Textile sector leading economic recovery
Dr Gohar Ejaz
In recent times, the textile industry has made notable progress and yielded spectacular results, particularly following a sharp rise in investment from industrialists. Further good news is that the industry is well on its way to achieve textile exports of $21 billion for FY22, based on the assumption that government policies will remain supportive of the industry. At this pace, a sustained yearly growth of over 25% is possible. However, the coming year presents a unique set of challenges, particularly in the cotton sector. These challenges are attributed to the uncertainty in the cotton market as well as currency markets. Furthermore, while the global textile market is worth around $800 billion, Pakistan is still a very small player with only about 1.7% market share in 2020, which signifies ample room for expansion and diversification.
The increase in the rate of cotton and resultantly higher prices of cotton yarn may be a cause for concern in the industry. The cotton price in the world market has currently reached over $1 per pound, a high that was last noted way back in 2010-11. When this happened in FY11, downstream industry proposed a quota on exports and regulatory duty on yarn exports, which was not imposed in favor of allowing a free-market mechanism to take precedence.
With raw cotton prices reaching $1 per pound for the second time in the last 100 years, there has again been talk of a regulatory duty to be imposed on yarn exports, but those in favor clearly do not understand the workings and importance of a free market mechanism. The government must continue to abstain from such quotas and regulatory duties as they can have adverse effects and distort market operations. It is not viable to purchase cotton at import substitution from the local market and sell it at 10 percent below export parity price. It is also of critical importance to look after the wellbeing of our farmers, who had been facing massive losses for the last 5 years, and are now finally earning profits. The downstream industry must not be subsidized, as any policy which puts farmers at a disadvantage cannot be supported.
The current environment being conducive to farmers has resulted in an expected 50 percent higher cotton production from last year, amounting to roughly 9 million bales.While Rs. 200 billion was disbursed as crop value to cotton farmers last year, the higher prices and higher expected crop size this year is expected to take the value up to Rs. 600 billion. Farmers will thereby reap the benefits of an additional Rs. 400 billion. Allowing the market to operate freely will leave farmers in an even better position to sow cotton next year, reaping positive results for the first time since the 2010 cycle, and leading to economic growth.
APTMA and all textile industries are to pay international parity prices to domestic farmers, and to stand firmly with them against any segment of the value chain that demands duty as it will negatively impact their profits.The Association is also taking steps to improve the cotton sector’s performance through the APTMA Cotton Foundation (ACF). ACF has taken initiatives to create cotton clusters and centers of excellence, and promote model farming techniques.
The country’s domestic supply of cotton is being fully utilized, with some 84% of our apparel exports coming from cotton. Meanwhile, the rising demand for high-performance apparel such as athletic wear shows that synthetic fiber is a booming market. Competing in this market will require more technological sophistication than producing apparel from traditional fibers. While other textile-led economies in South Asia have diversified their export baskets and increased the proportion of high-value-added products, Pakistan is playing catch-up. It is hoped that new investment continues to come in, which will be instrumental in upgrading the industry’s technology to capture a higher share in the synthetic fiber market.
When it comes to the currency pressure in recent times, we can largely attribute it to the previous unavailability of new investment, which led to deindustrialization. While Pakistan’s Large Scale Manufacturing sector had been witnessing an upturn over the past year, this LSM growth seems to be slowing down once again.
However, when it comes to individual LSM sectors, it is evident that the role of the textile sector is of primary importance, accounting for over 60 percent of all exports. This necessitates consistent support and investment in the sector to achieve economic growth for Pakistan. The textile industry has now invested $5 billion in 100 new units of the value-added sector, gearing up to boost textile exports by a further $5 billion. The industry is on track to achieve the target of $21 billion in textile exports as long as the government continues to ensure the availability of energy at regionally competitive prices, i.e., gas/RLNG at $ 6.5/MMBtu and electricity at 7.5 cents/kwh. A long-term textile policy incorporating regionally competitive energy tariffs would spur investment and take exports to much greater heights.
A large proportion of expansion is already underway, and is considered a direct result of the government’s regionally competitive energy pricing policy. With this evident correlation between energy tariffs and the country’s investments and exports, it cannot be emphasized enough that the continuation of this policy is essential to maintain the momentum gained so far. Pakistan can further improve its competitiveness by upgrading its technology, which is now increasingly possible given the recent growth in the industry and economy. Furthermore, diversification can be enhanced by directing more investment towards technological upgradation, refining the sector’s position in the apparel value chain and redesigning import duty suspension and refund programs for exporters. By maintaining value addition, with a consistent supply of competitive inputs and supportive policy, the textile sector can continue to succeed in its crucial role of spearheading economic growth.