Fool’s paradise?

According to figures from SBP, half of incremental Rs 146 billion LT loans disbursed under LTFF/TERF schemes have been extended to textile manufacturers (over last 12 months). These include industries in spinning, weaving, and fabric finishing segments, which have historically formed the bulk of Pakistan’s textile exports. As Pakistan gears for export led growth over the next 2 years, it seems it has once again placed the proverbial eggs in the textile basket. But does it have the raw material to get to $10 billion incremental exports by next year?

Much has been made of Pakistan poaching orders from other value-add competitors during last year, when GoP lifted lockdown early even as lockdowns persisted elsewhere. Timely capacity expansions and energy pricing have been lauded as initiatives that will enable local exporters maintain regional competitiveness as industries in Bangladesh, India, and Viet Nam come fully back online. But with domestic cotton output set to record a new low, can the exporting sector survive on imported raw material alone?

For at least past two years, Pakistan now features among top 5 importers of cotton and cotton-based raw material/intermediate goods, which feed into manufacturing of high value add products such as apparel, readymade garments, and home textiles. According to UN Comtrade data, in 2019, world imports of cotton and cotton-based products (HS Code 52) – which includes raw cotton, cotton yarn, and cotton fabrics – stood at $55 billion, of which Pakistan’s total share stood at nearly $1Bn. In contrast, China, Bangladesh, and Viet Nam accounted for bulk of global cotton-based imports, with China $9.2 billion; Bangladesh, $6.5 billion, and Viet Nam $4.4 billion.

Unlike Pakistan – which until last year met half of its cotton requirement through domestic production – Bangladesh and Viet Nam have virtually nil cotton production. Yet, together with China, the three countries account for 45 percent of total $450 billion global apparel exports (HS Codes: 61 and 62), the holy grail of textile value-addition ladder. Uninterrupted access to imported raw material appears to have had a multiplier effect on Bangladeshi and Vietnamese value-added exports.

Except, replicating the Bangladesh model may not be as simple as it seems. Because these regional competitors are concentrated in apparel manufacturing, over half of raw material imports for (each of) Bangladesh, China, and Viet Nam consist of either cotton yarn or fabric; in fact for Bangladesh and China, yarn or fabric account for as much as two-thirds of cotton-based imports (HS code 52). For Pakistan, the share stands at puny 15 percent, as most of the imports are concentrated in HS Code 5201 – ‘raw cotton, neither carded nor combed’ sub-tariff line. As domestic cotton production continues its downward spiral, can Pakistan afford to diversify its raw material import base to cotton yarn and fabric?

The answer may not be very straight forward. As disbursement of TERF-based loans (thus far) indicates, future capacity expansion in the textile manufacturing base is planned in the low-value add spinning, weaving, and finishing segments. Compared to Rs 72 billion incremental refinanced LT debt extended to these segments, LTFF/TERF incremental disbursements to apparel manufacturers stands at just Rs 8.5 billion thus far. In absence of raw material, Pakistan’s yarn and woven fabric manufacturers may struggle to weather competition from giants such as China and India, that together control over 50 percent of global yarn & fabric exports, and have access to (largely) indigenous raw cotton production.

Although this may say something about the wisdom of a textile export policy that continues to add capacity in low-value add segments, that comment is for another day. Like it or not, Pakistan is gearing up for a large expansion in its spinning, weaving, and finishing capacity. Is it so far-fetched that Pakistan’s yarn and fabric manufacturers can survive – nay thrive – on imported raw cotton?

But Pakistan faces an additional problem. Consider that nearly 73 percent of Pakistan’s cotton-based raw material imports arrive through long distance ocean freight, of which 58 percent originate from the Americas (which include USA, Brazil, Mexico, and Argentina). In sharp contrast, China and Bangladesh – and to a lesser extent Viet Nam – procure bulk of the cotton-based raw material from within home region, while over 55 percent imports (40 percent for Viet Nam) originate from neighbouring countries. Although Pakistan shares borders with two of the world’s largest cotton producers – China and India – which together account for half of global cotton output, its cotton imports from these regions have come to naught in recent years.

Some clarification, however, is necessary. China may very well be world’s top cotton producer, it is also the largest buyer around due to its enormous yarn and fabric manufacturing base. However, the other belligerent neighbour is world’s third largest raw cotton exporter, and a very willing seller. In fact, China Bangladesh and Vietnam are its top three favourite customers, accounting for nearly half of Indian exports under HS code 52. But for (commonly known) reasons beyond the scope of this column, Pakistan has divorced itself from this regional textile value chain, while simultaneously daydreaming about global value chains (GVCs).

Nevertheless, since economic motives alone do not dictate state policy, this column will refrain itself from offering a value judgement. As things stand, Pakistan’s textile base has decided to go long on spinning and weaving, categories in which China and India are leading powerhouses with over 50 percent share in global yarn and fabric exports. With planned capacity expansions intended to come online over next 12 months, a fool might argue that Pakistan has decided to take on China and India head on, without comparable raw material base. Good luck!