testimony the significance of consumption in the effective working of our economy and indeed for the whole society.” would dare claiming that their country is shielded from the financial crisis effects as the storm unfolds worldwide. Left to the unknown is its scale, sequencing, distribution effects between regions and countries and the consequences for the future architecture of the financial system. As critical as the quality of the day-to-day management of the crisis is the understanding of what has happened and what may happen, whence the need for an interim diagnosis, even one incomplete and involving a certain margin of misperceptions and wrong interpretations. This short commentary tries to analyze the extent to which monetary policy and financial market regulation failures bear responsibility for the eruption of this crisis and its further spread, the zigzags of anti-crisis management, crisis impact on emerging markets and, finally, to present some tentative lessons for policymakers. Impacts over Exports of Pakistan’s Textile Industry Significance of Textile Industry for Pakistan Pakistan textile sector is by far the most important sector of the economy contributing 57% to export earnings and engaging 38% of labor force. At present it comprised of 521 textile units (50 composite units and 471 spinning units) with installed capacity of 10.0 million spindles and 114 thousand rotors. Pakistan has third largest spinning capacity in Asia with spinning capacity of 5% of the total world and 7.6% of the capacity in Asia. The entire value chain represents production of cotton, ginning, spinning, weaving, dyeing, printing and finally garments manufacturing. Pakistan has emerged as one of the major cotton textile product suppliers in the world with a market share of about 28% in world yarn trade and 8% in cotton cloth. The value addition in the sector accounts for 10

Financial Crunch & Pakistan’s Textile Industry (Performance & Exports)

over 9% of GDP and its weight age in the quantum index of large-scale manufacturing are estimated at one-fifth. An overview of impacts over Asian region The impact of the global recession has already reached the key supplier countries of textiles including China, India and Pakistan. China until recently was the unstoppable force perceived by all textile producing countries as a major threat. However, Chinese textile industry is now severely hit by the sluggish demand as well. Textile industry in China which had seen double digit growth made massive investments in plant and equipment in the last five years. The slowdown of the global economy has rendered these investments as redundant resulting in closing of huge textile units and unprecedented layoffs. To counter this adverse situation, the Chinese government has increased export subsidies to its textile industry by $10 billion, a 55% rise after giving firm assurances rejection of protectionism and pursuance of open market policies to the G20 Summit on Financial Markets and the World Economy. Furthermore, China apparently wants to move out of the high labor intensive mass production of basic textiles. That is why other high tech industries are getting more attention of the policy makers. India has also provided certain relief to its textile industry by reduction of excise duties, funneling more funds in the Textile Up gradation Fund and interest subvention for certain labor intensive textile sectors like handlooms, handicrafts and carpets. Indian textile industry is now perceived to be producers of high quality textile products. The Indian textile industry which has made huge investments in textiles in the last few years as a result of generous incentives including the “Technology Upgradation Fund” is also suffering due to eroded global demand. Indian companies are now looking inward and the domestic markets are now in focusing on the textile manufacturers who are looking at tier 2 and tier 3 cities to tap the market which is largely untouched by the economic downturn. Pakistan’s Textile Industry and Global Financial Crunch Surprisingly, Pakistan’s textile industry in spite of all expectations and pessimism has proven to be quite resilient and the sectors such as bedwear, towels, knitwear and synthetic textiles according to the latest statistics have shown increased exports both in terms of quantities as well as value. However, the unit price is generally seen decreased across the board. This is apparently an opportunity for Pakistan’s textile industry to provide basic good quality textile low priced textiles to Europe and the United States where discount stores like Walmart are not only surviving but also thriving in the present crisis. Producing low priced, lower margin range of textiles was until recently perceived as a weakness of Pakistan’s textile industry. According to industry sources there is no dearth of orders for the textile industry. However, increased cost of utilities and chronic power breakdowns have crippled a large section of the textile industry which needs to run 24 hours to perform efficiently. This is the time of reckoning for the textile industry of Pakistan. The window of opportunity provided by the present global crisis can be cashed if the basic demands will be addressed immediately by the government. Mere rhetoric will not suffice and the industry needs concrete steps taken like restoration of 6% R & D facility and provision of adequate and uninterrupted power necessary to keep the industry running. Other important consequences on Pakistan’s Textile Industry 11

Financial Crunch & Pakistan’s Textile Industry (Performance & Exports)

Pakistan Textile Industry is facing an uncertain environment. Following few factors have The increase in input cost of minimum wage by 50 percent, increasing interest rates, nonguaranteed energy supplies, lack of R&D and reduction in cotton production has had a negative impact on the industry’s competitiveness internationally. Because of the entire situation the companies are downsizing, production units are shutting down; around 500,000 of the workers have already lost their jobs. After surviving from the loadshedding scenario the industry has yet to survive the gas load shedding scenario as authorities have informed the industry that they would not be to supply power for the additional load and only the sanctioned load will be supplied during the times to come. Banker in the Office of Finance Advisor The financial crisis in the textile sector is getting deeper with every passing day, particularly because of a dilly-dallying attitude of the government towards the relief calls from the sector. Presence of a banker in the office of advisor to prime minister on finance, said the industry circles, is not less than a stumbling block to an early financial relief to the industry. According to them, the banking industry is also comfortable and taking no pressure of the situation after having a banker with a capacity to call financial shots in the finance ministry. The industry circles sincerely believe that the situation would have been different if a political person is sitting in the finance ministry. The US Aid However, those availing the opportunity of having the audience of the Prime Minister's advisor on finance in recent past are of the view that the government has pinned all its hopes on the release of aid package from the US. According to them, the finance advisor has categorically stated that nothing can be extended to the industry unless the government gets something from its friendly countries. Rather, a joke is becoming popular among textile circles that what the government would offer to the textile sector when it lacks sufficient funds to pay the Independent Power Producers (IPPs) in order to overcome the power shortage. Interestingly, Shaukat Aziz, the predecessor of Shaukat Tarin, was also a banker by profession and remained hostile to the textile sector, particularly the basic one, throughout his tenure as finance minister of Pakistan. Privatization of Leading Banks The privatization of all leading banks in the country has added salt to the injury, as it is only the National Bank of Pakistan (NBP) management that is ready to extend a patient hearing to the cries of textile sector. Rest of the banking industry, otherwise, is not ready to look at the situation through the lenses provided by the textile sector. The grim situation in textile industry is getting from bad to worse and many new entrants to the sector have already closed down their units. A good number of single spinning unit holders are on their way to closure. The weaving sector is breathing hard at the oxygen ventilator. The apparel sector is left in the lurch with the termination of 6 percent Research and Development (R&D) fund for 2008-09. Scarcity of Funds & Mark-Up Rate 12

Financial Crunch & Pakistan’s Textile Industry (Performance & Exports)

A scarcity of funds in the government kitty is resulting into deferment of all promises by the financial advisor to the prime minister. For example, the industry has demanded an immediate revision of the mark up rate to single digit, extension of export refinance and reactivation of subsidized financing. The finance advisor is deferring the implementation while promising to fulfill these demands 'within days' and 'not weeks.' Government’s Approach The government is stressing upon the industry for the consolidation of the sector through mergers & acquisitions in order to effectively face tough international trading environment, as the international and regional competitive pressures are going to further build up and it will be large corporate that are more likely to survive. To deal with this scenario government has approved the textile package, including different measures including relief in the interest rate for loan to spinning sector and Research and Development (R&D) support to textile and clothing industry. Our Industry - Being Conventional Although the textile sector is the backbone of Pakistan’s economy, the Government as well as the textile industry has kept their focus on conventional textiles, ignoring technical textiles and knowledge-based products. In many industrialized countries, technical textiles account for over 50% of the total textile activity, while this figure for China is 20%. FUTURE SCENARIO: Looking at the world as a whole a new and dramatic global order had emerged since the end of the cold war, and is continuing to develop into the new century. The W.T.O. as successor to GATT, is at the center of ongoing process toward international economic liberalization. On the other hand, in Europe and North America, the E.U. and N.A.F.T.A. respectively illustrate the growing trend to create regional economies. The W.T.O. aim is to progressively lower the barriers to world trade through multilateral agreements. Classic economic theory suggests that the global economy will grow faster if trade barriers are removed, leaving people and countries to focus on the things they can do best. But will trade be truly free and fair by then? It is doubtful. i)

Many developing countries have longer time frames for opening their markets.

ii)

Tariff barriers remain high on some products, even in developed economies such as the USA.

iii)

While the WTO’s aim is a mulilateralist approach to trade liberalization, there is an opposing force as regional trade blocs grow in importance.

The Industry has potential to perform better. There is need that both Government and industry should realize that a sincere and appropriate approach has to be made 13

Financial Crunch & Pakistan’s Textile Industry (Performance & Exports)

to meet the challenges of the present day competitive environment and future scenario when textiles and clothing sectors are to be fully integrated into the GATT-by 2004 where quality of product would be the major aspect to customers satisfaction besides price and after sales service. Investment in knowledge of markets, training of workers, improvement in labor productivity and product development would be immediate areas for each to concentrate. The Government has to ensure: • Stable macro economic environment. • Adequate finance for capital investments and working capital. • Consolidation of Federal/Provincial/Local Government Taxes and collection at one source. • Rationalization of the existing policy frame work and gradually developing a long term policy environment facilitating for long term project and business planning without economic shocks. • Motivation to higher value addition within the chain as well as each product group. The industry has to : •

Redevelop competitiveness by improving productivity – reduce wastages and thus lower cost of production.

•

Expand product base within each sub-sector at par with other competitors.

•

Develop marketing strength by adopting aggressive marketing strategies.

•

Focus on emerging marketing of developing countries which offer opportunities with opening up of the markets under W.T.O. regime.

RECCOMENDATIONS (1)

As a short tern measure to stabilize the market and to improve performance following demands of the industry deserve favourable consideration: (a) (b) (c)

Export of cotton may not be allowed unless clear position of exportable surplus is determined. Rebate needs to be rationalized and dispersed at a quicker pace. Rebate on Polyester/Viscose and Polyester /Acrylic blend need to be expedited. C.I.S cotton available with C.E.C (about 70,000 bales) should also be placed for sale to Textile Mills.

14

Financial Crunch & Pakistan’s Textile Industry (Performance & Exports)

(d) (e) (f)

Import duty on cotton substitutes viz Viscose and Acrylic which are presently not produced locally may be further reduced to promote diversification of products. Due to increase in cost of inputs the working capital requirement have increased necessitating increase in credit lines. Exemption of duty and sales tax on power Generators may be revived again

(2)

A ” Cotton crop Management System” (Purchase Stock) should be introduced using “Financing policy” as the major tool with the sole objective of equitable access to raw material – discourage hoarding and avoid incur inventory costs.

(3)

The closure of mills to that extent is a point of concern. There is immediate need to have an in depth technical audit of individual mills. A team of cost accountant – financial analyst and technical expert can be deputed by each bank/D.F.I to workout a plan of rehabilitation for consideration on merit of the case by the high level committee set up to provide relief in the Pakistan Banking Council. Following parameters may be kept in view for dealing with the closed capacity. (a)

(b)

(c)

The mills which are closed since long and are beyond redumption may be liquidated/auctioned. The land (which has appreciated) and building may be utilized for some new venture and the machinery in these units can be canabolized or updated and re-exported. This will also help in revival of the local engineering industry – minimise losses to banks and earn foreign exchange. The commercially viable units may be considered for revival by providing financial relief, preferably with the change of management by individual banks based on the technical audit of each mills. The mill thus sold to stronger entrepreneur ma put the capacity to economic operation. The units which had satisfactory performance in the past but have been seriously affected by recent crisis require to be financially facilitated on case to case basis.

(4)

Although Govt have granted a number of incentives for the development of value added products but the practical impact of these measures are diluted by its emphasis for promotion of direct exports of individual items. Thus the direct export of yarn and grey cloth has suppressed the process of integration which is essential to produce higher value added products. It is therefore imperative that the garment driven production and export strategy is developed by gradually shifting all the incentives to production and exports of higher value added products. This will enable the high value added production units to afford to buy quality raw materials locally at higher prices and would in turn develop positive move in the market to revive the closed spinning/weaving capacity.

(5)

Incentives also need to be diverted towards development of economic sized units where emphasis is made on innovation and R&D to promote higher value addition. The process of mergers – groupings or integration would require to be facilitated by relaxation of company laws and banking regulations. Investments in 15

Financial Crunch & Pakistan’s Textile Industry (Performance & Exports)

developing human skills and knowledge essential for upgrading competitive advantages should be rebated by tax concession.

Suggestions to revive & uphold the Growth Rate of Industry Performance and Exports In facing the present challenges and preparing for the future changes – the pictures of production and textile value – addition in Pakistan must be validated for the decades to come. 'Where we should stand' is the ideal command to explore new heights in the textile sector of world. These days textiles is no longer the trade of exporting fibers, bales of cotton or fabrics. It is an arena of marvelous fibrous materials and products that may bear many times higher value return. The value- chain of textile production has an origin in cotton crop. The cotton fibers obtained are used in producing a variety of textile products from fiber to fabric. The time has come to place higher priority for raising the standards in value – addition rather limiting or concentrating the approaches. 1. Continuation of R & D package for the textile sector, if government do not appraise it then the future of textile industry, and specially the most value added apparel sector, will further go into drastic stage. 2. Price of utilities which includes, electricity and gas, are also constantly going up, and there is an urgent need that it should be reduced for the textile industry and especially for the export oriented units. 3. Exporters have asked the State Bank to make certain modifications in Export Refinance Scheme to ensure more funds for the export trade presently on decline. Leaders of several exporters associations have drawn attention of SBP to the fact that the cost of financing borne by value-added textile sector under the scheme has rendered exports uncompetitive in the world market. 4. Cut in interest rates to bring at par with Regional Competitors. 5. Tax concessions, exemptions in levies, export permits for new and potential entrants. 6. Matching Incentives be given to textile exporters. 7. Technological advancements for firms to achieve added value – value chain. 8. Textile organization should hire professional CEOs and directors.

References: 1. www.brecorder.com 2. www.khilafah.com

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