Why textile exports fell in March despite full order books?

In March 2019, Pakistan's textile and clothing exports witnessed the largest monthly decline since May 2017. They fell 9.47 percent year-on-year basis to $1.088 billion, as uncertainty in the continuity of reduced energy rates for zero-rated industry and macro-economic instability kept the industry under pressure. However, it may be noted that the textile sector this season has its export order books at full and some major buyers are also returning to Pakistan after a long time. The decision makers and detractors need to realize that there is a time lag of almost 6 months between implementation of incentives (reduced cost of doing business) and realization of enhanced exports from reduced cost of doing business.

However, last month every major textile segment has shown a decline in exports. This March, cotton yarn exports decreased 28.23 percent year-on-year; knitwear exports declined 6.48 percent; bed-wear exports decreased 3.63 percent and readymade garments exports slipped by 3.42 percent. This reflects the export orders of 6 months ago when the power and gas rates were regionally uncompetitive.

Pakistan has had two five-year textile policies in the last decade, first five-year textile policy was developed in 2009 and the second one came in 2014, both policies were on paper but couldn't deliver because of their non-implementation and technical shortfalls.

The Textile Policy 2014-19 which is going to expire by end-June 2019 envisaged a strategy to make textile sector competitive but failed to achieve all its targets. It missed all its objectives including doubling value addition from $1 billion per million cotton bales to $2 billion per million cotton bales; increasing textile exports from $13.1 billion to $26 billion as well as creation of 3 million jobs in five years, facilitating additional investment of $5 billion in machinery and technology; improving fibre mix in favor of non-cotton i.e. 14% to 30%; improving product mix especially in the garment sector from 28% to 45% while also strengthening existing textile firms and establish new ones.

On the contrary, during the policy implementation period, energy cost almost doubled and resultantly over one hundred mills closed down, rendering thousands of people jobless. While, overall exports dropped from $25 billion to $21 billion during this period.

The major reason behind this decline is that textile sector failed to innovate and modernize production owing to systemic inefficiencies, administrative delays, low profitability due to ever-increasing cost of doing business, squeezed profit margins and liquidity crunch due to cash flows soaked up by FBR and State Bank in delayed refund/drawbacks along with tariff and non-tariff barriers on import of raw materials.

Pakistani currency has drastically lost its weight in the last one year which has also proved to be counterproductive, as the exports did not pick up despite a 34 percent devaluation since January 2018 but the working capital requirement has gone by 34 percent in the last year due to currency devaluation. This means that in order to meet the same export order, the processing cost has increased equivalent to devaluation. On top of that, the interest rate has almost doubled from 5.75% to 10.75% during the period, further restraining investment in the sector along with increased working capital requirement, expensive raw material and machinery imports necessary for production capacity expansion owing to devaluation.

Looking at the current dismal situation of once leading export sector and future opportunities, an all-encompassing strategy is under development to restructure and revive textile industry. Textiles units, which are suffering from the general market slump but are otherwise technically viable should be helped through transitional support in the form of loan restructuring, interest rate relief, relaxation of prudential regulations, additional financing through policies like Long Term Financing Facility (LTFF) and TUF etc. Further, fresh investment in the sector should be incentivized through special interest rates, a special Credit Allocation Policy for banks necessitating each bank to lend at least 20 percent of their portfolio to industrial sector with in which 15 percent should be specified for the Textile sector at subsidized interest rate of 5%.

The survival and growth of textile sector is subject to a new Long-Term Textile Policy that will be based on actionable plans to make textiles sector competitive, robust, goal oriented and sustainable. Bringing down input costs for the textile sector should rightfully be the primary objective of the government's new long-term textile policy enabling domestic firms to compete in international textile market.

The concerned ministries should make concerted attempts for ensuring that the new policy produces an enabling environment for textile industry to raise production of value added items through innovation, modernization, diversification, maintaining the quality of their products at international standards, and development of unit clusters.

The threat of increased competition in the global textile market is serious and becoming progressively more so, in order to compete with the world and also regionally, there is need to reduce our cost of doing business and make it comparable to regional competitors like India, Bangladesh, Vietnam and Thailand and for that a long-term policy is mandatory.

The only road to Pakistan's economic growth and socioeconomic uplift, passes through fast and colossal industrialization based on market research and understanding about the changing world preferences creating enormous employment opportunities, facilitated by conducive business environment and prudent policies.

Link: https://fp.brecorder.com/2019/04/20190423466609/