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Enhancement of cotton textile sector is critical for Pakistan’s economy

SAM SPECIAL-ENG-16-06-2020

Pakistan’s cotton textile industry is the largest in the country’s manufacturing sector. It accounts for 8.5% of Pakistan’s GDP, employs about 45% of the country’s labour force and 38% of its industrial workers.

Pakistan is the 4th largest producer of cotton. It has the third largest spinning capacity in Asia after China and India. Pakistan contributes 5% to the global spinning capacity. Today 1,221 ginning units, 442 spinning units, 124 large spinning units and 425 small units produce cotton textiles.

The textile manufacturing sector, which is the single largest export-oriented sector in Pakistan, recently spiked to full-capacity after the government withdrew duties and taxes on the import of raw cotton in January 2020.

Pakistan had got higher export orders for textiles since China, the single largest textile exporter in the world, was temporarily closed to fight the deadly coronavirus. The export of finished goods had been on the rise while the export of raw material including cotton and yarn were on a downward trend. This was a very positive development for Pakistan’s economy.

Lifts-01-Enhancement of cotton textile sector is critical for Pakistan’s economySAM Special

The cotton textile sector achieved the set export target of US $24-25 billion this fiscal year (July-2019 to June 2020). However the coronavirus lockdown badly hit Pakistan. The textile sector is in a shambles as many of its international orders have been cancelled or shipment of ordered goods had been suspended for at least three weeks.

With textile retailers and outlets closed, there is complete disruption of the entire domestic textile supply chain, putting at risk jobs of thousands of factory workers.

Pakistan’s textile exports dipped by 4.46% in March. The country’s textile exports stood at US $1.039 billion in March 2020 as compared to $1.088 billion in same month of the previous year, according to latest data of Pakistan Bureau of Statistics (PBS). Contrast this with Pakistan’s textile and clothing exports jumping by nearly 17% year-on-year in February.

The January 2020 draft of the Government of Pakistan’s Textile Policy spells out the steps needed to be taken to revive textile exports. These include (1) Restoring profitability of cotton farmers by increasing cotton yield, improving the quality of cotton and decreasing the cost of production; (2) Strengthening man-made fiber/filament sector to make this chain internationally competitive and export-oriented; (3) Regionally competitive energy pricing fixed for five years; (4) Prompt Sales Tax Refund System; (5) Abolition of Zero-Rating has created serious liquidity crisis for exporting sectors as the current refund system is soaking up market liquidity and is not working; (6) Long Term Financing Facility for the entire textile value chain; (7) Revival of impaired textile capacity and introduction of bankruptcy law; (8) Establishment of textile clusters and Export Processing Zones with “plug and play” facilities.

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The draft policy mirrors the situation before the coronavirus crisis. Therefore, a new policy or an amended policy outline must be developed immediately to meet the emergency. Even in the event of the lifting of the lockdown, revival of the economy will take time. The immediate and direct impact of the pandemic will be long-lasting. Recession can span a year or even more than that.

The longer the lockdown is continued, the deeper will be the debilitating impact on the economy. Recovery will be that much slower. In addition, global demand and consumption are showing a definite slump and all major economies are facing the same difficulties. That means export markets will also need time to recover. With fashion weeks and textile fairs cancelled, one could go online to keep in touch with old customers and present new ideas and developments.

The revival of the textile sector will need support, since a majority of jobs in the manufacturing sector depend on it. The Pakistan government needs to formulate a strategy that can prevent the present economic slump from turning into an immense financial crisis.

We have to take risks and end the lockdown in the textile sector. A relief package will help rescue the textile sector. Some immediate measures that could come into that package could be releasing sales tax refunds under the Rs.100 billion relief package for textile exporters to resolve cash-flow problems. The salaries of factory workers during the time production is down or not fully revived could be partially subsidised by the government. Concessions on turnover tax and sales tax could be considered.

Lifts-02-SAM Special-Enhancement of cotton textile sector is critical for Pakistan’s economy

Banks in Pakistan have made good profits. They should be encouraged to help industry take off after the lockdown by either waiving interest for pre-pandemic loans or at least considerably lowering interest rates.

The revival of textile exports cannot be achieved with the quantity and quality of cotton produced in Pakistan. For the financial year 2020 about 15 million bales of cotton are required, but only half of that amount is produced locally. That means either the area under cotton has to be raised, or the yield has to be improved or both. Compared to other countries yield per acre in Pakistan is quite low. In addition, the quality of the cotton produced in Pakistan needs to be improved urgently so as to substitute the import of high-quality Egyptian cotton for meeting high-quality demand.

One option is to switch to the production of organic cotton instead of the gene-manipulated variety common in Pakistan that is susceptible to diseases and need a lot of pesticides. The slump in demand caused by the coronavirus crisis gives a window of opportunity to actively work on implementing such a policy change.

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In addition, what needs to be improved is infrastructure so that cotton can be handled cautiously, transport to the next processing module is short, and does not face delays which would diminish the quality of the goods.

The Government of Pakistan’s textile division declared on its webpage that: “The textile sector in Pakistan has an overwhelming impact on the economy, contributing 60% to the country’s exports. In today’s highly competitive global environment, the textile sector needs to upgrade its supply chain, improve productivity, and maximize value-addition to be able to survive. The objectives of the Textile Industry Division are to formulate strategies and programmes to enable the textile sector to meet these challenges and attain global competitiveness.”

Let us see whether these nice words match deeds on the ground. Success will depend upon implementing good plans. There is a cycle between cotton production (the agriculture sector) and the textile industry (the manufacturing sector). Both in agriculture and manufacturing, cotton is the backbone providing the maximum number of jobs in the country.

We can have a lockdown in these sectors only at the cost of our existence. Disruption of the supply chain from the field to exports will be disastrous. To keep the mainstay of the economy going, we have to take calculated risks.

 

(Ikram Sehgal is a defence and security analyst while Dr Bettina Robotka, former Professor of South Asian Studies, Humboldt University, Berlin).