Breaking the curse in textiles
The loss in textile exports has been attributed to lack of investment in upgrading technology and innovation in the textile industry.
Absence of investment in the sector has been a result of: non-accumulation of savings and investment owing to low profitability because of high costs of production, liquidity and cash flows being soaked up by the Federal Board of Revenue and the State Bank in delayed refunds/drawbacks, and continued overvaluation of the currency for five consecutive years making exports uncompetitive.
There is no denying the fact that our textile sector has become regionally uncompetitive, but this is not because of inefficiency of the industry but because of a non-conducive business environment.
To avoid going to the IMF again, we must improve export performance by tapping into the textile industry’s exportable surplus of almost $20bn, which can help reverse the trade account deficit
It is the government’s role to provide a viable business environment by maintaining a competitive cost of doing business, promoting competition through an open economy which brings trade opportunities and protects domestic industries through tariff and non-tariff barriers where necessary.
Market forces should be allowed to work; any greater role of the government that interferes with market forces creates bureaucratic delays and inefficiencies.
According to the recent World Bank report, “Pakistan’s poor trade performance in recent years is an outcome of diminishing export competitiveness”. The reason for the loss of competitiveness is the increased cost of doing business.
According to the ease of doing business report, Pakistan stands at 147 out of 190 countries, significantly lower than regional peers and competitors like India, Vietnam, Indonesia and Turkey.
A country with a regionally uncompetitive business environment cannot be expected to compete with regional players. Pakistani textiles were once a celebrated international brand, famous for their premium quality as well as affordability owing to the moderate cost of doing business and low prices.
International organisations in 2006 rated Pakistan’s textile industry as one of the most technologically advanced industries.
Now, unfortunately, we cannot ensure high quality products because of the unavailability of quality raw material and other inputs. Cotton is the lifeline of the textile sector and its production has declined by 21 per cent in the last three to four years.
Furthermore, through irrational policies, import of quality cotton has been restricted while domestic crop production is also dismal; the quality of output will be compromised even with the most innovative machinery.
To provide a competitive price for exports, competitive cost structure is a prerequisite, attained only through correct currency valuation. We have an overvalued currency as well as a high cost of doing business. These instruments need to be stabilised in order to compete.
On the contrary, regional competitors like India, Vietnam, China, and Bangladesh are pursuing aggressive textile policies and buying market share in textiles through highly subsidised exports.
Amusingly, Pakistan is the world’s leading importer of used clothing with per capita per annum import of approximately $1, whereas import in India is only 9 cents per capita per annum.
Our imports of used clothing are 10 times that of India which has a similar poverty rate. This is because Pakistan is importing used clothing under the guise of new apparel. This is actually the rejected apparel and clothing from the US and EU, dumped in our market at unbelievably low rates that no one can compete with.
The government should act as a regulatory and complementary body in market economies, making policies that support the domestic industry. Once an enabling environment is created, market forces will compel competitive production, accurate pricing, and set the floor for achieving economies of scale.
Pakistan’s textile industry has an untapped exportable surplus of almost $20bn, which can help reverse the trade account deficit. Such a balance of payment situation is not a very comfortable position to be in.
In order to avert the possibility of going to the International Monetary Fund again, we must improve export performance through the aforementioned measures and then place our bet at winning against aggressive competitors.
Shahid Sattar is a former member of the Planning Commission and Hira Tanveer is a policy analyst
Published in Dawn, The Business and Finance Weekly, March 5th, 2018