The years have not been kind to Pakistan’s leather industry with production and exports going downhill. Leather product manufacturing continued to slide in the Jul-Feb FY18 period by 7.91 percent while Jul-Feb FY17 was even worse with a plunge of 19.6 percent on a year-on-year basis.
One of the main reasons has been the inability of the local leather industry to comply with increasingly stringent regulations for exports. The Leather Working Group (LWG) is an international multi-stakeholder group which comprises of member brands, retailers, product manufacturers, leather manufacturers, chemical suppliers and technical experts.
In order to get export orders from international buyers, it has now become necessary to become a member of the LWG. According to the group’s website, its objective is to “develop and maintain a protocol which assesses the environmental compliance and performance capabilities of leather manufacturers.” Its members are expected to follow the appropriate environmental business practices meted out by the organization for the leather industry.
According to the State Bank of Pakistan’s (SBP) latest quarterly report there are only three manufacturers in Pakistan which are members of the LWG. This is a depressingly low number especially when compared to India and China which have 88 and 76 manufacturers as part of the LWG, respectively.
The up-gradation of existing water treatments plants to comply with the LWG standards is a capital intensive process and the domestic industry has had a rough ride over the past several years. This has taken a toll on leather companies’ cashflows. The government tried to address the issue by providing a 25 percent matching grant to eight leather manufacturers to upgrade the effluent plants under the Strategic Trade Policy Framework.
However, when Business Recorder talked to Ejaz Ahmed, Chairman of the Pakistan Tannery Association (South Zone), he highlighted that despite running around in bureaucratic circles for the past year and a half, this 25 percent grant was still in the air while the companies have already embarked on up-gradation of their plants. At the same time banks are reluctant to finance investments in the leather sector, given the sector’s declining profitability over the past several years.
According to Ejaz, the fall in international leather prices in the last three to four years has led leather exporters to book large losses on their inventory stockpiles further constraining their ability to make any fresh investments in their businesses. To make matters worse, even incentives provided to the leather industry such as the DLTL scheme are facing delayed processing. No exporter has received any DLTL claim for this fiscal year while before these claims were being processed on a monthly basis.
Understandably then, in circumstances like these it will be tough for more companies to come under the umbrella of the LWG. But this is one of the key areas where work needs to be done by the next government in order to spur the rapidly declining leather exports.