“Exporters must also be given RDA level profit rates on dollar repatriation”.
Mohammed Zaki Bashir joined Gul Ahmed Textile Mills Limited in 2005 and subsequently joined its Board in 2008. He is currently the company Chief Executive. He holds a graduate degree from Regents Business School, UK, in the subject of International Business and is also a certified director from the Pakistan Institute of Corporate Governance (PICG).
Zaki Bashir is a member of Executive Committee of All Pakistan Textile Mills Association (APTMA), and a member of the Entrepreneurs Organization since 2014. He is also a board member of several family/group concerns, such as Arwen Tech International Limited (FZC) – UAE; Gul Ahmed Power Company (Private) Limited; Gul Ahmed International Limited (FZC) – UAE; GTM (Europe) Limited – UK; GTM USA Corp. – USA; Ideas (Private) Limited; Gul Ahmed Holdings (Private) Limited; and Worldwide Developers (Private) Limited.
BR Research spoke to Zaki in his capacity both as CEO of one of the largest textile composite units in the country, as well as an industry insider, to understand the challenges of textile value chain, forecast of future exports, concerns regarding government policies, and expectations from a fast-changing global trade geopolitics. Following are the edited excerpts of the conversation:
BR Research: Pakistan’s textile exports have shown substantial resurgence over the past 8 months. Going ahead, do you expect the momentum to continue?
Zaki Bashir: Pakistan has tremendous export potential as our textile houses are now very well recognized globally. Moreover, the global geopolitical situation with respect to the US-China trade war has allowed space for penetration in the North American export destinations. Similarly, the existing GSP+ arrangement with EU so far stands. Having said that, a lot depends on Pakistan’s foreign policy direction and the way we conduct ourselves and whether we react to situations or take initiatives to improve Pakistan’s market share.
BRR: Could you expand more how Pakistan’s textile exports stands to gain from US China trade war?
ZB: On a geostrategic level, the policy thinktanks of United States have realized that they need to reduce their skewed dependence on anyone trading partner, and instead have a more balanced trading relationship across emerging market economies. This means that US hopes to avoid skewed trade deficits/surpluses with any partner.
Over the past three decades, US import dependence had allowed China’s industrial base to outpace rest of the world in its growth trajectory. It is now well established that China maintained a deliberately weaker currency using it as a tool to develop itself as an export powerhouse.
Developed economies have now come to a consensus that this can no longer be allowed to continue if they are to rekindle economic growth in home markets. Within the US, a policy shift was witnessed not only under the last administration but has also continued under the new Democrat regime.
This means all other exporting economies in the emerging markets can benefit from this shift. Pakistan stands a greater chance compared to others due to its small exporting base. We believe that South Asia will be given a greater share in this upcoming opportunity. Already, we have seen a massive shift in buying to this region over the past year.
BRR: Do you believe that the right policy shift has taken place in Islamabad to ensure that Pakistan achieves export led economic growth?
ZB: Pakistan needs to ensure that it has good policies for medium to long term. These include policies across sectors such as energy, textile exports, and agriculture. And we must ensure that these measures are interlinked and are provided quicky. Similarly, we must also revisit our anti export tax regime. For example, successful exporting economies such as Bangladesh and Vietnam do not have turnover taxes; yet, Pakistan still insists on retaining this anti-export anachronism, despite its obvious harmful effects.
So far, the pace in policy formulation has been slow and spasmodic, even as the government has demonstrated seriousness of intent. The fact that housing finance policy schemes have taken a precedence over export policy is a reflection on government’s priorities.
One example of shifting policy focus is successful launch of Roshan Digital Account. However, we must ask if these incentives are offered to expats why have similar incentives not been extended to promote the industrial and exporting base of the country?
Given RDA’s success in bringing in dollars, we advise that similar incentives and rates of returns be offered to exporters, which may help build forex reserves manifold. It may be worth emphasizing that deposits by expats into RDA can flow out any time, just like hot money. Same will not be the case for dollars received against exports.
Understandably, it may not be possible to offer these returns on all existing exports, but in order to achieve long term growth of exports and their diversification, RDA-like incentives should be offered at least to export by new sectors or to new markets.
BRR: The central bank claims that the exchange rate policy is now finally market based. Has exchange rate stability not helped improve exports in recent months?
ZB: Sporadic movements in exchange rate either way are detrimental for all businesses. These increase volatility and hurt the ability of exporters to develop forecasts. It must be emphasized that the industry sells export orders six months in advance; thus, adverse exchange rate movement at the time of export receipts realization hurts competitiveness of future sales.
According to our research, the Real Effective Exchange Rate (REER) has once against crossed 100, indicating exchange rate policy inconsistency. Pakistan has had an anti-export bias under past regimes, where over $8 - $12 billion were spent to ensure an overvalued rupee. Had that not been the case, the export base would have been at least 20 percent larger today. We fear the return of the same as the government tries to fight off inflationary pressures and goes into consumption led growth mode before next elections.
As an exporter, we believe that REER must remain around 97 – 98. At this range, not only are exporters most comfortable, but government is also able to meet its debt repayments easily.
BRR: How do you view the recent liberalization of foreign exchange regulations allowing local companies to acquire and invest in companies abroad?
ZB: I would like to commend the SBP and Governor Reza Baqir for their leadership in steering the country out of a currency crisis. SBP under the governor has been very creative in coming with new initiatives to encourage export led industrialization. We believe that these initiatives will yield results in two to three years.
For example, after the recent liberalization of Foreign Exchange Regulations by SBP, GATM has signed NDAs with several international brands and is exploring plans to acquire several reputable brands. The timely decision by SBP to allow exporting companies to make investment in foreign markets will allow us to build on this strategy and integrate ourselves in those markets, distribution channels, and global value chains.
BRR: Within textile value add exports, which sub-segments do you believe boast most growth potential?
ZB: Garments and home textiles will both grow, but health and hygiene may become a new growth area within exports. The primary driver for future growth will be the LTFF and TERF schemes, which have allowed sizable investments in expansion.
BRR: Do you believe that the massive fall in cotton output poses a serious risk to textile export thesis?
ZB: Of course, there are several long-standing issues such as the cotton crop which has shrunk to half in recent years. Pakistan needs to engage the right seed technology companies. But hope is not lost; cotton can once again become a formidable crop if the government urgently rectifies its agricultural policies.
Gul Ahmed has pioneered the adoption of Better Cotton Initiative in the country, together with IKEA and WWF. Today, GATM is the largest supplier to IKEA out of Pakistan, and among its top three textile suppliers globally.
BRR: There are indications that the fall in reported cotton output is exaggerated due to incidence of increased under reporting of ginning output, ever since the imposition of GST?
ZB: Sudden changes in indirect tax regimes usually have adverse consequences as it encourages the organized sector to take advantage. Although no data is available to establish to what extent or quantum under reporting of ginning output is taking place, it stands to reason that overnight imposition of GST over cotton ginning encourages under reporting across the supply chain. We believe that the GST is currently too high, and must be brought under single digit, especially since much of it is refunded anyway.
BRR: What is the segment wise composition and contribution of exports and local sales?
ZB: A large degree of overlap exists between our exports and local product offerings within the home textile segment. In contrast, exports and local product offerings vastly differ within the apparel category. Local sales are dominated by our ethnic tastes for kurta/kurti shalwar, lawn fabrics, and chairman latha; whereas export apparel composition is completely different.
BRR: Is it possible for Pakistan to substitute its falling cotton-based yarn output with man-made fibres?
ZB: Over 65 percent of global textile trade consists of man-made fibre blends. Thus, Pakistan needs to make sizable investments in this area by developing MMF-based product value chain. To some extent, MMF growth has lagged due to indifference shown by both government as well as by the industry.
Within GATM, MMF and its blends now constitute up to 20 percent of total sales for the company, and we project this may go up to 40 percent in the next five years.
BRR: Is man-made fibre only consumed as a cheaper substitute to cotton in production of blended fibres? Or does it also have a growing demand of its own?
ZB: Broadly speaking, man-made fibres can be classified into two categories. First is the lower end polyester chain, which allows spinners to reduce price of their product. However, global fashion apparel brands are fast skewing towards another type of MMFs.
These are value-added MMFs which include highly functional polyesters that employ various spinning technologies to make the fabric more breathable or has wicking properties. Other value-add MMFs include tensile fibre, or bamboo (which removes odour). Demands for these come from top global sportswear brands such as Nike, Puma, Adidas for the manufacture of their high functionality shirts, socks, and even trackpants etc.
BRR: Do you believe Pakistan’s demand for imported cotton has increased substantially in recent years due to non-availability of long staple cotton?
ZB: GATM imports cotton both from USA as well as from other regions such as South America, West Africa, and Australia. Long staple cotton, mainly from US, is imported to produce finer count textiles such as domestic fabrics.
Of course, cotton import from India is not taking place right now due to geopolitical reasons. However, India produces long staple cotton which is far cheaper than in other parts of the world. We must remember that because of similar soil and climatic conditions, most cotton varieties across the border can also be successfully grown here.
However, due to policy inaction and lack of investment into R&D, Pakistan does not have indigenous production of long staple varieties. As a result, Pakistan loses by a considerable amount in its ability to achieve raw material cost minimization.
Nevertheless, several domestic textile players have been able to circumvent such bottlenecks with various degrees of success. Some spinning units have demonstrated reasonable success in reading the global long staple market by importing at opportunistic time to take full advantage of international prices, although those are rare.
BRR: As a composite textile unit, does GATM oppose APTMA’s lobbying against raw material imports from India?
ZB: The policymakers must take into account the geopolitical situation and make decisions based on national interest, and not just the economic interest of one particular segment of the economy. However, in principle, if trade with India is liberalized, it must take place across all product categories and not just one or two commodities.
For example, if cotton is allowed, so should be yarn, as well as other product categories. Otherwise, domestic players will lose out on even playing field, as the gains from cross border trade will pass on to only one sub-sector and create problems later. Therefore, we must study this carefully, and avoid any ad hoc decisions. Going forward, GATM is optimistic of trade liberalization based on recent diplomatic developments.
BRR: Let’s talk about your company’s recent financial success. How is the ongoing fiscal year looking so far?
ZB: Over the past five years, Gul Ahmed Textile’s has doubled its topline, on the back of phenomenal growth in both local sales as well as exports. In 9MFY21, GATM’s exports have grown by 38 percent; we hope to close the full year near $280 million exports. Together with strong local sales performance, overall topline shall clock in around Rs 85 billion, making GATM the largest composite textile unit of the country.In terms of topline composition, 50 percent are direct exports; local B2B sales constitute 25 percent, while the remainder comes from Ideas, our hugely successful textile retail chain.
BRR: Ideas has become the premier local retail fashion brand. What are your plans for the retail market going forward?
ZB: Over the past two decades, GATM has successfully repositioned itself in the local market as Pakistan’s leading retail fashion brand, which now has over 110+ outlets nationwide. The retail division boasts approximately Rs 20 billion in annual standalone sales. In fact, the management plans to spin off Ideas as a fully owned subsidiary, with eventual plans for its listing on the stock exchange.
Similarly, Ideas also has a growing e-commerce presence. Retail sales from e-commerce platform constitutes Rs 5 billion in annual sales (of the total retail division topline), making it one of the largest online e-commerce presences within textiles from Pakistan. The management is also considering forming a subsidiary by the name of Ideas tech, to fully leverage the recently announced incentives by GoP for technology companies. Gul Ahmed’s Vision 2025 forecasts increasing company sales to Rs 165 – Rs 170 billion within next four to five years.