Many of us wonder why the Pakistani rupee is trading at 284 against one USD. A number of reasons are presented for the fast eroded value of the Pakistani rupee. In this writer’s view, however, there is effectively only one obvious reason.
Consider the following: Pakistan’s exports were of USD 25 billion in 2013. These are around USD 30 billion in 2023. Imports were of USD 43 billion in 2013 against USD 70 billion in 2023.
If the exports and imports would have kept the same pacer then the trade deficit would have been around USD 13 to 15 billion per year.
Due to almost stagnant exports ranged between $ 18 and $ 25 billion. Thus if the exports would have kept pace with import’s increase the foreign loans of Pakistan would have been $80 billion to $100 billion less with a foreign exchange rate around Rs. 100 to 120 per USD. We Pakistanis are not known for doing this simple arithmetic.
In comparison, Bangladesh exported $45 billion worth of clothing in 2022 as per “World Trade Statistical Review 2023” released on 31 July. This South Asian country’s was around USD 25 billion in 2013. India’s annual textile exports stood at USD 44.4 billion in FY 2022. In 2013, they were around USD 24 billion.
If we would have followed in the footsteps of our South Asian neighbours our exports would have been around USD 45 billion. In accounting and economic sense the matter is quite clear and there is nothing strange in having an exchange parity of above USD 250 per USD 1.
This is history, now the crucial question is whether or not we can arrest this slide? Three articles by this writer on the likely USD rate in 2024 carried by this newspaper only recently were well received; now this article by him concentrates on the major item of export being textiles business.
In Pakistan the problem is not new. Cotton production is forecast to rebound 36 percent to 5.3 million bales in 2023/24. Pakistan’s highest cotton production was set in 2004/05 with 11.2 million bales.
On the other hand, India is ranked at 2nd place in the world with an estimated production of 34.5 million bales during cotton season 2022-23 i.e. 23.83% of world cotton production of 144.1 million bales (24.51 Million Metric Tonnes).
In 1947, Pakistan’s production was 1.1 million bales whereas India was producing 2.3 million bales of short and medium staple cotton from 4.4 million hectares. Furthermore, in India, a bulk of raw cotton produced is capable of making good quality yarn.
The position is not the same in Pakistan, so to speak. India exports raw cotton to Bangladesh of over $ 4 billion to 5 billion.
Commercial and economic reasons are discussed in the following paragraphs.
There is a need to take into account some critical cultural differences between Pakistan and Bangladesh. Unlike Pakistani businessmen, Bangladeshi businesspeople do not have any substantial investments in real estates in Dubai. Bangladeshi businessmen really feel that the future of the textile sector in their country is quite bright and they are therefore continuously improving the quality and volumes in Bangladesh. In Pakistan, however, there is stagnation. The profits are not equitably reinvested in the value-added sector. Instead, many of our businessmen are now in the real estate business in a big way.
Whether this mind-set will change without any positive outlook is an essential question about Pakistan’s future.
The results are negative at the moment. This is the main reason why we come across so much advertisement for real estate projects and expensive watches in Pakistani newspapers. Not only is it a cultural and social issue, it is also related to economics.
Even with these dismal statistics of the last decades we, as a nation, are not concentrating on the core issue of economic sustenance. In his new series of articles, the author will seek to explain the economic and commercial science of Pakistani exports, especially the textile sector.
The conclusion is not very favourable; however, there has to be a start for a correction with a proper understanding of facts and the mistakes made in the past. For the sake of clarity the same has been shown in a simple diagram as under:
The explanation of the diagram is as under:
Export of yarn to the USA and EU;
Sale of yarn by spinning mills in the Suttar Mandi;
Weaving and finishing mills buying yarn from the yarn markets;
Export of yarn to garment and value-added destination like Bangladesh
Export of cloth from un-organised sector to value-added destination like Bangladesh;
Sale of yarn to jurisdictions for transhipment. Prone to transfer pricing;
Sale of finished cloth for trans-shipment. Prone to transfer pricing;
Export of cloth to value-added jurisdiction from organised sector;
Export of cloth to value-added jurisdiction from unorganised sector;
Export of garments and value-added products;
Trans-shipment from conduit entity to the USA or EU;
Receipt of funds from exports;
Sale of yarn in unorganised market;
Sale of cloth in unorganised market;
Local wholesale trade;
Local whole trade finished goods;
Sale of yarn to weaving sector-organised;
Sale of cloth by weaving to garment-organised.
An understanding of the aforesaid diagram explains the whole science of economics of the textile industry in Pakistan. It is accepted that the same is complicated but it may be the simplest in this form.
What we do in textile industry?
The government of Pakistan in its report dated January 2023 namely “ANNUAL ANALYTICAL REPORT ON EXTERNAL TRADE STATISTICS OF PAKISTAN FY2021-22” states as under:
Textiles and apparel sector is the leading exports of Pakistan. Exports of textile manufacturers, which accounts for 60.82% in total exports witnessed an increase of 25.5% during FY2022 in comparison to a growth of 22.9% of last year.
The exports of intermediate commodities like cotton yarn witnessed an increase in value by 18.7%, while the quantity witnessed a decline of 13.9%. Cotton cloth export increased both in quantity and value by 4.0% and 26.9%, respectively during FY 2022.
The position in 2023 has worsened as the value of textile and garment exports from Pakistan decreased by 14.63 per cent in fiscal 2022-23 (July-June). During this period, Pakistan earned $16.501 billion from textile and apparel exports, compared to $19.329 billion in the same period of 2021-22.
Pakistan’s exports in 2023 were of around USD 26 billion. In that year the Bureau of Statistics made the following remarks about textile exports from Pakistan:
Main buyers of cotton fabrics during July, 2013 of the current financial year were China (Rs. 4,385.79million), Bangladesh (Rs. 3,617.58million), Turkey (Rs. 1,274.63million), USA. (Rs. 877.50 million), Germany (Rs.776.03 million), Italy (Rs. 774.27 million), Sri Lanka (Rs. 721.40 million), Korea Rep. of (Rs. 692.23 million), Egypt (UAR) (Rs. 639.74 million) and Russian Federation (Rs. 626.93 million). Their total take-off accounted for 62.17% of total exports of cotton cloth as compared to their combined share of 60.60% during the same period of last year.
Fabric exports to China and Bangladesh ring a bell. We are left in non-value added places and real profits are being made by these locations which have developed a really competitive value-added industry. In the author’s view, the issue now is not only the cost but the quality of industries that have been established in those jurisdictions. This leads to the issue of real value addition.
Is there any real net value Addition?
Despite being a large producer of cotton with a substantial textile industry Pakistan is also an importer of textile products. The same report states asunder:
Textile group that has 6.85% share in overall import showed a noticeable increase of 23.8% during FY2022 and clocked at US$ 4,785.90 million as compared to US$ 3,866.1 million in FY 2021.
Within this group, raw cotton which has highest share of 38.2%, displayed an increase of 23.6% in value but a decrease of 8.9% in quantity during FY2022 as compared to FY2021 and reached US$ 1,828.46 million while it was stood at US$ 1,479.69 million in FY 2021. Plunged cotton production and rising demand for high value-added textile products of Pakistan in international markets, compelled the producers to import a significant amount of cotton thereby increasing the import bill. Other items in this group i.e., synthetic fibre, synthetic & artificial silk yarn and worn clothing also posted an increase of 18.1%, 34.0% and 40.0% respectively during FY2022 compared with FY2021 due to sharp rise in global prices.
This means that effective net exports are only of around USD 15 billion only. In the present circumstances a question will surely arise whether or not there is any justification for providing direct and indirect support to the textile industry when its contributions to taxes and exports are not economically justified. This is obviously not the option; however, some independent analysts may question why there is a need for so much spinning and weaving when ultimate products are not exportable at a value-added price. This is a very serious and a relevant question. How the markets are operated is explained in the following paragraphs:
Two markets: Only to get input tax or refunds
There are two textile markets in Pakistan: organised and unorganised. Spinning is a process that cannot be undertaken in the unorganised sector; therefore, all spinning mills are in the system. The product of the spinning industry, being yarn, is sold / used in the weaving and finishing sector, which, in a very large proportion, is represented by the unorganised sector. Thus there are three broad uses of the yarn produced.
One part goes to the yarn market called ‘Suttar Mandi’ Faisalabad which is almost wholly unorganised. The yarn going to the unorganised yarn market is around 60 percent of total production.
The second part goes to the organised weaving and finishing sector. The third use is the export of yarn. Export of yarn is effectively a ‘less remunerative’ business as margins due to low value-addition.
Furthermore, Pakistan, on account of low quality of raw cotton is not able to produce high quality yarn. Yarn production is subject to sales tax at the rate of 15 percent that cannot be avoided by the mills. The mess is created by the undesired urge of the businessmen to claim such sales tax back from the government either by way of input tax or refund.
This is the biggest issue in Pakistan’s indirect tax system. The term is known as ‘flying invoices’, which has been explained in the following paragraph.
Since yarn is an organised sector therefore it is subject to sales tax. When it goes to Suttar Mandi, it is out of system. In this situation, there is no possibility of refund of sales tax paid on yarn or claim as input tax.
Our businessmen based in Suttar Mandi do not want to come under the system and at the same time they want the refund of the sales tax paid on the yarn at the spinning stage. This leads to give birth to ‘Flying Invoices’ system.
This means that yarn sold in the yarn market is shown as being used in export sales or organised weaving and finishing. The swap is quite common. Under that swap sale is made to ‘A’ whereas the actual buyer is ‘B’. The latter is the person who can use that invoice for input tax or refund.
Unorganised textile markets
The entire chain of textile business from Suttar Mandi to sale of finished goods is effectively out of the taxation and documented system. There is no record of sales by the yarn dealers and the wholesale and retail trade of textile be it in Lahore, Faisalabad or Karachi.
Whenever there is a crackdown against wholesalers and retailers the main finances for the agitation are arranged by these people. There is a ‘mafia’ type attitude in the system.
The enormity of the problem can be gauged from the fact that there is a huge market for ‘ladies summer wear’ in the country. Except for a few, a large part of input of that industry comes from the unorganised market. It is generally an investment joint venture between a textile processing person, an advertiser and a designer. The profits generally remain out of books.
Estimation of total local textile business in Pakistan
There cannot be exact calculation for the total local unorganised and organised textile business in Pakistan; however an ad-hoc and conservative estimation has been made as under:
Segment of Total Average expenditure Total expenditure
populatioAnnual on textiles.Clothings
and all other usages.
120,000,000 Rs 2000 per year 240,000,000,000
100,000,000 Rs 15,000 per year 1,500,000,000,000
10,000,000 Rs 100,000 per year 1,000,000,000,000
10,000,000 Rs 250,000 year 2,500,000,000,000
240,000,000 21,000 5,240,000,000,000
Rs 5240 billion
There is a sales tax at the rate of 15 percent; therefore, local textile should contribute around 750 billion. The income tax on the same should be around Rs 500 billion if profit is taken at 33 percent and tax at the rate of 30 percent. Actual collection is substantially lower.
(To be continued)
Copyright Business Recorder, 2023