By Ahmed Waqar Qasim
The textile sector is one of the vital economic drivers for the economy and makes up around 8.5% of GDP. It is also among few sectors where a complete value-chain exists. The inherent potential for higher value-addition in the production chain further signifies the importance of the textile sector for Pakistan. However, the sector has not performed well over the last 10-15 years. Reasons for underperforming include recurrent power shortages, high manufacturing costs, and weak policy support. The recent performance of the sector has exceeded all expectations and records a strong exports expansion.
A recent spike in exports
According to the data released by the PBS, overall textile exports experienced a jump of 30.6% during March 2021 over the corresponding month of the last year. This extraordinary performance of the textile sector can partially be because of the government’s supporting policies that include the introduction of regionally competitive energy tariffs, elimination of duty and taxes on industrial raw materials, lower interest rate, and paying off pending refunds to exporters. The closure of regional textile markets such as India and Bangladesh, because of the COVID-19 pandemic has also diverted global attention towards Pakistan.
The textile products that Pakistan exports are diverse, ranging from raw cotton to readymade garments. However, except for the recent up tick, overall textile exports have followed a downward trend. The government is formulating a Textile Policy 2021-25, which aims to increase textile exports from USD 13 billion to USD 25.3 billion by 2025 and USD 50 billion by 2030. To achieve these ambitious targets, Pakistan must promote the exports of high value-added products such as knitwear or readymade garments.
For instance, out of total textile exports during March 2021 around 23% constitutes the exports of low value-added products like cotton yarn. The ongoing pandemic, where it brings havoc to the economy, has also offered a window of opportunity to tap the actual potential of the textile sector by re-orienting towards value-addition. This re-orientation is not possible without addressing the issues faced by the sector.
PIDE recently conducted a study on the role of energy tariffs in the textile sector’s competitiveness. The research highlighted industry perceptions regarding the challenges facing the sector. The main challenges that emerged during the interviews and discussion with the experts, technical officers, and senior management from the sector were on three fronts, as detailed below.
1. Government Policies
Unpredictable, inconsistent, and non-inclusive
Unfortunately, policies in Pakistan are not predictable and consistent. For example, the government devises a onetime policy to provide gas to the textile sector at concessionary prices, while at the very next moment they table a gas moratorium. The industry faces serious issues because of non-predictable and in-consistent policies. They cannot take strategic decisions like expansion, investment, and procurement of the machinery since these critically depend upon the predictability of policies.
Currently, both productivity and investment in the textile sector are showing promising signs. To avail the full potential of the textile, consistent implementation of the policies is the need of the time. With whimsical policy signals, we will not develop investors’ confidence, and reaping the full potential benefits of the sector will remain a far-distant target.
2. Raw Material
Poor quality, faltering production, absence of R&D
The other major problem faced by the entire industry relates to the quality and volume of the raw material, i.e., cotton. Its production is on the low and quality is very poor. Over the last two decades, the area of cotton cultivation has decreased by 18%. The problem is not only the reduction of cultivation areas but also contamination and poor quality. Pakistani cotton is one of the most contaminated cotton in the region. Untrained cotton pickers from field to low ginned quality standards all add to cotton fetching lower value in the market. Pakistani ginned bales contain 8-10% trash, while in the world it averages around 2-3% only. Poor quality cotton in terms of its physical properties not only raises the processing costs but also reduces the output and quality of the final products.
To increase cotton production, we need to offer farmers high-yielding seeds which bring more profitability. Provision of such high-yielding seeds only possible after accomplishing necessary research and innovation regarding the seed quality. We need further research on the type of seeds that are resistant to pests/insects and plant diseases. All these concerns put a big question mark on the performance of government agriculture research bodies.
3. Energy Issues
Unending tariff shift worries, transmission, and supply issues
Third, one of the most significant factors impeding the productivity of the textile sector and its exports is the energy tariffs. Energy cost is the leading component of the conversion cost in the textile sector. Therefore, energy tariffs that are not regionally competitive hurt the competitive position of Pakistani products in the international market. To assume that offering competitive energy prices would solve all the problems would be a naïve assumption.
Take the example of electricity, the power supply from the grid follows a lot of fluctuations and breakdowns. These fluctuations in the supply cost heavily to the unit depending upon which sub-sector it is operating. For instance, a 1-second breakdown in spinning stops work for 20 to 25 minutes and causes 10 to 15% production loss in weaving. Similarly, ensuring the desired pressure of the gas at the unit’s inlet cannot be ensured by just competitive energy tariffs. The latest machinery is computerized with sensitive electronic gadgets. Power shutdowns and fluctuations sometimes cost these gadgets to fuse and stop working. These gadgets are not locally made, so we must import these which takes at least a few days if not more, further adding to the cost.
What should we do?
Large investment in machinery, availability of quality raw material, enhanced skill set, and product development are essential to realize the sector’s export potential. However, success in these avenues is not possible in the absence of consistent and predictable policies, and continuous power supply. This is particularly true due to the fierce competition in textile products that our region observes. The government must resolve the key issues of policy consistency and energy issues facing the sector.
Ed. Note: This is the first in a series of blogs highlighting key findings from recent research at PIDE. The main research study is available from PIDE’s website.
About the author:
- Ahmed Waqar Qasim is Research Economist, PIDE
One of the challenges faced by the textile industry is the supply shock. The negative supply shocks are to be scale down.