The currency has depreciated over 30 percent in last 12 months but
textile exports grew by a mere 6 percent during Nov17-Oct18 over the
same period last year. This implies that currency adjustment alone is
not sufficient to boost exports.
Pakistan textile exports grew by 85 percent from $5.8 billion to
$10.8 billion during FY02-07 at a time when currency and cotton prices
were sticky. Since then, there has been no significant growth in textile
exports during the last decade, despite the fact that the value of
dollar has more than doubled against the rupee during the same period.
FY11 was the only exception when textile exports jumped by 34 percent
due to over 100 percent increase in cotton prices during that year.
Turning around stunted growth in textile exports requires more than
just currency depreciation Yes, there are advantages of recent currency
adjustments; but given the capacity constraints of value added sectors,
growth may remain restricted to 5-10 percent this year.
In order to go beyond, textile industry needs to significantly
increase its capacity as it happened during 2002-06. No significant
sector wide expansion has been recorded in the industry during the last
decade which could have led to a exportable surplus. It appears that
stars have aligned for significant expansion in textile over coming
periods: government has set the price for gas at 6.5 cents per unit and
electricity at 7.5 cents per unit, is providing long term financing at
attractive rates, and is seemingly committed to flexible exchange rate.
These factors are making players to seriously consider massive
expansions. It takes a year or two for the industry to expand and for
that process to kick start more clarity is needed in implementation, and
a few more incentives are warranted.
For example, the government has to do away with 0.25 percent tax for
export development fund which is wasted in TDAP and other such
nuisances, and refunds of exporters need to be cleared sooner or later.
Anyhow, the direction is right.
Another major impediment is the falling cotton production in the
country. Back in FY05, cotton production peaked at 14.3 million bales
which was aligned with industry expansion. Cotton production has been
downhill since; averaging at 12.7 million bales per year during FY06-15,
before further spiraling downward to average annual production of 10.8
million bales by FY16-18.
One reason for recent dip is the shift of cotton production area to
sugarcane which is due to undue incentives for sugarcane production in
the form of support price mechanism. Per hectare yield has also
deteriorated substantially over the same period. For context, yield in
Indian Punjab is around 50 percent higher than Pakistani Punjab, even
though domestic yield was not far behind as recent as in FY12.
The major problem is in cotton seed research which is poor in
Pakistan. Three big textile players (Nishat, Sapphire and Fatima) have
formed a cotton seed company (Safina) to resolve the problem. Such
interventions can resolve the problem of germination and purification of
seeds; but without stewardship of a global player such as Bayer (ex
Monsanto), resistance against pesticides and other harming elements
cannot be developed. India, Brazil, US and many other economies have
done it; it is time for Pakistan to move towards GMOs in cotton
production.
Cotton production is important as increasing reliance on imported
cotton does not only strain current account deficit but also renders the
exports uncompetitive relative to India and others. Imported cotton
adds additional 10 percent logistics charge to cost of production. Value
chain price of garments is same for buyers but cost of production
increases due to higher input price.
With currency adjustment, minimum wage is becoming competitive too.
Until recently, Pakistan labour wage was around $145 per month which was
similar to India ($150) and little lower than Vietnam ($150-175) but
was almost double than Bangladesh ($70). Now with 34 percent currency
adjustment, labour cost has fallen to $110-115, while the internal
pressure in Bangladesh is pushing the wages close $100 per month.
Given the incentives for fabric, bed sheets, knitwear and towels, it
makes sense for value added textile sectors to go for expansion, Market
pulse confirms this view, as major players appear to be in advanced
planning stage of expansion.
The problem is in garments which is a big market to tap. There are
one or two players at the competitive curve in Punjab, but none in
Karachi. The low hanging fruit is to incentivize garment industry in
Pakistan. The labour lacks the skill set and our productivity is far
behind even Bangladesh. Garment players require sustainable support –
not like cash support for six months.
One option is to create a garment city in Punjab – be it Multan,
Faisalabad or Lahore. But one that has all the facilities including
housing for workers (aligned with PM’s low-cost housing passion), skill
development by one of the three Punjab institutes in this area, and
custom office at site to reduce the friction in importing raw material
for exporting goods. The other option is to incentivize existing players
to expand where they are already present.
The math is simple – if 25 new garment factories are added by
existing players, each can add $50 million of exports with 2,500 jobs
per factory while the cost of setting up is just $10 million per
factory. This can create sustainable exports of $1.25 billion per year –
50 percent increase from existing $2.5 billion exports in FY18.
Similar is the story of other value-added sectors, as they will expand
too if long term financing, flexible exchange rate, and affordable
energy prices policies continue. The problem in Pakistan is scale.
Pakistan has niche buyers, but mass-market stores such as Walmart,
Target and the likes do not come to Pakistan as there are too few
garments or other value-added factories in Pakistan.