The textile industry of the country way back in 1957 organized itself into what became the premier textile industry association of the country. 100% of the country’s textile exports and more than 50% of the country’s clothing exports emanate from Member Mills that constitute the All Pakistan Textile Mills Association. The textile industry is the mainstay of our economy. It contributes 8.5% to GDP and employs over 40% of the manufacturing sector workforce. Besides, the spinning industry being the sole consumer of cotton worth $5 billion, sustains the largest cash crop of the Pakistan.
FREE MARKET MECHANISM
Consequent to Pakistan’s accession to the World Trade Agreement, the country’s trade economy has been integrated with global trade that operates on the principle of free and open international trade. This is particularly true of Pakistan’s textiles and clothing sector, that was integrated into the upcoming $800 billion international textiles and clothing trade. The international textiles and clothing market is intensely competitive and operates on very low margins. Any sector or segment has to be competitive enough to survive in the quota-free world of international trade. With an eye on the characteristics and requirements of the WTO regime and to be able to compete therein, the spinning industry made $ 3.5 billion investments since the quota-regime of ATC was done away with in favour of open and free international trade.
It is noteworthy that the spinning industry operates in a free competitive environment especially with regards to the use and availability of raw materials. It procures 11.5 million bales domestically and 3 million bales from the international market on international terms. International procurement became necessary due to insufficient cotton crop since last ten years. It is therefore perfectly legitimate for it to expect the latitude to market and sell its products in the international market on the same principles. Having done so much to attain international competitiveness, the free market mechanism is at the heart of our interest and philosophy.
The free market regime enabled a significant resource transfer to the farm sector on account of cotton sale proceeds at international prices. As a result an additional Rs. 200 billion has been transferred to the agricultural sector this year. Textile exports have also increased in proportion and likely to maintain the momentum by increasing up to $ 4 billion this year.
In keeping with its resolute determination to realize its vision, the textile industry performed to improve its performance thereby enabling it to re-invest its earnings in productive assets. We visualize an export potential of $ 25 billion by 2014 with an investment of $ 2 billion per annum resulting in creation of job opportunities for a work force of one million and an increase in exports by $4 billion.
There is a dire need to fast-track the economy. A beginning has to be made involving at times painful and difficult decisions. Enabling conditions would have to be provided for increasing production, exports and employment opportunities. The primary prerequisite for all these is investment. Investment in industry is urgently required to impart inherent strength to the economy and confer on it the resilience to manage shocks and in the long term cure the economy of inflationary propensities and the like. There is an inverse relationship between industrial investment and interest rates. High interest rates while keeping inflation low have always disabled investment in industry. For achieving an economic turnaround a special line of credit for industry at internationally competitive interest rates is imperative.
Competitive availability of quality raw materials, cotton as well as man-made fibers is very important for the textile industry. Acclaimed technology for production of genetically modified, high yielding and pest-resistant cotton should be adopted to meet the persistent shortage of cotton and the growing gap between consumption and production.
APTMA is funding cotton research by contributing Rs. 250 million as cess on cotton and this contribution is being increased by 250%. There is need for cotton research management to be re-structured to involve farmers and the industry in a meaningful way.
The development of the textile industry is restricted by the low use of Man-Made Fibers in the fiber-mix. Our MMF and cotton use ratio is 20:80 as against the world-wide 60:40 use. Correction of our fiber-mix ratio will bring about qualitative improvement to our product range as well as broaden the range itself. Towards this end it is imperative that
- All duties on import of MMF be done away with altogether.
- Inoperational domestic capacity be revived without delay and
- New investment encouraged so that MMF shortage is overcome.
HIGH INTEREST RATE REGIME
An internationally competitive interest rate regime is a must for present investment to bear fruit and for not deterring new investment inflow. There is an inextricable link, an inverse relationship between investment and interest rates. Investment in the textile industry increased during the period the interest rates were low and decreased with rise in interest rates. Also, with rise in interest rates there came about an increase of non-performing loans. Another negative fallout of higher interest rates was the whittling down of exports. In spite of the fact that the textile industry installed sizable additional capacity to create exportable surplus, textile exports either declined or stagnated, both in quantity terms as well as value-wise. Thus, low interest rates are conducive to investment inflows. The international bank rate prevalent presently is not more than 2%. In the circumstances our interest rates of around 15% are not viable and good enough for any investment to come about. Under the Textile Investment Support Fund (TISF) a special interest rate comparable with the international interest rate would encourage new investments.
Regional competitors, from 2005 onwards induced investment to develop sizable capacity and as a result the textile exports of our principal competitor increased from $ 12 billion to $ 30 billion. The instrument used was the Technology Up-gradation Fund Scheme (TUFS) that provided for a remission of interest rate up to 50% for investment. Similar schemes visualised here did not materialise because of the characteristic gap between policy and implementation.
Better market access is important for the export oriented textile industry. The mind-set of our western trading partners has to be changed. They view market access to Pakistan as a kind of charity or concession extended unilaterally and gratuitously. These countries are not sensitized to the burden that industry in Pakistan bore and is bearing in terms of disarrayed infrastructure, strained economy, dislocation of normal working conditions, lost exports and ironically uncharitable travel advisories, on account of Pakistan undertaking the war on terror. Developed countries should see widening of market access to Pakistan as a reciprocal measure for what has already been borne by the country and its industry for a cause that is dear to all right-thinking humanity and is as much international as it is national. We do not accept that market access to Pakistan is a unilateral gesture. We ask for the due, the consideration for which has already been made.
REFORMED GENERAL SALES TAX
We do not hold any opinion against the levy of Reformed General Sales Tax (RGST). Rather we feel that this levy will bring on board other sectors to share the responsibility of contributing to the exchequer, hitherto being borne by industry. Our concern is with respect to the over Rs. 517 billion of the textile industry funds that will remain stuck as non-productive asset awaiting refund as 85% of the textile industry’s produce is exported. It is oppressive that for collection of Rs. 25 billion tax on domestic consumption, the industry be saddled with a burden of Rs. 517 billion.
For this reason the zero-rate tax regime for sectors from ginning to garmenting should be continued for Pakistani textiles to remain competitive in the international market.
Previous imposition of 15 percent sales tax on industry proved a failure and the government zero rated the export-oriented industry after realizing that refunds were far in excess of collection of the sales tax.
Unprecedented increase in cotton prices has already impacted the textile industry. Therefore, it cannot sustain additional liquidity requirement of 15 percent under the RGST. Banks are reluctant to finance textile industry to procure swelling cotton prices and the SBP regulations do not allow financing of sales tax part.
There were difficulties in obtaining adjustments/refunds against sales, as the spinning industry procures cotton in three months and consumes it during twelve months to manufacture and sell yarn to the weaving and knitting industry.
PAK CHINA INVESTMENT INITIATIVE
China’s current progress in textiles and the continuing shift of its focus on downstream sectors gives an opportunity to Pakistan to fill up the area in spinning and weaving being vacated by China. This is an opportunity that should not be missed. We must take benefit of the rapid economic progress of China and enable synergies of operation to be achieved.
We are committed to the progress and prosperity of Pakistan and will continue to exert ourselves for making Pakistan a vibrant and self-reliant economy.