Consolidation of the textile industry necessary to meet the challenges of global competition

Pakistan textile industry failed to compete in international market despite availability of cotton locally, also because of high cost of production, especially as the industry does not get power to run the plants, rising utility costs and other inputs and poor law and order situation. Besides the economical and political factors attributable to the failure of textile sector to increase its share in the world textile trade, its corporate structure also shares the blame. Exporters have predicted further decline in shares of textile sector in overall export of the country if the present state of affairs continue to persist in the coming days.

Country’s textile sector is struggling hard since the last fiscal year to compete in the international markets, where its regional competitors are shown significant growth in export since the abolition of quota regime. During July’07-March’08 period , textile exports also missed their targets for the said period while the export of other products not only registered growth but also achieved the targets set for the period.  The second quarterly State Bank of Pakistan (SBP) report said fall in the textile exports was attributed to both supply and demand factors. On the supply side, textile exports were adversely affected by the rising cost of production due to increase in domestic cotton prices and tariff rates, as well as by the frequent power shortages and political unrest. On the demand side, textile and apparel product exports appeared to have suffered from the slowdown in the global economy.

The SBP further said that poor cotton harvest and the resultant growth in cotton prices appeared to be the most critical factor in deteriorating competitiveness of domestic textile. The decline in the textile exports was broad based with only the exports of synthetic textiles, readymade garments and textile made-ups registering growth. The SBP report also confirmed that a lacklustre performance of textile sub-group was disappointing, mainly due to a shortfall in cotton production as well as a weak external demand. Moreover, weakness in the production of ginned cotton and cotton cloth also reflects the smaller crop, shift to production of synthetic fabrics.

Textile sector has been provided cash incentives and subsidies worth billions of rupees since the last fiscal year, however, the export of these products did not pick up. Exporters attributed this situation to high cost of production, which is soaring with each passing day due to rising rates of utilities especially gas prices. After enjoying Rs30 billion as cash subsidy as well as concessions on bank loan rates and export refinance in the last two and half years, the export could not be enhanced. However, textile exporters termed the incentives too small to revive the sector because of major problem of cost of production, which is soaring due to rising high rates of utilities. Investment on balancing, modernisation and renovation (BMR) of textile has been continuously declining since 2004-05 after a record of $928.6 million investment in a year. Textile machinery imports declined to $817.2 million in 2005-06, to $502.9 million in 2006-07, and to $281.7 million in July-February of 2007-08.

Dr. Shamshad Akhtar, State Bank Governor, while addressing the All Pakistan Textile Mills Association, has advised its members to seriously look into the consolidation of the sector as international and regional competitive pressures are going to further build up and it would be larger companies that are more likely to survive.

Pakistan textile industry appears to have failed to compete in international market despite availability of cotton locally, also because of high cost of production, especially as the industry does not get power to run the plants, rising utility cost and cost of other inputs and poor law and order situation.The companies, are losing the benefit of scale and suffer from inefficiencies being smaller size of units. The Planning Commission of Pakistan, with a view to encourage mergers and acquisitions in textile industry, had floated an idea to allow 15% tax credit to the profit-making companies. It had also recommended that the profit-making company should be allowed to declare the losses of acquired smaller or loss-making unit in its accounts. Though the Government approved the Commission's recommendations, but these have not materialised so far. In fact these recommendations are not called for consolidation of the textile industry. The Government has already provided in the Income Tax Ordinance 2001, the incentives for mergers and acquisition of a company. A strong textile industry supported by consisting Government policy, good perception of Pakistan in the international market and low cost of production, especially resolution of energy problem, would enable the industry to gain maximum advantage under the liberalised WTO.