Policy measures for enhancing textile exports
Shahid Sattar and Madiha Nisar
March 20, 2019
Pakistan’s poor trade performance in the last decade is an outcome of diminishing export competitiveness and imprudent national policies. Pakistan has had two textile policies, first fiveyear textile policy was developed in 2009 and second one came in 2014. Both policies were comprehensive on paper but these failed due to non-implementation and technical shortfalls. The appraisal of last policy and its achievements depicts a 5 percent level of implementation.
Nevertheless, incumbent government’s commitment to implement export-led growth policy incentivizing the exporting industry is heartening and will provide impetus to country’s exports. Initiatives such as regionally competitive electricity and gas prices for exporting industry and rationalizing import duties on raw materials to reduce cost of doing business will help certainly render our exports more competitive in the world. However, to sustain increasing exports, huge investments in balancing, modernizing and expansion are required.
The government’s determination to reduce cost of doing business, textile sector is willing to invest in its manufacturing infrastructure and upgrade production units with a view to enhancing exports. However, there are some corrective policy measures recommended, which if implemented, can further facilitate exporting industry which is envisioned to increase textile exports from $13.53 billion (FY2017-18) to annually $29.15 billion (FY2023-24) with an additional accumulative investment of $9.30 billion. Some of proposed policy measures are:
Increase domestic cotton production: Decrease in cotton acreage, per hectare yield and imprudent government policies have taken a heavy toll on cotton production. According to figures released by the Pakistan Cotton Ginners Association, Pakistan’s cotton production up to March 3 fell by 6.8 percent. To protect the cotton industry from further downfall, concrete policies are needed. The cost of cotton inputs should be reduced and new version of Bt technology seeds should be provided to farmers. Efforts should also be made to explore the feasibility of cotton production in newly available arable areas, e.g., in Balochistan and KPK. Encroachment of crops in cotton growing areas shall be curtailed through adoption of appropriate policy changes in sugarcane pricing and cropping patterns.
Transfer of administrative control of PCCC to textile ministry: The administrative control of Pakistan Central Cotton Committee (PCCC) should be transferred back from Ministry of National Food Security and Research (MNFS&R) to Ministry of Textiles and management to the textile industry to implement pro-cotton policies more successfully as MNFS&R has failed to arrest a sharp decline in cotton production so far.
Removal of irrational customs duties: For the success of any export-led industry, local availability of basic raw material is considered as an added advantage being a key factor in reducing cost of doing business. But unfortunately, over the last five years, our cotton production has decreased from 13.86 million bales to 10.8 million bales creating a supply deficit of 3.7 million bales which is to be filled through cotton imports. It is encouraging that government has taken initiatives like rationalizing import duties on raw materials in an effort to reduce cost of doing business. But the abolition of cotton duty should not be confined January to July only, it should be available 12 months a year to fulfil excess demand of cotton.
On the other hand, we also need to reform our product mix within our industry to compete with the world. A decade back, share of cotton products in the world market was more than 70 percent and
Pakistan had its name internationally. Now world trade has started moving away from cotton products, preferences have shifted to manmade fibres (MMF) and yarns globally due to their affordability and durability, whereas Pakistan’s export mix has stayed the same leaving us out of the arena. We are still stuck in old cotton strategy whereas basic raw material for synthetic textiles is burdened with up to 20 percent regulatory duties. Such irrational duties should immediately be removed to facilitate largest exporting sector.
Payment of refunds: The working capital of the textile sector remains blocked due to delays in sales tax refunds, customs duty drawback and income tax refunds. All pending refunds should be lodged and paid within a reasonable time to provide much-needed liquidity for the expansion of the export base and investment and modernization of the industry. The amount of pending refunds are shown in the table.
=================================================== Schemes Pending refunds (in Million Rupees) =================================================== Sales Tax (Current) 44 Sale Tax (on account of defe 22 Custom Duty Drawback 10 PM Package 30 No DLTL refund made for 2017-18 Textile Policy 2014-19 3 Textile Policy 2009-14 31 Total 140 ===================================================
Expansion of DTRE and other export scheme for indirect exporters: The duty and tax remission scheme (DTRE); a government’s temporary importation scheme, which allows traders to import duty-free goods only if they re-export them needs revision and expansion. This scheme should be expanded to indirect exporters too which will result in surplus raw materials available to direct exporters and will foster exponential growth in manufacturing sector.
Expansion of LTFF: The long-term financing facility (LTFF) scheme enables borrowers to avail loans to build their infrastructure or business channels. It is time that the LTFF scheme is expanded to the entire value chain of the textile sector to enable a wholesome expansion of the industry for sustained export growth. Further, the maximum company limit of Rs 1.5 billion should be increased to Rs 3 billion and State Bank of Pakistan’s overall limit should be enhanced to Rs 300 billion to create a borrowing space.
DLTL on value-added: In order to fully develop the value chain in the domestic market, all future DLTL schemes may only be applicable on the value-added products in Pakistan. Further, the DLTL rates may be designed to favour end products. Imbedded in the cost of doing business the possible rates could be as per table.
======================================================================= Proposed Duty Drawback Rates ======================================================================= 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 Fabiric 5% 4% 3% 2% 1% Made Ups 6% 7% 8% 9% 10%
Garments 7% 8% 9% 10% 11% =======================================================================
Exemption from turnover tax: The regressive tax of 1.25% on export items acts as a disincentive for exporting industry so exporting industry should be exempted from any such tax.
To remain competitive in the international market, necessary support is obligatory to attract further investment in new machinery and technology as compared to the incentives given by our competitors such as Vietnam, china, India and Bangladesh. Investors are also reluctant to invest due to huge burden of taxes, regulatory procedures and unsustainable policies.
We hope that these proposed corrective policy measures, aimed at increasing exports and textile production will be adopted by the government so that Pakistan’s exports can once again proudly lead the country to prosperity and economic sustainability.