Shahid Sattar and Asad Abbas
“Business Recorder”
October 11, 2018
The production and distribution of cotton plays a key role in the economy of Pakistan. It is not only an essential segment of economic strategy but has social dimensions as even the farmers’ schedules of social activities which are dependent on expected cash flows from value chain.
Cotton as the basic raw material for the Pakistan textile industry accounts for almost 70% of the basic cost of production in the textile industry and any movements in price or quantity have significant impacts.
Pakistan is the 3rd largest consumer and 4th largest producer of cotton crop in the world. For the last five years, the country is facing a huge cotton shortage close to 40 percent of demand. This year Pakistan has missed the cotton sowing targets, largely in Sindh, due to acute water shortage, leaf curl disease and climate change. The overall sowing area in Pakistan is 2.71 million hectares against the target of 2.95 million hectares which signposts an 8% decrease in yield. The production estimates showed an estimate of 10.82 million bales, indicating a shortfall of almost 4 to 5 million bales.
Over the last five years, decrease in production of cotton crop has caused almost Rs 1 trillion loss to the economy. In the past several years, the quantity and especially quality of the cotton declined drastically. In 2012, country had produced more than the targeted level – 14.8 million bales against the target of 14.1 million. Since then, cotton crop suffered from encroachment of land (sugarcane encroached best cotton growing area), viruses and water shortage issues. Currently, shortfall is expected around 25% majorly due to farm inputs, including poor quality seed, cotton leaf curl virus (CLCV), pest management issue, lack of plant resistant seeds, depleted technology, late sowing and severe shortage of water. According to reports, the occurrences of CLCV were told about 29.28 percent this year against 21 percent recorded last year which affected the yield.
On water paradox, Pakistan has the world’s fourth highest rate of water usage per unit of output as it is bigger threat than the terrorism in Pakistan. This decrease in our water resources over last year, was recorded at 2.3%, forecast for the current year is even worse. This issue has curtailed estimates of the production of cotton crop especially in Sindh where there is lack of reservoirsand a poor water management system.
There are 1300 ginning industries working in Pakistan. In the same way, the share of intermediaries (ginners) is also worsening the production as in New York the share of intermediaries is almost 12% and in Pakistan, it’s currently about 45%.
Environmental hazards and high cost of production challenge sustainability and farmer’s income in Pakistan. The average farm gate price of phutti is Rs 3700 per 40 kg and ginning cost is roughly Rs 700 per bale plus 7% wastage. Whereas the sale price of cotton is almost Rs 8300 per 40 kg. This difference in marketing and risk margin is kept by ginners. Ginning units have to go for better technology to eliminate inefficiencies and the material in the ginned cotton. This higher gap between the farm gate and the market price generates inefficiency and inadequate return to the farmers. Ginning quality in Pakistan leave much to be desired as Pakistani ginned bales contains up to 10% trash and are usually underweight and contains high levels of moisture, sand, dust, threads of nylon bags and leaves of cotton plant. These impurities make the cotton expensive for textile mills.
To increase yield and ginning quality efforts are being made to resolve the problem in Punjab, which accounts for almost 80 percent of the yield. Punjab may suffer from a decline of 19% in output despite increase in the area of production. Similarly, Sindh is going to suffer from almost 38 percent decline in the production. This deficiency will again create panic for entire value chain as government has already imposed duties on import of cotton. This duty will further increase the cost of raw cotton. This severe shortage and duties will adversely affect the export sector. The production shortfall will force the entire value chain to rely on imported cotton this year as well, to meet the shortfall and to get export-quality cotton.
Increase in cotton production is not possible without introducing new cotton seeds as Pakistan Central Cotton Committee (PCCC) has totally failed to launch new seeds qualities due to lack of research. Our average cotton yield is 17 maunds whereas progressive farmers are getting 40 maunds yield in Pakistan. Government needs to take measures on emergency basis in cotton research areas, i.e., variety besides high productivity and desirable fibre traits.
Promotion of cotton means promotion of exports while failure of cotton crop translates into heavy damage to country’s economy. It is said that one million bales of cotton has 0.5 percent impact on GDP. It would be difficult for textile industry to compete with textile giants like China, India, Bangladesh, Vietnam and Sri Lanka when we have to import a larger amount of expensive cotton to meet the shortfall of our cotton requirements.
PCCC is required to ensure availability of cotton to the industry at reasonable prices through-out the year and develop such varieties of cotton seeds that are resistant to diseases and enhance per acre cotton yield. The industry requirement is increasing with each passing year but indigenous production of cotton is further decreasing. Most importantly, the government is required to revisit its decision of duties on import of raw cotton immediately.
(https://fp.brecorder.com/2018/10/20181011414236/)

Interventions to control trade gap
Shahid Sattar
“Business Recorder”
September 19, 2018
Preparation and implementation of a well-thought and properly constituted strategy to effectively control the fast widening trade deficit to strengthen country’s macro-economic position is urgently required. Latest data released by state bank of Pakistan suggests that the trade deficit has reached USD 36.3 billion and current account deficit is over USD 18 billion as of fiscal year ended on June 2018.
This drastic increase in the trade deficit would have dire consequences on the economy of Pakistan; therefore, all future trade policy initiatives should take a comprehensive view of this problem. Economic realities show that the country cannot sustain a high and growing trade deficit; therefore, the trade should be enhanced through close coordination with both economy experts and private sector. The growing trade deficit, led by 13 percent increase in imports (102pc higher than exports), is posing a key challenge to the macro-economic stability of the country besides converting it into a consumer society.
The galloping imports propelled the outgoing government to take certain measures, including levying regulatory duties ranging from 4-60% on 731 products on October 2017, imposition of a 100pc cash margin requirement for cars and devaluing the local currency against US dollar to curb imports. Apparently, these measures could not achieve the desired targets (as shown in graph below).
Imposition of RD’s did not have any lasting impact on imports. Imports did fall but only for a very short period of time, i.e., for about a month and only by 2.6 percent. On contrary the exchange rate/devaluation seems to have a significant impact on the imports. As expected, the devaluation impact came with a lag of a month and is continuing to date. Despite high regulatory duties and currency devaluation, imports have increased by almost 13pc in fiscal year 2017-18 while exports improved by only 8 percent.
The failure of these measures basically lie in the inelastic nature of the imports. As many of our imports are inelastic and there are no substitutes available domestically. Infrastructure development has boosted the demand for machinery, steel, cement, and coal, which cannot be met with domestic production yet imports for these products, cannot be cut despite RDs and other duties on them. Similarly, high energy demand does not allow to reduce oil and petroleum imports despite high prices.
Considering inelastic nature of imports, imposition of duties, taxes and depreciation of currency will only contribute to increase in imports bills and will also violate the world trade organization’s treaties. Thus, imposition of regulatory duties is not a wise decision to discourage imports. Following the footsteps of other developed countries, government should utilize non-tariff barriers (NTBs) to achieve the desired results. NTBs can take the shape of
a) 100% cash margin for import L/C’s.
b) Quotas and outright bans on imports categories
c) Phytosanitary requirements made more stringent
d) Cumbersome customs and administrative Entry Procedures
A policy or measure cannot succeed to curb imports until and unless the inelasticity of imports is considered. There should be separately import policies for the two categories of imports i.e. essentials and unnecessary imports. Custom duties and other restrictions should be imposed on imports of luxury
items but subsidies and relaxation should be provided on essential items, especially on imports of raw material like cotton, polyester and machinery, etc., to promote local production and export industry.
Along with the imprudent import policies, government’s export unfriendly policies have also taken heavy toll on trade position of the country. Exports are highly sensitive to exchange rate and have increased significantly after currency devaluation in February 2018 (a 4% depreciation lead to 17% increase in exports). However the amendment in DLTL offset the positive impact of exchange rate and exports started to fall drastically. After the amendment in DLTL policy in June 2018, exports fell by 12%. (As shown in graph below).
The ground realities suggest that in order to encourage maximum exports, the government is required to maintain a market based exchange rate for both curtailing imports and increasing exports. The current government should also revise the DLTL changes made by outgoing government which have resulted in a precipitous fall of exports in July 2018.
In order to develop the domestic market all future DLTL schemes may only be applicable on the value added with Pakistan. Further in order to encourage the value added sector the DLTL rates may be designed to favor end products. We suggest a gradual shift in DLTL rates towards the value added sector given the duties, etc., in the cost of doing business the possible rates could be:
Apart from effective trade policies, government should also cut the cost of doing business in Pakistan and evolve a long-term strategy to make its products attractive in the global market to enhance its exports. If the PTI government adapts to analysis and information based import-export policies, the BOP crisis can certainly be controlled.
======================================================================= PROPOSED DUTY DRAWBACK SCHEME ======================================================================= Commodities 2018-19 2019-20 2020-21 2021-22 2022-23 ======================================================================= Cotton Yarn 4% 3% 2% 1% 0% Greige Fabric 4% 3% 2% 1% 0% Processed Fabric 5% 4% 3% 2% 1% Made ups 6% 7% 8% 9% 10% Garments 7% 8% 9% 10% 11% =======================================================================
(https://fp.brecorder.com/2018/09/20180919408976/)

Let Pakistan compete in synthetic textiles
Shahid Sattar and Hira Tanveer
“Business Recorder”
September 15, 2018
Polyester is now the most dominant man-made fabric across the globe. Its demand surpassed the demand of cotton in 2002, and it continued to grow ever since at a significantly faster rate than all other types of fabric. The recent unsustainable hike in prices of Polyester Staple Fibre (PSF) in Pakistan will only lead to further closing of the capacities of yarn manufacturers and adversely affect the entire textile export value chain. Pakistan has lagged far behind the global market players in the area of man-made textile products and failed to make inroads into synthetic market globally. This is because Pakistan has imposed heavy import duties on raw materials required for the production of synthetic fibres. The import duty on Polyester Staple Fibre (PSF) which is spun to make Man-made Fibre (MMF) yarns reaches up to 20 percent – 7 percent import duty and 2.9 to 11.5 percent anti-dumping duty.
Resultantly, imported PSF (input to our spinning mills) becomes more expensive than international prices. The aforementioned anomaly in regulatory duties is making domestic MMF yarn production uncompetitive, even in their own domestic market. The irony is that when MMF yarn is imported directly it faces a lower import duty of five percent (under the South Asian Free Trade Agreement) to 10 percent, under chapter 55 for MMF yarns import, resulting in unsustainability in the synthetic yarn industry. This led to a reduction of 36 percent of domestic MMF yarn production capacity in the last one year alone.
Pakistan has imposed these duties in a hope to protect obsolete PTA and PSF plants in the country working on inefficient technology. If the government wants to provide protection to these plants, this should not be done at the cost of whole textile value chain, but policies like in 2003, of deemed duty drawback, can be reintroduced. The whole textile sector should not be forced to cross subsidize PTA and PSF plants in Pakistan.
In contrast, today, world is transforming at a faster pace than ever, consumer preferences are changing across a wide range, from food consumption to the standard of living, to travelling and then to clothing. Simple textiles and clothing have evolved into fashion brands. Textile consumer preferences are shifting from cotton-based apparel to synthetic man-made apparel. In the world market, consumption of man-made or synthetic fibres against natural fibres has shifted to a ratio of 70:30, with synthetic fibres having the lions share – a decade ago it was 30:70.
On the domestic front, our policies are distorting both cotton and synthetic fibre market. Pakistan’s share in US’s total textile and apparel imports in 2016 was 3 percent, as per the Office of Textile and Apparel, USA, and for cotton-based products, it was 5 percent. US’s total man-made fibre imports in 2016 were $52 billion of which Pakistan’s share was $200 million. This means that if we do not keep up with the new world preferences, our international market share will continue to shrink.
Our policies have become so regressive in last years that even “cotton” which is considered the backbone of our textile industry is burdened with an import duty of 11 percent regardless of consistent fall in cotton output in the last 3 years. This year cotton production is estimated to fall 25 percent short of its target of 14.37 million bales in the current season as water shortage and pest attacks have squeezed the crop yields signaling hard time ahead for the already struggling economy that is heavily reliant on fibre.
One reason for reliance on cotton based products in Pakistan is that, apart from polyester, nothing is made in Pakistan. We virtually import all synthetic fibres including nylon, viscose etc.
Amidst the ongoing crisis, foreign exchange spent on the import of MMF yarns from Indonesia, China, Thailand and India is around Rs 12 to 16 billion. In Pakistan, the domestic production of polyester viscose blended yarns is approximately 165,000 tons per annum. More than 50,000 tons of PSF yarns are imported per annum. This is equivalent to the production of almost 15-20 domestic mills in the business of 100 percent polyester, polyester viscose blended, viscose or polyester yarns and other synthetic fibre-blended yarns spun out of a total of 45-50 mills. These mills provide employment to more than 100,000 people. Importers of synthetic blended yarn not only put local industries out of competition but also fully exploit them to sell the product at a cheap rate equivalent to India. What is hurting the local synthetic fibre manufacturing industry most is the lack of a level playing field, with higher tariff barriers being imposed on the import of raw materials and a minimal duty on import of MMF yarns, leading to the widespread dumping of MMF yarn and fabrics in the country.
By imposing an appropriate level of regulatory duty on $100 million imports of MMF yarn, jobs of more than a 100,000 people employed in our spinning industry can be saved; however, this is not the ideal solution as the best solution would be to zero rate the duties on polyester and pay any subsidies to the PTA industry through other means. This would ensure that Pakistan can internationally compete in the MMF sector. It is high time that the new government shows its commitment to enhancing exports by rationalizing irrational duties imposed on raw materials which are already short in the country.
(https://fp.brecorder.com/2018/09/20180915407891/)

PTI’s 100-day agenda: The BoP challenge
Shahid Sattar
“Business Recorder”
August 02, 2018
Managing Pakistan’s rising current and trade account deficit constitutes the most difficult challenge for the incoming government. This crisis requires immediate policy interventions to reverse the deteriorating economic situation. Pakistan Tehreek-e-Insaf, which has been mandated to form the federal government, in their first 100 day agenda prioritizes addressing key economic and governance issues. All these are secondary to harnessing the growing deficit in the Balance of Payments (BoP). This requires limiting the trade deficit and building foreign exchange reserves by working on the external and internal fronts simultaneously. Trade deficit reduction can be achieved by two equally important policy measures; one to curtail import bill and the other to enhance export earnings. In the last fiscal year, import surged to $60.9 billion while exports were only $23.2 billion leading to a trade deficit of $37.7 billion. This was partially covered by remittances. However, the current account deficit was still $ 17.99 billion which increased 42.5 percent over the last one year. The concern with limiting trade deficit through import curtailment is that many of our imports are inelastic in nature and there are no substitutes available domestically like for fuel, machinery and raw materials required for manufacturing sector. Increasing import duties will also run afoul of World Trade Organization (WTO) covenants. The more effective strategy is to increase exports rapidly. This is challenging but a substantially more sustainable approach bearing long-term benefits in accordance with PTI’s 100-day agenda goals in the form of creating mass employment opportunities, increased economic activities enhancing production and therefore exports.
These agenda goal items can be achieved by making synchronized policy interventions like tax rationalization, zero rating raw material imports, early refunds, LTFF schemes extended to indirect exporting sector and the most important making energy accessible and affordable for exporting industry. The Prime Minister in waiting Imran Khan in his victory speech emphasized on reducing the cost of manufacturing and enhancing ease of doing business.
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 deep rooted into increased cost of doing business.
Small steps add a lot of value while we are struggling in the highly competitive international market. Easily implementable and concrete policy measures can go a long way towards realizing economic goals set out in 100-day agenda by PTI. A few policy measures that can be implemented immediately and can accelerate the economic recovery process are listed below.
a) In order to reduce production cost of exporting goods, all duties on raw material imports should be removed. The contemporary world markets are evolving at a much rapid pace and if we have to keep up with them, we need to at least provide raw materials at the import price.
Taking the example of Pakistan’s largest exporting segment “textiles”, World Market consumption of manmade/synthetic fibers against natural fibers has shifted to a ratio of 70:30 while a decade back it was 30:70. We are still sticking to the old cotton strategy, Manmade fibers like Polyester Staple Fibre (PSF) which is the basic raw material for synthetic textiles is burdened with regulatory duties which reaches up to 20%, such irrational duties should be immediately removed along with custom and regulatory duties on cotton to facilitate largest exporting sector.
b) Over the last five years cotton production has decreased from 13.86 million bales to 11.98 million bales, witnessing a decrease of 14pc which has caused a loss of Rs.535 billion (almost 2pc of total GDP) to the economy. To meet the domestic demand of 14.5 million bales Pakistan heavily relies on cotton imports. Under these conditions 11pc cotton duty and non-tariff barriers (NYB) will worsen the situation and will leave Pakistan globally uncompetitive.
c) In the light of current energy sector situation, energy sector reforms are vital for sustenance of economic activities. Electricity tariffs in Pakistan are much higher than regional competitors leaving our export sector uncompetitive in international market since electricity cost is 35pc of total processing cost. Regionally competitive electricity tariff rate can be provided to exporting industry by introducing a separate electricity tariff category for the sector.
d) In order to ensure sustainable gas supply and competitiveness, price and priority of gas supplied to different sectors of the economy should be reviewed in a way that productive sectors of the economy that add more value to GDP be given preferential priority in domestic gas allocation and supply. One of the pillars of the economic emergency should be to allot 1st priority to export industry ahead of domestic, commercial and power sector. To make the gas sector sustainable, exploration activities should be accelerated to add new gas to the system e-g Block 28 has 3 times higher potential reserves than Sui field itself.
e) LNG sector has remained suspicious and non-transparent under the last government, bringing transparency in LNG contracts should be a priority to reduce import costs and add-ons by PSO, SSGC and SNGPL and hence the consumer gas price.
f) The regressive taxes like turnover tax of 1.25 percent on export items act as a disincentive for exporting industry so exporting industry should be exempted from any such tax. All taxes should only be collected on the basis of profitability.
g) The working capital of the textile sector remains blocked in delays in sales tax refunds, custom duty drawback and income tax refund. The cash flow crunch caused by these blocked refunds squeezes the financial streams of exporting industry, breeding liquidity jerks. All pending refund claims should be immediately paid to provide much needed breathing space to industry. Aggressive policy measures are required to improve export competitiveness like China’s and India’s. China’s Xinjiang Uygur Autonomous Region has provided cheap electricity at US 6 cents per Kwh to industry, rent-free factories in industrial parks, interest free loan deals and maximum tax rate of 15%, while Indian Punjab has frozen their electricity price for industry at Indian Rs 5/KWH for the next five years.
Pakistan’s export performance has been particularly lackluster in recent years. Should the government implement progressive policy measures, the textile industry of Pakistan alone has potential increase in export volume to US $ 45Bn plus in next five years and creation of 3-4 million additional jobs through tapping unutilized potential. Similarly, a share by all exporting industries will mitigate ballooning trade deficit and current account deficit.
(https://fp.brecorder.com/2018/08/20180802395772/)

How to stop wastage of precious domestic gas
Shahid Sattar and Madiha Nisar
“Business Recorder”
July 24, 2018
Pakistan is blessed with the natural gas reserves but years of mismanagement, inadequate exploration activities and poor distribution policies have led to gas deficit of three billion cubic feet per day (bcfd), which is projected by OGRA to touch 6 bcfd by 2030.
Battered by gas shortages and high cost of doing business accompanied by elevating exchange rate, Punjab’s textile industry is on verge of closure. Around 70 percent of Pakistan’s textile industry is in Punjab, which is extremely exposed to energy shortage and affordability compared with the mills in other provinces operating on uninterrupted gas supplies. Over the last three years, almost 30 percent of textile-oriented industries have closed adding 1.2 million workers in unemployment base.
Overlooking the 18th Amendment, gas is sold at through away price in KPK and Sindh which is causing huge loses to the economy. When it can easily be sold at Rs 1000/MMBTU it is being sold at RS 488/MMBTU in KPK and Sindh. While, despite being third on the priority list Punjab textile industry is getting only one-fourth of their allocated gas supply and is also forced to pay more than 3 times higher (Rs 1700/MMBTU) than other provinces. The following table shows price discrimination prevailing in provinces.
This price discrimination is not sustainable as bulk of industries and exports originate from Punjab. This disparity in energy prices is hindering Pakistan’s efforts to accelerate economic development as a major sector of the economy is crashing.
Moreover, both demand and supply of gas have alarmingly increased in domestic sector. Despite prevailing gas deficit, three lacs consumers are added to gas network every year which aggravates the situation even further. To appease the voters, the outgoing government has also granted approval to 235 gas schemes in January for parliamentary constituencies that cost billions of rupees to the economy. This extra supply to domestic sector also causes losses to the economy as most of the gas is burnt in inefficient home appliances with an average efficiency of 22 percent. In order to ensure sustainable gas supply and competitiveness, price and priority of gas supplied to different sectors of the economy should be reviewed in a way that productive sectors of the economy that add more value to GDP be given preferential priority in domestic gas allocation and supply. That means allotting second priority to industry ahead of commercial and power and creating a two tier allocation for industry in which export based industry should be given preference. This would allow domestic gas to be supplied to export based industry at Rs 600 in Punjab for at least 9 months a year providing a much-needed relief.
To rectify the situation, more indigenous energy resources should be explored. Proper production, management, distribution, allocation and consumption strategies should be planned. A constitutional amendment is required for proper action plan over existing energy resources and their utilization. All federating units should understand and co-operate with each other on their provincial energy needs and their overall contribution to the national GDP.
More exploration and investments are needed in gas sector. The usage of CNG as an alternate fuel to petrol, owing to the disparity in oil and gas prices should be curtailed.
A comprehensive national energy policy which includes regularization of illegal connections, cancellation of allocations for the transport, ban on gas-run electricity generators and illegal
commercial consumers are the immediate policy changes required and must be implemented by the government to overcome this gas shortage crisis in Pakistan.
To achieve the objectives of judicious use of the precious domestic gas in the domestic sector, a two-pronged strategy needs to be implemented through appropriate price signals and energy efficiency standards.
(https://fp.brecorder.com/2018/07/20180724393265/)

Collapse of Pakistan cotton sector
Shahid Sattar
“Business Recorder”
July 11, 2018
Decrease in cotton acreage, per hectare yield and imprudent government policies have taken a heavy toll on cotton production. According to Pakistan Central Cotton Committee’s (PCCC’s) report, cotton production target has been missed by 15 percent for the year 2018. The following table shows the cotton area and production targets and achievements for the year 2017-18.
Over the last five years, cotton production has decreased from 13.86 million bales to 11.98 million bales, witnessing a decrease of 14pc which has caused a loss of Rs 535 billion (almost 2 percent of total GDP) to the economy.
Moreover, as the sowing of cotton crop 2018-19 is in progress, only 48pc crop has been sown in Sindh against the target of 0.62 million hectares whereas Punjab has achieved 95pc of the target (2.31 million hectares) till June. Total sowing of country stands at 2.494 million hectares, witnessing a decline of 8.8pc over the last five years.
Apparently the main reason for the decline in cotton crop is low per hectare yield (further decreased by 6.2pc over the last five years), which has left Pakistan with the only choice to import cotton to meet domestic demand. Under these conditions when import of cotton is the last resort to meet excess demand, 11pc cotton duty will worsen the situation and will leave Pakistan globally uncompetitive. Along with high custom duties government is hunting textile industry with non-tariff barriers (NTB).As per the NTB restrictions, cotton importers are not allowed to import cotton in more than one shipment against one permit which inflates the input costs. It will also directly impact the textile and garments exports, 75pc of which are cotton based.
In addition to low yield many other mutually reinforcing factors have also impacted the cotton production. For example better returns of sugarcane because of special policy incentives offered to sugar industry by government, has eventually frustrated cotton growing farmers. So they shifted from cotton to sugarcane which resulted in a 15pc increase in sugarcane acreage and significant decrease in cotton acreage.
Apart from technical and administrative challenges, climate change and irregular rainfall is also adding fuel to the fire. Farmers also blame widespread use of genetically modified Bt. Seeds, seeds mafia and water scarcity for low production of cotton. Farmers claim that Seed mafias are posing a substantial threat to cotton crop by selling fake Bt. seeds which results in a loss of 2-3 million cotton bales every year. The low toxin level (0.2-0.6 per gram) in those fake seeds and outdated Bt. technology has lost its effectiveness against severe cotton diseases like cotton bollworms and other insects.
Water scarcity has also played a major role in shrinkage of cotton production. At present, farmers fear that because of severe water shortage the production of cotton may decline by 35-40 percent further compared to last year. Along with water and energy crisis, the enormous increase in water, gas, fuel and electricity prices have also impacted the yield per hectare.
Besides drop in production, cotton quality is also deteriorating. Fake Bt. seeds with low toxin level and contamination are impacting both production and quality of cotton. Against the international standard of 2.5g/bales, Pakistan produces highly contaminated cotton with an average contamination of 18g/bale which causes a monetary loss of almost $1.4 billion every year.
Besides these issues, low Investment in cotton research is also a matter of high concern. Pakistan’s investment in Cotton R&D is lowest than other countries. It is financed by cotton cess collected by PCCC which has already decreased by 53pc than the previous year causing a further decrease in cotton R&D. This decline in cotton R&D should be revised in order to assure the survival of cotton industry in Pakistan.
To protect the cotton industry from further downfall prudent policies are needed. The cost of cotton inputs should be reduced and new version of Bt. technology seeds should be provided to farmers. In addition to new and updated technology, better quality of seeds should also be provided to farmers. Efforts should also be made to explore the feasibility of cotton production in newly available arable areas e.g. in Baluchistan and KPK. Moreover, a proper lands reform system can be introducing to promote crops that are more important for the growth of the economy.
In the meanwhile, to protect the textile industry, mainstay of our economy, all duties and non-tariff barriers on cotton should be removed till such time when cotton production can meet demand.
To improve quality, campaigns and awareness programs should be initiated to train farmers about proper picking, storing and supply of cotton. Ginning should be modernized and upgraded to meet international standards.
In the absence of the government taking serious notice the imposition of 11pc duty on cotton will be the last nail in the coffin for the Pakistan textile sector as well as any hope of sustaining growth in exports.
==============================================================
Cotton Area & Production Targets and Achievements 2017-18
===============================================================
Province Area Production
(‘000’ hectares) (million bales)
==============================================================
Target Achievement Target Achievement
==============================================================

Source: Provincial Crop Reporting Service Department
(https://fp.brecorder.com/2018/07/20180711389783/)

Pakistan loses textile export share from 2.2pc to 1.7pc
An Interview of Mr. Shahid Sattar by Khalid Mustafa
“The News International”
June 07, 2018
ISLAMABAD: Pakistan has lost its textile export share from 2.2 to 1.7 percent in the world market over the last decade, Adviser to Textile Industry Shahid Sattar told The News.
“Pakistan’s textile industry is currently facing the toughest periods in decades as despite being the 4th largest producer and 3rd largest consumer of cotton, country is facing deficit in cotton production since 2013 and relies heavily on imports of cotton to meet local demand.” During ongoing season, he said, industry has failed to achieve the cotton production target of 14.1 million bales. The production has been estimated at 11.9 million bales against the domestic demand of approximately 15 million bales. “As the cotton sowing season has ended on May 31 (started in April), only 50 to 55 percent of sowing target has been achieved so far.”
He said that cotton oriented textile industry is mainstay of economy of Islamic Republic of Pakistan. It contributes to 60 percent of countries’ exports, 8.5 percent to total GDP and provides employment to 40 percent work force.
Highlighting the agonies that the industry is facing since long he argued saying that an industry with such a great potential has been subjected to significant threats and challenges over past few years. The major challenges faced by the industry are unstable world prices, macroeconomic instability and high cost of doing business, inappropriate policy environment and anti-industry government attitude. In addition to economic issues, Pakistan’s textile industry is also facing strong competition from the regional competitors (Vietnam, Bangladesh, India and China) as well as from the global competitors like American and European textile industries.
Cotton production has declined in the past few years due to many reasons; like ongoing water shortage, outdated technology, low quality seeds and fertilizers. Government’s biased policies towards sugarcane, natural disasters, high cost of doing business and high prices of raw materials and competing crops etc. are responsible for the drop in cotton production.
The policies to support sugar cane, Sattar said, has been short sighted and detrimental to the economy of Pakistan as investing in sugar cane crop actually lowers the overall wealth generation in the country, apart from the wastage of our scarce water resources as sugarcane is more water intensive than cotton. Moreover, cultivation of cotton can also contribute in the production of edible oils that is a significant import of Pakistan. “Our government accepts that one million bales change in production of cotton translates into a 0.5 percent impact on GDP.” He said that textile industry of Pakistan has been the worst hit by power cuts. In addition to energy crisis, a massive increase in gas, electricity and other fuels has forced the textile mills to close their units, especially in Punjab the industry is under severe pressure due to unsustainable gas pricing. Almost 200 textile mills have closed their operations and about one million workers lost their jobs. As a result low profitability and loss in textile industry, the machinery being used is obsolete and has not undertaken up-gradation.
At present, farmers fear that because of severe water shortage the production of cotton may decline by 35-40 percent further compared to last year. Load shedding in cotton belt areas, shortage of water and severe heat waves are causing seed burns. To protect the sown seeds government will have to provide uninterrupted electricity in cotton belt areas to keep irrigational tube wells functional, if a half decent cotton crop is to be expected.
Under these circumstances, imposition of 10 percent custom duty on imports of cotton is anti-industry and growth. In Pakistan cost of doing business is already extremely high as compared to regional countries so the import duty of 10 percent will affect the exports of textile industry and will make the industry uncompetitive in the global market. In January 2018, Pakistani government withdrew 4% custom duty and 5% sales tax to meet the shortfall of silver fiber and to promote value addition. This withdrawal of custom duty contributed positively in the growth of textile industry and as a result the exports of value-added textile products recorded a growth of 12.8 percent in the first five months of 2017-18.
Previous year cotton growers, he said, received 3,100 rupees per mound and this year expected price is around 4,200 rupees per mound which means farmers will receive 35 percent higher remuneration as compared to previous year, therefore abolishing import duty will not jeopardise the livelihood of cotton producers.
“Cotton forms almost 70 percent of the total cost of textile final product and an increase of 10 percent in raw material prices will result in further closures of firms and millions of people may lose their jobs. An economy where cost of doing business is already high cannot absorb 10 percent increment in cost of raw material may result in to decline in the mainstay of our industrial sector.”
He stressed his arguments further saying: “Our regional competitors have thrived under the zero tariff policy. Bangladesh, the regional competitor of Pakistan, in spite of being second largest exporter of readymade garments (RMG) after China, also relies on imports of cotton to meet its almost 99 percent domestic demand for cotton. Regardless of cotton deficit industry, Bangladesh textile industry is flourishing because of its duty free cotton imports. Even with increasing cotton import trend, 0.34 percent growth in RMG exports’ earnings and 10.21 growth rate in world exports was recorded in fiscal year 2016-17, with a duty free import policy. The third largest exporter of textile, Vietnam has also recorded a growth of 10.23 percent in previous year. With a custom duty of zero percent and value added tax of 5 percent, Vietnam’s production capacity is expected to rise by 12-14 percent and export potential is also forecasted to grow by 15 percent during the period 2016-2020.” And to compete with Bangladesh, Vietnam and other regional competitors like China and India, he suggested that the government of Pakistan should revise its current tariff policy. If the cost of doing business is not decreased and brought at par with other Asian countries, our products would not be able to compete in global markets both in price and quality. “To promote textile industry and economy of Pakistan all the utility charges and levy of taxes should be brought down to the level of our competing nations,” he said.
(Pakistan loses textile export share from 2.2pc to 1.7pc)

Shahid Sattar and Hira Tanveer
“The News International”
April 16, 2018
The rupee plunged over eleven percent against the dollar in the last months. Following this currency devaluation, the impact assessment of the devaluation on different sectors of economy, and whether it will be able to achieve its desired results of boosting the exporting sectors, is currently being debated.
Exporters have welcomed the move with caution, since this will also increase the already surging cost of doing business by increasing the prices of energy, raw materials and transportation. However, for raw material producers, like cotton farmers, the devaluation is God-sent. They will benefit from both the devaluation of currency and the rise in international price of cotton, as payment for domestic cotton is directly linked to internationally prevailing prices.
Textiles, the country’s largest exporting sector, will be impacted by the devaluation by a small increase in export volume as well as by the negative impacts of doing business at an increased cost. In the form of higher energy prices, the Reclassified Liquefied Natural Gas has become unaffordable, whereas the cost of raw materials has also increased. Where the latter accounts for 70 percent of the finished product, the former constitutes almost 15 percent.
For sustainable growth in the textile sector, free availability of quality raw material is required. Being the major raw material in textiles, cotton has gradually deteriorated both in quality and in quantity over the last decade. The government now plans, as reported by several newspapers, to halt cotton imports or impose duties during crop harvest in an effort to ensure farmers get an attractive price and are encouraged to plant more in the next season. However, this appears to be untrue since the country already faces a shortfall of three to four million bales a year to maintain its current production level, let alone meet the increased requirement of rising exports.
According to a report submitted to the cabinet by a special committee on cotton, production has faced virtual stagnation since 1991-92, fluctuating within the range of 10 to 12 million bales. In 2015-16, the output dropped even below 10 million bales – 9.9 million. Pakistan’s annual consumption needs are estimated at 15 million bales, turning the country into a net importer of cotton. If we put a ban on cotton imports or impose import duties our textile sector will starve and any textile production will not remain competitive. Therefore, the industry which has recently shown growth will start declining once again.
Pakistan’s cost of manufacturing is already highest in the region. So if raw material price is further increased by 10 percent, as compared to the global price, there is no chance for the cotton spinning sector to survive. We have already lost one-third of our spinning capacity in the last four years due to a high cost of business. If duties are imposed on cotton imports now, we will likely lose another one-third of our spinning capacity. Pakistan’s industry already gets cotton at a price almost five percent higher than India due to crop shortage. The rate of cotton in India today is around Rs7,200 per bale, compared to Rs7,900 per bale in Pakistan.
Internationally, the price of cotton was around 68 cents per pound at the start of the cotton season. Now it has currently risen to more than 82 cents per pound, and is expected to further increase. There has been a hike in the international cotton prices. A dollar was worth Rs105 during the last cotton season and is equivalent to Rs115 now; it will probably be more than Rs120, at least, during the next season. So phutti (cotton) rates will automatically be much higher the following year.
Cotton prices in Pakistan are fixed in accordance with New York’s prices. So the devaluation of currency will already be getting farmers a much higher price for their cotton. With the devaluation and a higher international price there is certainly no requirement to impose any duty on cotton this season, as the farmers would reap substantially higher financial returns from the cotton crop.
In the early 2000s, when the Argentinian currency lost its value, the agricultural produce became the country’s most precious currency. Grains were considered more reliable and more welcomed than cash because they are priced in dollars. They were traded for new vehicles, homes and watches. Even the Ford Motor Company, General Motors Corporation and Toyota Motors started country-wide sales pitches and taught their employees how to swap vehicles for grains.
Restricting cotton import by imposing duty as a policy response to the declining cotton production is not the solution to the problem. We need imported cotton to meet our consumption and expansion requirements, especially if exports are to grow.
Policymakers should focus on increasing the cotton cultivation area and production, especially as the issue of water scarcity intensifies. Among all Kharif crops, cotton requires the minimum amount of water, hence, special attention should be paid to increase its growing area this season.
If the textile industry stagnates due to paucity of raw materials, cotton farmers will suffer and will have to export raw cotton instead, as in the case of sugar farmers. They will have to sell their produce at prices lower than the domestic price. On the other hand, the textiles export sector will also shrink, creating with an even greater trade deficit, which would be dangerous for the country’s economic security.
(https://www.thenews.com.pk/print/305012-devaluation-benefits)

Shahid Sattar and Hira Tanveer

“The News International” March 14, 2018
In the contemporary world, the only constant is ‘change’. The world is transforming and consumer preferences are changing across a wide range, from food consumption to the standard of living, to travelling and then to clothing.
Simple textiles and clothing have evolved into fashion brands. Everyone has now jumped on the environmental bandwagon. Textile consumer preferences are shifting from cotton-based apparel to synthetic man-made apparel. In the world market, consumption of man-made or synthetic fibres against natural fibres has shifted to a ratio of 70:30, with synthetic fibres having the lions share – a decade ago it was 30:70.
Polyester is now the most dominant man-made fabric across the globe. Its demand surpassed the demand of cotton in 2002, and it has continued to grow ever since at a significantly faster rate than all other types of fabric. Man-made fibres are cheaper, environment-friendly and more durable; their quality does not deteriorate with washing. Technological advances in synthetic material have offered textiles that are softer, hang better and even have better moisture absorbency than cotton.
The demand for man-made fibres such as polyester staple, viscose and tencel is increasing as a substitute for cotton, amid changes in the global fashion trend. But the policy situation remains the opposite in Pakistan; its exports are still primarily cotton-based. Pakistan’s major export destination of textiles and apparel is the US and Europe. The US imports of synthetic apparel overtook cotton-based imports from 36 percent in 2006 to 54 percent in 2016. Pakistan’s share in the total textile and apparel imports of the US in 2016 declined to a mere three percent owing to its narrow export basket which basically comprises natural fibre. This means that if we do not keep up with the new world preferences, our international market share will continue to shrink.
One reason for reliance on cotton based products in Pakistan is that, apart from polyester, nothing is made in Pakistan. We virtually import all synthetic fibres including nylon, viscose etc. Further, when raw materials such as Polyester Staple Fibre (PSF) are imported for the local production of synthetic man-made fibre (MMF) yarn, providing raw material to our spinning industry and helping diversifying our textile exports, the import duty reaches up to 20 percent – 7 percent import duty and 2.9 to 11.5 percent anti-dumping duty.
However, when MMF yarn is imported directly it faces a lower import duty of five percent (under the South Asian Free Trade Agreement) to 10 percent, under chapter 55 for MMF yarns import, resulting in a dichotomy. Resultantly imported PSF (input to our spinning mills) becomes more expensive than international prices. The aforementioned anomaly in regulatory duties is making domestic MMF yarn production uncompetitive, even in their own domestic market. This led to a downfall of 36 percent of domestic MMF yarn production capacity in the last one year alone.
Amidst the ongoing crisis, foreign exchange spent on the import of MMF yarns from Indonesia, China, Thailand and India is around Rs12 to 16 billion. In Pakistan, the domestic production of polyester viscose blended yarns is approximately 165,000 tons per annum. More than 50,000
tons of PSF yarns are imported per annum. This is equivalent to the production of almost 15-20 domestic mills in the business of 100 percent polyester, polyester viscose blended, viscose or polyester yarns and other synthetic fibre-blended yarns spun out of a total of 45-50 mills. These mills provide employment to 100,000 people.
Importers of synthetic blended yarn not only put local industries out of competition but also fully exploit them to sell the product at a cheap rate equivalent to India. On the other side, the value-added export sector imports cheap MMF yarns under the Import Policy Order 2012-15 (SRO 193(1)/2013) which allows import of MMF yarns consisting of pure polyester, polyester viscose and others, with five percent import duty on yarn imported from India. The export sector uses this imported yarn, adds value to it and then exports the product claiming full duty drawbacks, which is patently unjust.
What is hurting the local synthetic fibre manufacturing industry most is the lack of a level playing field, with higher tariff barriers being imposed on the import of raw materials and a minimal duty on import of MMF yarns, leading to the widespread dumping of MMF yarn and fabrics in the country. By imposing 20 percent regulatory duty on $100 million imports of MMF yarn, jobs of 100,000 people employed in our spinning industry can be saved with using the additional revenue of around Rs2 billion in the Federal Board of Revenue’s kitty. The MMF industry, which is backed by sufficient raw materials and a huge global demand, can give a boost to the textiles. It is high time that the government and the industry realised this and captured a bigger share in the growing market for synthetic textiles.
Being high-technology products, man-made and synthetic textile products can attract additional Foreign Direct Investment (FDI) in Pakistan, since the world has moved away from cotton-based textiles. India, Vietnam and Bangladesh have gone way ahead of us in terms of growth. They could do so by following a uniform tax structure and attracting FDI through manmade synthetic textiles.
With the world population growing and requirement for food grains and land available for cultivation mounting, natural fibres will diminish with time. This will in turn lead to reduced supply of natural fibres like cotton; which will increase the price due to a shortage of supply. High price and shortage of supply will further propel people to use more man-made synthetic fibre-based apparel. In Pakistan, cotton cultivated area had reduced to 16.7 percent within a year (from 2015-16 to 2016-17)’ it was substituted by sugar cane and maize. Furthermore, a growing population will need more land to grow more food crops.
Synthetic fibres are here to stay and their demand will only increase over time. Synthetic fibres will find varied usages because of their property to be designed and verified as per a desired use. Pakistan is clearly missing the shift from cotton to man-made fibre apparel and needs to re-examine its position and flawed policies to become conversant in manufacturing MMF-based fabrics in order to maintain, if not improve its share in the world textile trade.
(https://www.thenews.com.pk/print/292023-disappearing-textiles)

Shahid Sattar and Hira Tanveer
“Dawn”
March 05, 2018
PAKISTAN’S exports touched their zenith at $25.05 billion in 2013, but have declined since then to $20bn during the last four years. All major exporting sectors of the country saw this decline, including 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.
(https://www.dawn.com/news/1393230/breaking-the-curse-in-textiles)