THE TEXTILE INDUSTRY

At this juncture, on the international front, the biggest threat faced by Pakistan is to retain its share in textiles and clothing trade in the post year 2004 era. Pakistan is a single crop country and its economy and exports are heavily dependent on raw cotton. It may not be wrong to say that textile quota regime has been a blessing in disguise for the country. Keeping in view the existing status of textile industry, it is feared that the country may not be able to retain its share in global trade of textiles and clothing in the free trade era, unless a very comprehensive revamping programme is undertaken on top priority.

At the domestic level, the economic managers face three key issues: 1) putting the economy on faster track of development, 2) reducing the trade deficit and 3) containing the budget deficit. In one sentence, "They have to accelerate the GDP growth rate." While efforts are being made to achieve higher GDP growth rate, the challenge has become all the more pressing due to the various conditions stipulated in the stand-by assistance agreement with the IMF and to qualify for long-term funding under PRGF.

It may be true that the performance of local textile industry in last five decades, has been a little disappointing, the industry still has the highest potential to play a vital role in overcoming the key issues facing the country. To a large extent, the GoP policies are responsible for the pathetic performance of textile industry, but the players are equally responsible for the imbalance growth, production of coarse counts and grey fabrics and low unit price realization. The result is, despite being the fourth largest cotton producing country, Pakistan's share in global textiles and clothing trade is less than 3 per cent.

The present economic managers are making efforts to identify the key issues faced by various industries for taking immediate remedial steps and formulating medium and long term policies. Textile Vision 2005 draft circulated in April 2000 was an attempt to identify problems faced by textile industry and to suggest economically viable and sustainable plan. This document was expected to be the basis for a comprehensive textile policy. However, the inordinate delay in announcing the Policy and the measures to achieve the objective of enhancing textile export leads to apprehensions that Pakistan may once again miss the train.

After going through Textile Vision 2005 many industry experts say that it is heavily tilted towards spinning sector. Although, they believe that a strong and efficient spinning base is the backbone of textile industry, Pakistan does not need to increase production of coarse counts of yarn. The fresh investment should only be made to create facilities for the production of fine and super fine counts, add modern weaving and processing facilities. Some of the investment advisors even question the rationale for investment in spinning in the first phase. Keeping in view the pressing situation, Pakistan should follow the strategy of Bangladesh, Sri Lanka, Indonesia and Thailand. Instead of investing in spinning, the country should invest in made-ups manufacturing and demand for superior quality fabrics should be met by imports till the country is able to upgrade and enhance weaving and processing facilities.

The justification against investment in spinning is based on two factors: 1) establishment of a 14,400 spindles units costs more than US$ 20 million and creates employment for around 100 people only. Whereas an investment of the same magnitude in made-ups manufacturing creates direct jobs ranging from 2000 to 5000 persons.

On top of this, made-ups manufacturers add the highest value. The suggestion is also based on the saying of spinners that indigenous cotton is not suitable for manufacturing of above 30 counts yarn and addition of new spindles capable of producing finer counts would necessitate import of fine quality cotton.

INDUSTRY SCENARIO

However, before going into further details, it is necessary to have a dispassionate and closer look at existing status of each of the sub-sectors of textile industry. These are spinning, weaving and knitting, processing and made-ups manufacturing. The analysis should begin with taking into account production and quality of indigenous raw cotton.

As regards demand and supply of raw cotton, it is necessary to keep in mind a few points. 1) Pakistan can get an output of over 20 million cotton bales from the area presently under cotton cultivation, but actual production is around 10 million bales. 2) Locally produced cotton is sufficient to meet the demand of spinners — estimated around 9 million bales. 3) The GoP has allowed free trade of cotton paving way for import of superior quality cotton. 4) The local spinners use superior quality cotton for the production of yarn of coarse counts. 5) The glut of coarse counts is mainly due to obsolescence of spinning facility over the years— spinners have not undertaken timely BMR. 6) Weaving is mostly confined to un-organized sector using obsolete/outdated looms which is not capable of utilizing fine and super fine counts.

In the spinning sector, at present there are about 9 million spindles and over 150,000 rotors installed. However, the average capacity utilization has always been around 75 per cent. The low capacity is

mainly due to intermittent closure of mills because of inadequate cashflow rather than scarcity of cotton. The spinning capacity has increased mainly due to area and industry specific incentives. This proliferation has resulted in inefficiency and uneven playing field. Most of the units, established since early nineties are economically unviable and have survived only due to the incentives. The bulk of the percentage of yarn produced by these mills fall in the coarse counts category.

Weaving at mills level has experienced constant decline. At present less than 3 per cent of total fabrics is produced at mills and remaining quantity is produced on powerlooms. The fabrics produced on powerlooms is much inferior in quality compared to the cloth produced on shuttleless and air jet looms. This handicap does not allow the made-up manufacturers to produce superior quality garments. Therefore, despite enjoying the highest ceilings in certain categories, export proceeds have remained low. In case of Pakistan, the average unit price realization is below the world average. Like weaving, knitting is also mostly confined to smaller units operating in the unorganized units. This has been due to high duty applicable on shuttleless/air jet looms — although these looms are not manufactured in the country.

According to some analysts, the GoP policies coupled with the bad lending framework of financial institutions are responsible for exponential growth of spinning. While highest quantum of funds was dished out to spinners, there was hardly any financing of down-stream industries. On top of every thing, the entry of politicians and businessmen enjoying political clout in spinning business has resulted in lending to unviable projects. The concessional financing of and over invoicing has been the main reason for huge accumulation of non-performing loans pertaining to textile industry. The highest percentage

of non-performing loans belongs to state owned financial institutions which have recklessly, as well as under pressure, lent money to such sponsors. According to some financial analysts the average cost per spindle for units in nineties was as high as US$ 110. Whereas it should have not been more than US$ 60 per spindle.

TEXTILE MINISTRY

Many industry experts believe that creation of a fully autonomous Textile Ministry is the only solution to ensure sustainable growth of the industry. The policy planners have used other alternatives to avoid creation of the ministry. While the resistance may have served the purpose of a few, Pakistan has emerged to be the biggest losers. In India, our next door neighbour, Textile Ministry was created in sixties. Countries like Bangladesh and Sri Lanka, which do not produce cotton, have Textile Ministry. Despite being the fourth largest cotton producing country, where economy and exports are largely dependent on textiles, Pakistan does not have a Textile Ministry.

The demand for Textile Ministry is the unified voice of APTMA and most of the associations working under the umbrella of Council of Textile Associations (CTA). While the proposal for Textile Ministry was first made in sixties, the idea has met the highest resistance from the Ministry of Commerce. Even the present Commerce Minister, Razzak Dawood, has emerged to be the vehement opponent of the idea. He has been expressing, without being asked, his dislike and rejecting the demand for Textile Ministry.

TEXTILE VISION 2005

Although, one may not fully agree with the suggested strategy in the draft, it was a good attempt. For lack of any support for the

downstream industries, the blame should only go to the respective trade associations who have failed in making their point. However, the delay in announcement of final policy is unpardonable. The economic managers should keep in mind that buyers would identify the sources of supply by middle 2003 and start placing orders by early 2004. Therefore, Pakistan has to revamp its textile industry at the earliest and without waste of further time. Many of Pakistan's traditional competitors are way ahead of Pakistan. The initiative taken by some of the key players to revamp their units should be an eye-opener for those who want to live on the GoP support. Gone are the days and if the industry, as a whole, has to grow it must depend the least on the government.

TRADE PROMOTION

The least one should talk about the role played by Export Promotion Bureau the better it is. It has failed miserably in discharging its responsibilities in three key areas, i.e. trade promotion, participation in exhibitions and arranging visit of delegates. This is mainly due to the fact that in more than last 10 years its Vice Chairman was never picked-up from Trade and Commerce service group. One fails to understand why Ministry of Commerce never realized that trade promotion is a different ball game.

OUTLOOK

The first priority of the GoP should be to change country's image. Pakistan is considered to be a source of supply for low quality and low price products. Export Promotion Bureau has outlived it life. Therefore it should be given a new name — Trade Development Authority — a new mandate and a different team to manage the affairs.

At the same time, exporters should participate more in international fairs. They should also create their own websites to promote their products. At present a large number of buying houses are operating in the country and exporters should increase interaction with them. These buying houses are not only the potential buyers but can also help in producing new products and improving quality standards of products already being manufactured.

The performance of textiles and clothing industry is directly related to supply of raw cotton in reasonable quantity and at moderate price. The GoP has allowed free trade of cotton with no payment of custom and excise duty. The GoP has withdrawn the 15 per cent excise duty on import of cotton below 28mm staple on the demand of APTMA. However, some analysts consider this very myopic move. The APTMA should have asked for no excise duty on longer staple cotton to facilitate production of fine and super fine counts yarn.

The textile and clothing export figures for the first half of current financial year should be an eye-opener for the economic managers. There has been fall in the contribution of textile manufactures and a slight increase in the share of primary commodities. Textile manufactures accounted for 62.94 per cent of total exports. In absolute terms, the textile manufactures exports amounted US$ 2.79 billion. Within this group, the share of cotton yarn declined. An analysis of figures points to a disturbing trend of continuous drop in unit price realization. While there was an increase of 9.66 per cent in the quantity of cotton yarn exported, there was less than 1.5 per cent increase in value. This indicates that exporters are trying to sell more by reducing price and not by improving quality standards.

According to some international trade experts, Pakistan's balance of trade gap is expected to widen further. Import bill is expected to

remain high due to higher crude oil prices, enhanced imports of plant and machinery and raw materials. Export proceeds will come under pressure due to the worldwide economic slow down and particularly in those countries who are biggest buyers of made in Pakistan products.

According to Trade Policy 2000-2001 import of machinery more than five-years old has been allowed. Previously the duty free import of ring frames was not allowed and was subjected to 10 per cent custom duty which has been withdrawn. To further facilitate establishment of spinning facilities, the GoP has also allowed duty free import of plant and machinery for expansion and BMR. While APTMA considers the conditions stipulated in the SRO very harsh and cumbersome, industry experts term these appropriate. They say all the industries should be treated at par and there should not be any more favour for textile industry which has failed to reciprocate.

The central bank has also announced appropriate export refinancing facilities for textiles and clothing. These policies are aimed at curbing export of products with low value addition. However, APTMA feels that the lending policies of financial institutions for BMR and shortage of available funds does not allow the players to undertake BMR activities.

According to Mohsin Aziz, the outgoing chairman of APTMA, "The critical factor in achieving a mega size investment for the textile industry is the support from the lenders. It is true that some financial institutions are not keen to increase their exposure in the industry due to past experience. It is also imperative on their part (financial institutions) to come up with their own funding criteria as the industry emerges, once gain, as the biggest contender for funds. No generic policy should be followed by the lenders. They should decide each case on merit. Even during the worst period some textile units were able to get funds, only because the proposals were economically viable."

He suggested some key parameters which could be used by the lenders to evaluate the risk profile of the borrowers. These are: historical data regarding debt servicing, dividend pay out, business growth (volume and diversification) and proposed expansion plan based on least support by the GoP. To ensure least quantum of non-performing loans all the financial institutions should join their hand and come up with a uniform financing strategy. They should estimate the quantum of funding in each year, monitor performance rigorously and consider each application for financing purely on economic fundamentals.

Contrary to APTMA's expression, it has been observed that a very substantial investment has been in the sector in the recent months. Even APTMA sources are proud to claim that over 50 members of the Association have undertaken BMR by investing about US$ 400 million. Bulk of this has been self-financed. Therefore, it may not be wrong to say that only those mills are unable to solicit funds which suffer from poor financial health or expansion programme is not viable. The lenders may be right when they say, "Why does APTMA members consider it is their inherent right to borrow money at their own terms?

Pakistan was prompt to respond to nuclear tests by India to create effective deterrence. The country also meets requirement of certain products by import from India. However, it is beyond comprehension why Pakistan has failed in establishing Textile Ministry. Apparently, Ministry of Commerce seems to be the biggest hurdle in the formation of the Ministry and has been influencing the Minister to oppose the idea. But, the country needs a centralized body to tackle the issues of the industry which has been earning the largest chunk of foreign exchange and which also has the largest potential to change Pakistan's destination.

TEXTILE INDUSTRY'S ECONOMIC CONTRIBUTION

The contribution of Textile industry to Pakistan is given below in the form of data that was available to us:

EXPORTS 60% OF TOTAL EXPORTS ( US$ 5.1 BILLION )

MANUFACTURING 46% OF TOTAL MANUFACTURING

EMPLOYMENT 38% OF TOTAL EMPLOYMENT

G D P 8.5% OF TOTAL GDP

INVESTMENT 31% OF TOTAL INVESTMENT

GROWTH OF COTTON TEXTILE INDUSTRY IN PAKISTAN

Installed capacity (in 000) Working capacity (in 000)Year Unit

sSpindl

esRotor

sLoom

sSpindl

esRotors Looms

1990-91 277 5,568 75 15 4,827 67 8

1991-92 307 6,216 81 15 5,333 67 8

1992-93 334 6,860 95 14 5,520 79 6

1993-94 471 8,419 138 14 6,105 84 6

1994-95 494 8,610 132 14 6,262 74 5

1995-96 503 8,717 143 13 6,548 80 5

1996-97 440 8,230 143 10 6,538 87 5

1997-98 442 8,368 150 10 6,631 80 4

1998-99 442 8,392 166 10 6,671 66 5

1999-00 443 8,477 150 10 6,825 66 4

Source: T.C.O.

CONSUMPTION OF RAW MATERIAL

Year Cotton Man-made fibre

Total

1990-91 1,128,978 85,560 1,214,538

1991-92 1,257,399 105,775 1,363,174

1992-93 1,318,892 125,525 1,444,417

1993-94 1,511,610 182,077 1,693,687

1994-95 1,412,732 192,152 1,604,884

1995-96 1,509,955 192,691 1,702,646

1996-97 1,444,368 236,692 1,681,060

1997-98 1,471,169 318,923 1,790,092

1998-99 1,441,923 407,686 1,849,609

1999-00 1,566,348 404,008 1,970,356

Source: T.C.O.

PRODUCTION OF YARN COUNT-WISE

Years 1995-96

1996-97

1997-98

1998-99

1999-00

Mills 461 440 442 442 443

Coarse-Count

684,913

699,893 686,718

707,723

806,556

MediumCount

451,646

425,165 413,294

368,424

382,330

Fine Count

60,177 58,165 60,140 35,969 36,014

S. Fine Count

22,827 23,043 17,591 18,437 19,126

Poly/Cotton

134,784

192,960 242,589

277,149

273,212

Source: T.C.O.

PRODUCTION, EXPORTS AND DOMESTIC REQUIREMENT OF YARN

Year Production

Consumed in Mill Sector

Export Available For Local Market

1990-91 1,055,228 40,215 501,072 513,941

1991-92 1,188,270 36,022 505,863 646,385

1992-93 1,234,539 35,101 555,294 644,144

1993-94 1,498,948 36,846 578,648 883,454

1994-95 1,413,648 29,111 522,091 862,446

1995-96 1,505,244 30,164 535,889 939,191

1996-97 1,530,855 46,962 508,188 975,705

1997-98 1,540,720 53,445 461,919 1,025,356

1998-99 1,547,632 55,947 421,481 1,070,204

1999-00 1,678,536 65,481 512,971 1,100,084

Source: TCO/CSO

PRODUCTION OF CLOTH: CATEGORY-WISE

Period Blended

Grey Bleached

Dyed &

Printed

Total

1991-92 66,256 158,790

18,345 64,542 307,933

1992-93 67,344 163,213

20,363 74,476 325,396

1993-94 59,835 170,032

15,482 69,565 314,914

1994-95 51,907 180,81 12,008 77,116 321,841

0

1995-96 61,293 191,492

13,110 61,086 326,981

1996-97 57,198 194,420

11,935 69,942 333,495

1997-98 56,478 206254 13,032 64,516 340,280

1998-99 64,799 195,687

25,722 98,353 384,561

1999-00 60,607 263,593

11,064 101,926

437,190

Source: T.C.O.

PRODUCTION OF CLOTH: VARIETY-WISE

Year Blended

Coarse Medium

Fine & S. Fine

Total

1990-91 57,534 60,079 147,235 28,063 292,911

1991-92 66,256 84,640 131,609 25,428 307,933

1992-93 67,344 86,846 144,828 26,378 325,396

1993-94 59,835 84,080 144,867 26,132 314,914

1994-95 51,907 82,596 130,694 56,644 321,841

1995-96 61,293 83,966 109,737 71,985 326,981

1996-97 57,198 81,428 102,920 91,949 333,495

1997-98 56,478 88,551 79,119 116,132 340,280

1998-99 64,799 95,375 117,329 107,058 384,561

1999-00 60,607 92,096 210,710 73,777 437.190

Source: T.C.O.

PRODUCTION EXPORTS & DOMESTIC REQUIREMENT OF CLOTH

Period Mill Secto

r

Non-Mill

Sector

Total Producti

on

Exports Quantit

y

Available for Local Market

1993-94 314.91

3063.09

3378.00 1046.79 2331.21

1994-95 321.84

2778.91

3100.75 1160.66 1940.12

1995-96 326.98

3379.02

3706.00 1323.09 2382.91

1996-97 333.50

3447.70

3781.20 1257.43 2523.77

1997-98 340.28

3573.42

3913.70 1271.27 2642.43

1998-99 384.56

4002.23

4386.79 1355.17 3031.62

1999-00 437.19

4549.97

4987.16 1574.88 3412.28

Source: TCO/CSO

EXPORT OF COTTON & COTTON MANUFACTURES

Period Cotton

Yarn

Cotton

Cloth

BedWea

r

OtherMade-Ups

Garments

Hosiery

1993-94 1259.3

820.6 285.6

129.4 612.2 509.1

1994-9S 1528.1

1081.4

340.2

163.5 641.7 688.5

1995-96 1540.3

1275.9

422.2

179.1 648.5 703.4

1996-97 1411. 1262. 456. 208.7 736.4 688.9

5 4 3

1997-98 1159.5

1250.3

508.8

245.8 746.5 696.7

1998-99 945.2 1115.2

611.0

255.3 651.2 742.1

1999-00 1071.6

1096.2

709.9

307.6 771.7 886.7

Source: CSO/EPB

The above shows that the textile industry is doing very well due to the production of cotton within the country itself. Pakistan is one of the leading exporters of cotton and is rated number 2 in the market. The advantage that Pakistan has over others is the home grown cotton that is produced in the country.

Pakistan an attractive market for textile machinery producers

Textile industry plays an important role in Pakistan's economy

Pakistan, an attractive market for textile machinery manufacturers all over the world, has become a focal point of the suppliers in view of the massive Balancing-Modernization-Replacement (BMR) to take place

under "Textile Vision 2005" programme jointly launched by the government and public sector of the country.

Under the BMR plan an investment worth Rs333 billion has to take place by the year 2005. In order to market their products, trade delegations of textile machinery producers from France, Switzerland, Germany, Japan and India are frequently visiting Pakistan as a part of their marketing plans.

A textile delegation had visited Pakistan 10 days ago while another is due next week. Similarly French delegation visited Pakistan to explore the market and they are coming again to display their machinery in Faisalabad next week.

Italian Trade Commission recently established by the Italian embassy in Pakistan also arranged a symposium on "Italian Textile Machinery and Technology" in Karachi on April 10 and Lahore on April 12. The symposium was attended by a trade delegation of Italian Association of Textile manufacturers from their country. The representatives from All Pakistan Textile Mills Association (APTMA) including its Chief Executive Khalid Amin, Textile Commissioner Mohammad Idrees and prominent textile industrialists attended the seminar among others from Pakistan industry.

Speaking on the occasion Khalid Amin said that textile industry plays an important role in Pakistan's economy. The textile industry not only has to continue this role but also has to accomplish higher targets by increasing the exports from $5 billion to $15 billion in the years to come.

In order to achieve this target, the BMR plan chalked out by the government has to be implemented seriously. Financing constraints is

however one of the impediments in implementation of the BMR in textile industry in Pakistan. Although over $500 million were spend on BMR by the industry from its own resources. However the industry is unable to meet the entire funding from its own resources obviously because of financial constraints. The financial support is generally provided for BMR purposes all round the world and the textile machinery producers generally play a significant role by offering innovative financial schemes to support the industry as well as to promote the sale of their products. Khalid Amin suggested to the Italian delegation to extend such financial scheme to get a larger share in Pakistani market. It may be mentioned the banking sector is not in a position to extend such a large size of advances to the textile industry. The commercial banks are generally offer short term loans while those who were suppose to provide long term financing either are not in a good financial health.

The Italian Trade Commissioner while appreciating the growth rate of textile industry in Pakistan said that Italy was among top three-textile machinery producing countries and has already earned a respectable name in Pakistan textiles.

He said that the textile sector in Pakistan however is required to be upgraded to go for more value addition and consequently enhance value of its exports in terms of quality, quantity and value.

He was of the view that since a large portion of the textile exports from Pakistan goes into European market, it is vitally important for textile sector to equip this sector with European machines, products and designs popular in that choosy market.

He said that Pakistan is a major cotton producing country, yet it has to go a long way to enhance value of the available raw material through

improvement of the ginning, spinning, weaving or other sort of finished products.

The Textile Commissioner Mohammad Idrees, who also spoke on the occasion said that Pakistan is getting ready to face the post 2004 scenario when there will be no textile quota.

In order to survive in the high competitive market steps are being taken to equip the industry with the most modern machinery to produce quality productions.

Aziz Memon, Chairman, Pakistan Italian Business Forum welcomed the first event organized by the Italian trade commission recently established in Karachi. He expressed the hope that the Italian textile machinery has earned a respectable place in the textile industry in Pakistan and will continue to grow with the size of the market.

Meanwhile the textile sources have expressed their serious dismay and concerns over what they called bureaucratic chains restricting growth of the textile industry in Pakistan.

Sources said that industry is passing through the acute financial crisis due to non-payment of billions of rupees held up under the head of sales tax refunds. Various smaller units with limited resources have gone to the brink of collapse and if immediate steps were not taken to redress the issue, most of the smaller units would go out of business. He said that despite tall claims and frequent promises made by the bureaucrats, the textile exporters as well as the manufacturers are denied their due right of refunds running in billions of rupees. He said that such uncalled for problems created by the bureaucrats are seriously contradicting the policies of the government for economic reforms and industrial growth.

 

TEXTILE INDUSTRY: Emerging challenges demand greater competitiveness

 Better quality, greater value addition indicated

A closer look at the past and the new challenges facing the textile industry, establishes only one point: the country was not able to take proper advantage of the abundance of raw cotton. As cotton is no longer available at subsidised prices and the bulk of Pakistan's textile exports would remain under quota restrictions till the end of 2004, the country faces a threat from India, whose spinning sector is expanding rapidly. In addition, the opening up of textile imports under the WTO arrangement demands revamping of the textile industry to face the new challenges. Incentive packages alone cannot help the industry to compete in the international markets. The manufacturers have to broaden their vision and try to remove the label 'Pakistan is a source of low-quality, low-priced products'.

At the time of independence, Pakistan comprised two provinces. The erstwhile East Pakistan was blessed with the golden fibre jute, and West Pakistan with the silver fibre cotton. However, when East Pakistan became Bangladesh, Pakistan was left with cotton only. The country is among the top five cotton-producing countries in the world, but its share in world exports of textiles and clothing is less than three per cent. The textile industry not only occupies a significant position in the economy of the country, but it is also the main foreign exchange earner.

Realising the strategic importance of the textile industry, the government has been providing it the maximum protection, ensuring availability of cotton at subsidised prices — 30 per cent below international prices. But the unbalanced expansion has created a glut of cotton yarn in the country. The country, in the absence of modern weaving and processing facilities, is forced to export 50 per cent of the yarn produced and the bulk of grey (unbleached) fabrics. It was only during the last 10 years that the export of made-ups picked up.

Pakistan still has the lowest per-acre yield of cotton in the region, but was forced to export raw cotton, because the spinning sector could not convert all of it into yarn. Although the spinners have been complaining about the shortfall of cotton, even last year hectic efforts were made at the eleventh hour to export the surplus quantity. The spinners have not been able to take advantage of the government's policy of free trade in cotton. It may be true that the local cotton is not suitable to produce fine and super-fine counts of yarn, but, except for a few mills, most of the textile units failed to take advantage of this policy to produce higher-count yarn for production of good-quality fabrics.

Export of yarn and grey fabrics has, in a way, supported Pakistan's competitors. Not only were they using Pakistani yarn and grey fabrics to produce superior quality dyed and printed fabrics, but also better quality made-ups, due to which Pakistan has often been accused of dumping. It is said that Pakistani manufacturers export these products at prices lower than those charged in the domestic market.

At the time of independence, there were six textile units with less than 100,000 spindles and slightly more than 2,000 rotors. The number of textile mills has exceeded 500 during the past 50 years with more than 8.8 million spindles and about 140,000 rotors installed. However, the

average capacity utilisation has remained around 75 per cent. While many units have closed down due to technical obsolescence — no BMR — less than five per cent of the total installed capacity has remained closed due to non-availability of raw cotton. The fact that mills use less than three per cent of the total yarn produced in the country is sufficient to prove that the expansion of the spinning sector has been unbalanced. Weaving has gradually shifted to power-looms, because even the composite mills prefer, at times, to remain confined to spinning only.

While the spinning industry has expanded manifold, it is still totally dependent on imported machinery: new units as well as spare parts. With the continuous devaluation of the Pak rupee, the project cost of new spinning units has been increasing, resulting in higher financial and depreciation expenses, and eroding the profit margins of the manufacturers. In spite of the fact that textile machinery is not produced in Pakistan, successive governments have not been able to reduce tariffs on imports, but allowed duty free import for units enjoying area-specific incentives. It was assumed that if cotton was made available at discounted prices the industry would be able to sustain the high tariffs.

Although about a quarter of the total listed companies at Karachi Stock Exchange belong to this sector, their performance has remained dismal. Most of the companies have been either incurring losses or retaining the profits for expansion/BMR or diversifying into other sectors rather than making downward integration. This was the reason that when the capital markets in Pakistan were bullish and attracting foreign investment, the foreign fund managers abstained from buying shares of companies belonging to the textile sector. At present, over 250 textile companies are listed with the KSE with total paid-up capital

of over Rs13 billion. However, about two dozen companies have been performing well and paying good dividends to their stockholders. The reasons for their better performance are: efficient use of available resources like raw material, finance and human resources; superior quality of products; and effective marketing. They have also effected downward integration — spinning, weaving, processing and finished products. This way they have been able to ensure higher quality standards, from procurement of raw cotton to final product.

Although there was unbalanced growth — mainly due to government's policy and extra favours to spinners — the largest percentage of credit for textile industry has gone to the spinning sector. In the days to come, the industry faces two main threats: Opening up of textile import under WTO agreements; and, quota phase-out in the year 2005. The key to success is increase in productivity and improvement in quality standards.

As regards improvement in productivity, the country has the advantage of abundance of cotton and a large base for the manufacturing of textiles and clothing. The country also has the largest ceilings in various categories up to the year 2004 and the competitive advantage — through this advantage has eroded to a large extent, it could be regained.

The first and the most necessary step is to increase production of raw cotton in the country — Pakistan is capable of producing 20 million bales of raw cotton — and double the output from the area presently under cotton cultivation. This could be achieved through use of better quality seed offering higher yield and also resistant to CLV, balanced used of fertilizer, timely spray of pesticides, ensuring larger availability of irrigation water, and better crop management. Efforts should also be made to produce medium and long-staple fibre varieties of cotton.

Efforts should also be made to establish modern ginning factories in the country. Cotton experts say that, since ages old ginning technology is used in the country, cotton fibre is damaged during the ginning process — an 'A' quality produced at the farms become 'B' when it comes out of ginneries. Not only does it contain foreign materials, it has higher than normal percentage of moisture and often lower grades of cotton are mixed with higher grades. Unless very strict quality standards are maintained at the ginning stage, the country cannot produce superior quality of fabrics.

The financial institutions must ensure liquidation of closed spinning units. Since most of them have become technologically obsolete and are beyond redemption. At least 20 per cent of the spinning units should be scrapped to allow continuation of only efficient and technologically modern units. The units producing coarse counts are not making any positive value-addition. On the one hand, due to poor value-addition, they are not able to earn profits equal to the opportunity cost, and on the other hand if the quantity of cotton used by these mills is made available to the units producing higher counts and dyed cones, it would not only improve the profit margins, but also result in exportable surpluses fetching higher prices.

The objective of higher value-addition in textile industry just cannot be achieved without creating a very strong weaving and processing base. It may be true that the power-looms sector can meet the indigenous requirement of fabrics but for overseas buyers the country needs to install at least 20,000 additional modern shuttleless/airjet looms. It is also necessary to produce better quality fabrics to produce made-ups of international standard. There are two major complaints about Pakistani fabrics: there is no consistency in colours/shades; and the dye bleeds out in the first washing. While poor selection of cotton is

responsible for inconsistency in dyeing, the bleeding is due to use of substandard dyes. The poor finishing may also be attributed to the facts that the textile processing units are operating mostly in the unorganised sector, at small scale, without modern processing facilities, and there is inconsistency in the hardness of water used in the processing process. Thus, the overseas buyers prefer to buy yarn or grey fabrics from Pakistan. Modernisation of processing is the key to higher value-addition.

The made-ups manufacturing is still done at small scale for want of credit facilities. The disadvantage of smaller units is that they are not able to produce quality made-ups. Due to stringent customs procedure (for bonded warehousing facility) these units are not able to import superior quality fabrics and have to remain contented with whatever they can get locally.

Another factor which has been discouraging production and export of quality products is the quota allocation policy of the government. The present policy still encourages volume export over quality and higher unit price realisation. The bad implementation has also made quota a tradable commodity — as the premium on quota is more than the cost of the product itself. Pakistan has to redefine it quota allocation policy to encourage production and export of quality products. As the bulk of Pakistan's textiles falls under quota restrictions, one of the ways to earn more is to improve unit price realisation. The exporters have failed to reap the profits that could have been derived from the devaluation of currency. As they were able to get more in rupee terms, they should have concentrated on improving quality standards, but they lowered the FOB prices (in dollars) to attract more buyers. In turn, the unit price realisation has gone down further.

As there is a need to remove the tag that Pakistan is a source of low-quality, low-price products, the Export Promotion Bureau (EPB) has to play the key role. It should encourage local manufactures to exhibit only high-quality products. Lately, the EPB has allowed 'Spot Sales' during fairs which attracted more 'seasonal exporters' rather than manufacturers of quality products. The EPB must arrange participation of Pakistani exporters in more and more fairs and international exhibitions. However, selection of an exhibitor should be only on merit.

The government has been trying to provide various incentives through textile packages, economic and tariff reforms, export refinance facility and lowering of interest rate. There is an obligation on industry in general and textile sector in particular to reciprocate through improved productivity and quality standards. The effort should not only be to increase volume, but, more importantly, to improve the image of the country. In line with the Quaid-e-Azam's express desire, the 'Made in Pakistan' label should be a sign of quality.

It is also imperative that the government should remove all the small irritants. The government often announces very good policies, but poor implementation, delay in issue of amended SROs and subsequent changes distort these. The country must try to achieve a competitive advantage in textile sector which has been the largest foreign exchange earner, and its growth on solid grounds can help Pakistan double its exports in less than five years. Since Asia (excluding Japan) is emerging as the new textile manufacturing base, Pakistan could become to largest source of supply. However, offering low prices alone cannot help in exporting more. Pakistan mainly supplies textiles and clothing to developed countries. Efforts should be made to sell only high quality products in the years to come, as these countries have the

highest purchasing power and the buyers are also willing to pay good premium.

The new textile quota policy

It emphasizes quantity over quality

The caretaker government has recently released a 3-year (1997-99) Textile Quota Management Policy after announcing two relief packages for the textile industry to enhance textile exports. The main thrust of the policy is on enhancing value addition and encouraging exports of value-added products, ensuring transparency and the elimination of discretion in allotment of quota quantities.

MAIN FEATURES

The policy has been announced for a period of three years for the first time to ensure continuity and enable the exporters of quota items to make long-term plans. The discretionary quotas for less-developed areas, powerlooms and processing industry and new entrants have been stopped. Under the new policy, auction of quotas will be in respect of growth rate and residuals but their transfers will not be allowed. So the auction will be based on increased quantities to be imported by the buying countries and on the balance not utilized in the previous year.

The policy emphasises allocation of quota to performance holders 75:25 on quantity and value. The exception will be yarn and towels where the ratio in yarn and towels is 50:50. However in 1999, all quota categories will be allocated to performance holders on 50:50 basis of quantity and value. This means that 75 per cent of the quantity in a category would be transferred to the performance holders and the remaining 25 to those attaining higher price realization per unit. This still encourages the exporters to export more quantities rather than making efforts to improve unit price realisation

The quota management will be under Export Promotion Bureau. A valuation committee, headed by director general TQMD will determine allocation of quota categories on value basis and verify the performance and check any misuse.

The categories where utilisation on December 31, 1996 was ninety per cent or below would be opened and allocated to registered exporters after shipment on first-come-first served basis.

As a rule, quotas allocated would be transferable except for the auctions, exceptional flexibility and from European Union quotas allocated as advance reservations against bank guarantee.

Flexibility such as carry over, carry forward and swing would continue to be allowed to exporters on their authenticated entitlement including quotas obtained through auctions and would be finalized by March 31 each year to give ample time to exporters for planning.

The residual quota or growth element in textile quota has been allowed to be auctioned in economical lots twice a year. Exceptional flexibility of 3,000 tonnes in EU would be allowed for value-added categories.

REACTIONS

While the All Pakistan Textile Mills Association (APTMA) has welcomed the 3-year textile quota policy, the exporters of value-added products have expressed mixed feelings. Their contention is that the government has once again encouraged the export of quota items on volume rather than on higher price realisation.

In their opinion Pakistan gets a limited quantity every year and with the devaluation of the Pak rupee the unit price realisation as a whole has been going down. The efforts should be to earn maximum from these quantities. The stress should have been on encouraging exporters attaining higher value-addition.

Looking at the FOB prices negotiated by the exporters it is evident that the variation in prices for the same products is often too much. For example one manufacturer exports a particular type of T-shirt @ US$ 10 per dozen while another exporter charges US$ 18 for the same product. This clearly indicates that the overseas buyers are willing to pay a higher price for better quality and therefore efforts should be made to encourage the manufacturers to fetch a higher price.

The declining trend in prices has resulted in dumping allegations. The latest being anti-dumping duty ranging from 17.6 to 32.5 per cent on grey cloth and investigations for dumping of bed linen by the EU. Both these products fall under quota management and chances of Pakistani exports causing any threat to manufacturers in the Union were minimum. In the past Japan had also imposed anti-dumping duty on yarn originating from Pakistan.

All such impositions and investigations demand that if the exporters are not willing to improve export prices on their own, the Pakistan government should at least make the policies whereby exports at

lower rates are discouraged to avoid dumping accusations in the future.

The other point is that the government should implement the new policy in its true spirit. In the past, a similar policy was announced by the then government but was not implemented and altered by the successive governments. Another example is that the caretakers announced two textile packages but no SRO pertaining to the second package was issued.

The new quota policy, like many in the past, encourages the exporters to export more rather than improving quality standards. The new government should not only try to implement this policy fully but also improve earnings from the limited available quota quantities.

Textile Vision 2005

An effort to revamp Pakistan's textile industry

While going through the draft summary report on Textile Vision 2005, the first and immediate response is that after a long time a sincere effort has been made to revamp textile industry in Pakistan. The enabling backdrop was termed a vital pre-requisite to the viability of the strategy. Some of these factors are not controllable and there is still very heavy reliance on the GoP support/incentives. Unless the industry is able to stand on its own feet firmly, without the crutches of incentives/protection, it will be very difficult to compete in the global markets.

The draft of Textile Vision 2005 was circulated after the stakeholders of the textile sector attended the presentation of the strategy on April 14,

2000. This formed the basis of the final deliberation. However, the document, in no way, represents the final policy proposals to the GoP by the Textile Sub-committee chaired by Tariq Sayeed Saigol. Three different scenarios have been suggested for the strategy.

* Low road

* Exports will maintain the historic growth rates

* There will be no change in the product or the market mix

* Do-able

* Exports growth rate will match each importing country's growth rate of unit imports

* Unit exports of garments to Middle East market will grow at 3 per cent annually

* Pakistan will capture 0.5 per cent share in the Japan and Hong Kong markets

* Unit price of cotton yarn will grow at 3 per cent and that of fabrics will grow at 4 per cent annually

* Share of 100 per cent synthetic garments in the garments exports will increase from current 3 per cent to 30 per cent, in line with the world trend

* 13 million bales of cotton will be consumed

* High road

* Value added products (garments and made-ups) will be the engine of export growth (20% annually)

* Export product mix will be balanced by giving extra push in the women and woven garments

* Fabrics exported will contain 55 per cent processed fabrics

* Total cotton production will be 16 million bales of which 13 million will be consumed

Based upon the above assumptions, textile exports have been estimated.

EXPORTS IN THREE SCENARIOSCategory 1998 Low

RoadDo-able High Road

Garments 1,224 1,413 3,010 4,309

Made-ups 1,099 1,739 2,032 4,063

Fabrics 1,547 2,542 3,390 3,443

Yarn 1,027 1,746 2,132 2,000

Total 4,897 7,440 10,564 13,815

 

GROWTH RATES IN THREE SCENARIOS(Per cent)

Category Low Road

Do-able High Road

Garments 2 14 20

Made-ups 7 9 21

Fabrics 7 12 12

Yarn 8 11 10

Total 6 12 16

Growth rates in three scenario indicates that highest growth rate will be in yarn (8%) followed by fabrics and made-ups growing at 7 per cent each. Garments will grow at 2 per cent which is the lowest among all the categories. Garments is the most value-added category and Pakistan has the lowest growth rate in this scenario. The export growth rates of Pakistan are highest for the low value-added categories and lowest for the highest value-added categories. Together, garments and made-ups contribute 42 per cent of the total exports of which 23 per cent comes from made-ups and only 19 per cent from garments.

In the Do-able scenario Pakistan will reach an export figure of US$ 10,564 million. It means that historic growth rates of Pakistan are less than the growth rate of the importing markets. This implies that Pakistan will be losing its market share in its importing markets and some competitor will be capturing its share.

In the High Road scenario emphasis has been placed upon the high value-added products i.e. garments and made-ups. The growth rates taken at 20 per cent and 21 per cent for the two categories will help in boosting Pakistan's exports to US$ 13.8 billion. In this scenario, the share of garments and made-ups in the total textile exports will be 60 per cent, with 31 per cent coming from garments and 29 per cent from made-ups.

INVESTMENT REQUIREMENT(Rs in Billion)

Sector Low Road

Do-able High Road

Stitching Machines

0 11 39

Processing (Woven)

52 73 62

Processing (Knit) 2 5 7

Knitting Machines 1 14 29

Air Jet Looms 49 54 40

Weaving Water Jet 22 22 40

Spinning 25 87 87

Polyester Fibre 3 14 29

Total 151 280 333

In spinning, investment in low road is proposed at Rs 25 billion, in do-able and high road at Rs 87 billion each. This investment is aimed at achieving cotton consumption at 13 million bales. The existing capacity has been considered equal to the current working capacity. To attain 13 million bales consumption over 2 million spindles have to be added in low road scenario and 4 million spindles in do-able and high road scenarios each.

The Textile Sub-committee has proposed this and the same has been supported in general. According to Mohsin Aziz, Chairman, All Pakistan Textile Mills Association, there is an urgent need for BMR and expansion in spinning capacity. The country would not be able to achieve higher value addition without producing fine and super fine

counts, to be able to produce fine quality fabrics. This is also a pre-requisite for improving the quality of garments and made-ups produced in the country.

According to Mohsin, a critical factor in achieving such a mega size investment in spinning is the support from the lenders. While it may be true that some financial institutions may not be keen in lending to spinning units, it is imperative on their part (financial institutions) to come up with their own funding criteria. During the worst time some textile units have been able to get funds, only because the proposals were economically viable. In his views, no generic policy can be followed by lenders and they should decide each case on merit.

He suggested some key factors which may be used by the lenders to identify the prospective borrowers. These are, historical data regarding debt servicing, dividend pay out, business growth (volume and diversification), proposed expansion plan based on least support by the GoP. To ensure least non-performing loans all the financial institutions should join their hand and come up with a strategy. They should estimate the quantum of funding in each year, monitor performance rigorously and consider each application for financing purely on economic fundamentals.

However, some analysts belonging to the other school of thought say that the proposed vision is heavily tilted towards spinning sector. Efforts have been made to portray a scenario that spinners are the main foreign exchange earners. They say that there is no doubt that spinning is the backbone of textile industry but also question the contribution made of spinners, barring a few. Bulk of the yarn produced in the country consist of coarse counts. Spinners have always demanded more and more incentives but failed in increasing production of fine and super fine counts. Even if one accept the

proposal of adding 2 million or 4 million spindles, is there a guarantee that spinners would not, once again, indulge in producing coarse counts.

Some other analysts strongly suggest the contrary proposal of following the policy of Bangladesh. Since the availability of cotton, yarn production and processed fabrics is limited, Pakistan should also allow duty free import of fabrics for use in export-oriented garment manufacturing units. Initially, the number of beneficiaries of this policy may be low as the rules governing such imports are outdated. However, if the rules are made simpler the benefits could be befitting.

They also suggest that instead of going for the establishment of new stand-alone spinning units the GoP should only allow expansion in existing units, upwards integration and move towards composite mills. Following this policy would automatically weed-out the inefficient mills, encourage change in management through takeover and save foreign exchange. They say that establishment of spinning units in duty free areas has only propagated inefficiency and uneven playing field. This type of mistake should not be repeated at all.

Textile sector experts even go to the extent by saying that the biggest irritant redarding the growth of textile industry is the ever changing cotton policy. The recent intervention by the TCP has become questionable. It was given a mandate to intervene only if cotton prices go below a benchmark but the Corporation has become an active player.

The other impediment is inconsistency in the GoP policies. Even the best policy document becomes redundant if it is not implemented in letter and spirit. They say that for more than five years Pakistan's economy has been facing recession, but many textile mills were able

to expand only because they implemented economically viable projects. Even financial institutions supported them. If the policies are clear, not tilted in favour of any pressure group or groups and implemented properly mills will become less and less dependent on support from the GoP.

The proposed strategy has suggested certain fundamental macro level decisions to form the basis of Textile Vision 2005. These are: free trade,

higher technological orbit, human resource development, rewarding value addition and eliminating procedural and human level impediments. The critical success factors of the proposed strategy are: international standard cotton, producer subsidy equivalents to be neutral, shift to value addition and shift to man-made fibres.

Textile Vision 2005 was to be announced in August this year. Sector analysts believe that the GoP has taken more than desired time and it should announce it without further delay.