The currency has depreciated over 30 percent in last 12 months but textile exports grew by a mere 6 percent during Nov17-Oct18 over the same period last year. This implies that currency adjustment alone is not sufficient to boost exports.
Pakistan textile exports grew by 85 percent from $5.8 billion to $10.8 billion during FY02-07 at a time when currency and cotton prices were sticky. Since then, there has been no significant growth in textile exports during the last decade, despite the fact that the value of dollar has more than doubled against the rupee during the same period. FY11 was the only exception when textile exports jumped by 34 percent due to over 100 percent increase in cotton prices during that year.
Turning around stunted growth in textile exports requires more than just currency depreciation Yes, there are advantages of recent currency adjustments; but given the capacity constraints of value added sectors, growth may remain restricted to 5-10 percent this year.
In order to go beyond, textile industry needs to significantly increase its capacity as it happened during 2002-06. No significant sector wide expansion has been recorded in the industry during the last decade which could have led to a exportable surplus. It appears that stars have aligned for significant expansion in textile over coming periods: government has set the price for gas at 6.5 cents per unit and electricity at 7.5 cents per unit, is providing long term financing at attractive rates, and is seemingly committed to flexible exchange rate. These factors are making players to seriously consider massive expansions. It takes a year or two for the industry to expand and for that process to kick start more clarity is needed in implementation, and a few more incentives are warranted.
For example, the government has to do away with 0.25 percent tax for export development fund which is wasted in TDAP and other such nuisances, and refunds of exporters need to be cleared sooner or later. Anyhow, the direction is right.
Another major impediment is the falling cotton production in the country. Back in FY05, cotton production peaked at 14.3 million bales which was aligned with industry expansion. Cotton production has been downhill since; averaging at 12.7 million bales per year during FY06-15, before further spiraling downward to average annual production of 10.8 million bales by FY16-18.
One reason for recent dip is the shift of cotton production area to sugarcane which is due to undue incentives for sugarcane production in the form of support price mechanism. Per hectare yield has also deteriorated substantially over the same period. For context, yield in Indian Punjab is around 50 percent higher than Pakistani Punjab, even though domestic yield was not far behind as recent as in FY12.
The major problem is in cotton seed research which is poor in Pakistan. Three big textile players (Nishat, Sapphire and Fatima) have formed a cotton seed company (Safina) to resolve the problem. Such interventions can resolve the problem of germination and purification of seeds; but without stewardship of a global player such as Bayer (ex Monsanto), resistance against pesticides and other harming elements cannot be developed. India, Brazil, US and many other economies have done it; it is time for Pakistan to move towards GMOs in cotton production.
Cotton production is important as increasing reliance on imported cotton does not only strain current account deficit but also renders the exports uncompetitive relative to India and others. Imported cotton adds additional 10 percent logistics charge to cost of production. Value chain price of garments is same for buyers but cost of production increases due to higher input price.
With currency adjustment, minimum wage is becoming competitive too. Until recently, Pakistan labour wage was around $145 per month which was similar to India ($150) and little lower than Vietnam ($150-175) but was almost double than Bangladesh ($70). Now with 34 percent currency adjustment, labour cost has fallen to $110-115, while the internal pressure in Bangladesh is pushing the wages close $100 per month.
Given the incentives for fabric, bed sheets, knitwear and towels, it makes sense for value added textile sectors to go for expansion, Market pulse confirms this view, as major players appear to be in advanced planning stage of expansion.
The problem is in garments which is a big market to tap. There are one or two players at the competitive curve in Punjab, but none in Karachi. The low hanging fruit is to incentivize garment industry in Pakistan. The labour lacks the skill set and our productivity is far behind even Bangladesh. Garment players require sustainable support - not like cash support for six months.
One option is to create a garment city in Punjab - be it Multan, Faisalabad or Lahore. But one that has all the facilities including housing for workers (aligned with PM's low-cost housing passion), skill development by one of the three Punjab institutes in this area, and custom office at site to reduce the friction in importing raw material for exporting goods. The other option is to incentivize existing players to expand where they are already present.
The math is simple - if 25 new garment factories are added by existing players, each can add $50 million of exports with 2,500 jobs per factory while the cost of setting up is just $10 million per factory. This can create sustainable exports of $1.25 billion per year - 50 percent increase from existing $2.5 billion exports in FY18.
Similar is the story of other value-added sectors, as they will expand too if long term financing, flexible exchange rate, and affordable energy prices policies continue. The problem in Pakistan is scale. Pakistan has niche buyers, but mass-market stores such as Walmart, Target and the likes do not come to Pakistan as there are too few garments or other value-added factories in Pakistan.
This will change the narrative of Pakistani exporters amongst buyers. The industrial exports growth does not happen in short term, it requires strategic decision of buyers which is a gradual process and needs commitment both from government and exporters.
Meanwhile, Pakistan should also look for market access in regions other than US and Europe. Pakistan should look at China, Japan, South Africa and other economies for exports. Pakistan needs bilateral agreements for market access, but not FTAs as history suggests these have adverse impact on imports. For example, Pakistan imports 90 percent of Kenyan tea, but exports nothing back in return.
Another market is retail textile exports - Pakistani brands in lawn and other products are exporting to various destinations through Kyapia; as exporting destinations have imposed import duties on retail products from Pakistan.
Lady luck can work in our favour for yarn and fabric- our exports are part of global production chain. China adds value to imported yarn to export to western markets, primarily the US. With the truce between China and the US in Argentina, tariff war between the two giants may end. And to expand the low value-added market, FTA2.0 with China is critical – Pakistan’s yarn exports to China have 3.5 percent duty versus no duty for Vietnam. If Pakistan gets the same treatment, yarn exports to China can increase by 50 percent in no time. Note that unlike garments, there is no capacity bottleneck in yarn as around 100 mills are closed and they can become operative in months, if not weeks.
In a nutshell, if the policies are played right, Pakistan textile exports can grow by 50-70 percent in 3-4 years to cross $20 billion. Fingers crossed.