Making the textile sector competitive

To increase exports, innovative measures will improve productivity and competitiveness.Official sources said that the incentives regime available to Pakistani exporterswas at par with and in some cases even better than those available elsewhere in the region

By Fazal Hakeem

http://jang.com.pk/thenews/jul2007-weekly/busrev-09-07-2007/p4.htm

The Economic Coordination Committee on 28th June approved hefty package of Rs20 billion for the Textile Sector to help it in acceleration of exports in 2007-08 Under the package six per cent R&D support for garment sector, 5 per cent on dyed printed home textile and 3 per cent on dyed printed fabrics. R&D package is to increase Research and Development activities. Though it was withdrawn in budget. The Prime Minister, however, gave consideration to grievances of textile sector and decided to continue the assistance to make the industry internationally competitive. Subsidy under the new package will continue till June 2008. Earlier, the reduction of subsidy rate was scheduled from 1st July 2007. The spinning sector will be given 3 per cent markup on long term loans. It will cost government Rs1 billion. While Rs2 billion would be incurred on R&D from 1.7.2007 to 30.6.2008. Under the new package, flat rate of one per cent subsidy would give more benefits to sectors like yarns, grey fabrics and cotton etc.
Textile industry had expressed disappointment over new budgetary proposals for 2007-08. The criticism was focused on government policy of making little difference between exporters of value added goods and manufacturers of semi-finished raw material. Textile business tycoons in their criticism stated that the government proposals confirmed global textile rating agencies predictions that Pakistan would ultimately be made supplier of semi-finished goods. But after the first ever protest by spinners, Pakistan could also miss the chance of supplier of semi finished textile goods. They were critical of relief in tax particularly the withholding tax in 2007-08 budget. And demanded subsidy as has been extended to agricultural sector. At the same time spinners were demanding R&D on marketing value added goods. Government’s new package has resolved the issue and now the responsibility fell on the shoulders of textile industry as to how efficiency the package is utilised.
In May this year, the Prime Minister while expressing dissatisfaction about textile industry role in global market had stressed for more investment, merger and consolidation of textile sector. To increase exports, innovative measures would improve the productivity and competitiveness. The official sources had stated that the incentives regime available to Pakistani exporters was at par with and in some cases even better than regional competitors. Textile is the backbone of our economy. It is on government’s priority list. Home grown production of good quality cotton is an additional edge for Pakistani textile industry. In terms of workers wages electricity, gas and POL prices, container cost and price of cotton, tariff and long term normal financing for exports in Pakistan is cheaper. Pakistan is the only country that provides R&D at the time of export of textile products. However, a study conducted by a team of CBR, Textile sector contribution was noted unimpressive @5 per cent in GDP and about 29 per cent in manufacturing because of zero-rate of sales tax and wide ranging tax exemptions and concessions.
In South Asian perspective, Bangladesh has outstripped the other regional states. It has secured the maximum share of leading garments on the US and EU. Pakistan has been left behind both by India (13 per cent increase in exports to EU&US) and Bangladesh (22 rise in exports to US&EU between Jan-Nov 2006 and 34 per cent in November alone). While Sri Lanka exports up by 24 per cent to EU due to Generalised System of Preferences plus scheme-zero rate of duty. Japanese market is also being lost to its competitors. Before, the budget, State Bank of Pakistan, an important source of revenues for government, had shown concerns that textile sector had serious excess liquidity, distorted the tightening of monetary policy, chewed the Bank’s profits despite record subsidised loans in 10 months. According to SBP, under Export Finance Scheme (EFS) and Long-Term Financing for Export Oriented Projects (LTE-SOP) an estimated amount of Rs328 billion had been disbursed during July 2006-April 21, 2007. While an amount of Rs284 billion had been given only under EFS. In response to textile industry demand for more incentives, the Bank had made it clear that “the financial sector was fairly competitive”. Financing to textile industry and real interest rates in the country are lower than its regional and competitive partners”. It is further clarified that the State Bank of Pakistan provides finance to Banks @ 7.5 per cent against commercial lending of 12.57-13-57 per cent. In India the rate is 9 per cent against 15 per cent commercial rate. Bangladesh and Sri Lanka the concession rate is 6.7 against 11.14 per cent commercial rate while Sri Lanka provides loans at 18 per cent in both cases. Borrowing rates for Pakistani exporters is the lowest in comparison to other regional competitors.
Government’s policy is to (i) rationalise tariffs, (ii) ensure a conducive trade, finance and fiscal policies; (iii) removed the sales tax on textile value chain and (iv) reduce import duty on polyester chain. The government also provides availability of development finance and export financing at low mark up rate including hassle free environment. After the new package, textile industry needs to go in to production of high value added goods, technology up-gradation and research to meet the global competitiveness and challenges. The over all exports increase up to 6.5 per cent is not encouraging. Before the budget, Chairman Aptama had claimed that 116 textile mills have been closed down. An estimated 700,000 spindles were going out of operation which includes closure of 20,000 during May alone. He had claimed that about 500,000 spindles have been closed during last year and had rendered more than 15,000 people jobless.
Government plan of cotton vision is to improve the quality of silver fiber in the country. According to Chief Executive Trade Development Authority of Pakistan, textile vision was `being updated in line with the chaining needs. Harmonised coding system is the backbone of trade in goods. The Chief Executive who was speaking at a pre-budget Seminar on “importance and management of harmonised coding system in international trade” at Lahore stated “harmonised coding system was a multi-purpose tool and for universal language for goods being traded, it helps give required boost to exports”. He had urged the exporters to mention correct HS on the goods declaration (GDs) forms for availing the facilities based on export performance. Country’s exports are under pressure because the core products failed to give matching performance in terms of exports. Nevertheless, a study by CBR’s team comprising senior officials conducted before the budget had revealed that Rs40.7 billion as a refund and rebate was paid to the textile industry whereas the industry paid only Rs13.8 billion of indirect taxes (sales tax, customs and excise). In case of income tax, the textile industry had made unimpressive payment of Rs45 billion through withholding tax ranging between 0.75 and 1.5 per cent.
Despite EU’s restrictions introduced in 2005, Chinese textile exports continued to gain share in all major markets. Smaller exporters like Morocco, Egypt, Cambodia have also expanded their textile and clothing exports. Share of LDCs textile exports to EU and US increased during 2006. Pakistan textile exports to EU&US increased by 12 per cent only in post quota regime. Exports of yarn and fabric to Japan is also declined by 7 per cent. Developing countries like Pakistan required outsourcing arrangements to ensure cheaper good production to get maximum returns. The proposed Reconstruction Opportunity Zones (ROZ) in Tribal areas will be another opportunity to give a new boost to 41-hot selling textile/clothing and non-textile (leather, surgical, medical, sports stone etc) identified items for exports to US at a zero custom duty. Government’s latest package would therefore, improve skill, professional knowledge and managerial know-how. Extension of R&D facility will help to focus on innovative measures. It will facilitate sustainable indigenous environment to protect and promote textile industry and benefit the economy at the same time.