Will incentives package turn textile sector fortune around?

In a too late bid to uplift the dwindling fortunes of export sector with main focus on textile exports, the government at last has announced Rs180 billion export incentives package that will last till June 2018.

The move might be a political one, as seen by some, being an incentive to receive support in the next general elections. However, it is a much-needed boost for Pakistan’s exports sector that is continuously facing downward trend since long.

When the pro-business team of PML-N took reign in 2013, Pakistan had recorded an export of 25,078 million dollars, which were 1.1% higher than 2012. In January 2017, the SBP reported exports for 2015-16 were recorded at $21,977 million. This is a decline by 12.36% during the time period, when a 1% decline is observed in the global level of exports of goods and services. This decline is despite the acclaimed GSP Plus status that Pakistan had obtained in December 2013, suggesting that PML-N has comparatively enjoyed an advantage over its predecessor’s government in terms of market access.

The PBS data showed that textile exports amounted to $1.035 billion in December 2016, almost flat as compared to December 2015, but down 1.21 percent over November 2016. Exports of knitwear increased 4.21 percent year-on-year (YoY) and 1.54 percent month-on-month (MoM) in December 2016. Bedwear exports rose 9.26 percent YoY and 0.11 percent MoM. Exports of readymade garments soared 9.23 percent YoY and 11.88 percent MoM in December 2016.

It is worth noting that two earlier export policies, announced in 2013 and 2016, remained unimplemented. The current package offers cash support and duty waivers for the five leading export sectors: textile, leather, surgical equipment, sports goods and carpets. Each sector has been offered between four and seven percent duty drawback. Similarly, most import duties on raw material exports for the textile industry have been abolished.

Part of the deal is that there will be no condition on getting duty drawback in the first six months (January to June) of the scheme. However, exporters will have to record 10% growth in exports during the next fiscal year 2017-18 as compared to the ongoing financial year. This might prove a headache for the government as well as the exporters may try to outsmart the system by showing false increases in the exports.

Finance Minister Ishaq Dar has promised that these measures will deliver a 15 percent increase in exports by June 2018. This is an ambitious promise to make, given that the downward trend has continued into the first half of this fiscal year. So it is no surprise that there have been questions over whether the package will meet the same fate as the Kissan Package, which was barely able to stem the decline of agriculture in the country.

The real issues underlying the decline of textiles and broadly export sector are: low productivity owing to poor quality of human resource at design and quality stages, uncertainty in energy supply, an inward looking protective tariff regime, artificial support from the government and a general lack of competitiveness in the business firms.

Current situation in the textile industry is not very promising. The process of cotton has increased in the recent period, in addition to this the electricity and sales tax have also increased. Cotton yarn price is decreasing and other input prices are increasing. The slowdown in economic activity in the Far East has begun to adversely affect Pakistan’s textile industry in terms of exports to Japan, South Korea and other South Eastern Asian nations are undergoing a recessionary period.

Many of the problems in the products of the spinning and the downstream industries are due to poor raw materials quality. Only about 5% of cotton crop is suitable for spinning up to count 50. Most of the cotton grown is of thee short staple variety. It is the inferior quality of locally grown cotton that has led towards production of low count yarn. The looms, spindles and rotors sector has been exposed to challenges of modernization and sophistication of competitors in world markets. Domestic machinery is of poor technology, scarcity of quality yarn and lack of institutional financing are also adding to its problems.

New markets are not being discovered and the rate of growth of yarn exports is lagging behind the rate of growth of domestic yarn consumption. The package is hardly the answer to these deeper problems. It will only help delay our attention from realistic diagnosis. Worse, these packages, because of the power dynamics often benefit large and well-connected textile firms. In other words, the Rs180 billion package is a part of the problem, not the solution.

The major problem, textile industry is facing is the non- tariff barriers like ISO 9000 and ISO 14000. These standards lay greater emphasis on packaging, safety, and handling etc. Although the Pakistani textile industry and subsequently spinning industry is faced with a lots of problems, but there is a ray of hope as this year a bumper crop of around eleven million is expected.


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