Analysis of Pakistan Industries

Final Project Report: TEXTILE INDUSTRY

Submitted by:
Wajahat Ghani - BB-5652

Tooba Rao - BB-5711

Sania Nazeer - BB-5860

Saima Nazir - BB-5859

SUMMER-2019

Teacher: Sir Owais Khan

Table of Contents:

- Introduction of textile sector of Pakistan.

- Types of textile units in Pakistan.
- Textile exports: Dismal performance.
- Pakistan’s textile export surge.
- Textile industry continues to disappoint.
- Pakistan’s textile industry’s challenges and opportunities.
- Conclusion.
Introduction:
Pakistan is a developing country and for its survival it mostly depends on foreign aid in terms of loans
from IMF and World Bank. Conditions could have been worse, if the textile and agricultural sectors
weren’t performing well to boost exports and generating enough foreign exchange reserves and
employments in the country. Textile industry is the largest manufacturing industry in Pakistan and
contributes around 8.5% of the country GDP. This sector also employs 45% of the whole country’s labor
force. Recent fiscal policies have effected this sector’s performance and this sector have seen a decline
in its exports where exports have fallen from 65% to 60% in the recent years. At present, there are 1,221
ginning units, 442 spinning units, 124 large spinning units and 425 small units which produce textile.

Types of Textile Units in Pakistan:

● Spinning.
● Weaving.
● Processing.
● Printing.
● Garment manufacturing.
● Filament yarn manufacturing.
Textile exports: dismal performance:
The textile sector has not been happy lately with the decision of the government to remove the zero-
rated status granted to the industry. But the government has lost patience with hoping for textile
exports to record any meaningful increase. The recently released textile export numbers by the Pakistan
Bureau of Statistics (PBS) will have only reassured the government that exports cannot be increased on
the back of government incentives alone.

Far from registering growth, textile exports for the 11MFY19 period have remained stagnant around the
$12.3 billion mark and the full year numbers will likely be around the same that they were a year in FY18.
Many believed the currency depreciation would result in an increase in exports and they were not entirely
wrong. Looking at the quantity of exports, almost all value added segments registered double digit growth.
Readymade garments saw the most increase in quantity in 11MFY19, recording an increase of 33 percent
as compared the same period last year.
Knitwear and bed wear also saw their quantity exported go up by 18 percent for the 11MFY19 period.
However, the depreciation has meant a reduction in the selling price of textile articles, which explains the
lacklustre increase in value of exports despite an increase in quantity. There has also been a reduction in
the prices due to the slowdown in global demand on the back of the US-China trade war and intense
competition from Bangladesh and Vietnam.
While the zero-rating removal might pose some liquidity concerns for the textile sector, there is no danger
of it impacting textile exports. In fact the government is sure to fetch decent revenue on the domestic
sales of the sector, which are sizable. (Read: “Textile’s crocodile tears” published on 24 Jun, 2019
But even for the liquidity problem, the FM Hafeez Sheikh has assured exporters that a reliable and prompt
refund mechanism is soon to be set up. The aim is to automate refunds with refund payment orders
(RPSOs) being sent to the central bank immediately.
The electricity and gas tariffs for the exporters are also likely to be increased with a recent ECC decision
to withdraw Rs3 per unit subsidy on electricity tariffs to export industries excluding peak hours.
It is time now for textile exporters to up their game with regards to product diversification, improving
productivity as well as coming up with a game plan for improving local cotton output. Policymakers have
rightly lost patience with subpar performance despite government incentives and any further request for
incentives should not be entertained in the absence of any demonstrated performance.

Pakistan’s textile sector exports surge 2.9 percent in

February 2019:
KARACHI: Pakistan’s textile and clothing exports recorded 2.9 percent year-on-year surge to $1.090 billion
in February 2019, taking the eight-month (July-February FY19) exports to $8.9 billion up 1.38 percent, as
eased duties on imported raw materials provided some relief to the industry.

On month-on-month basis, textile sector exports recorded a decline of 6.63 percent in February
compared with $1.167 billion recorded in January 2019, the Pakistan Bureau of Statistics (PBS)
reported.[the_ad id=”32940″]Senior Vice President FPCCI Mirza Ikhtiyar Baig said the rupee devaluation
and reduced duties on imported raw material would enable overall exports to reach at most $25 billion.

He said due to unfavorable policies of the government and high handedness of the tax authority, the
industrialists were reluctant to take out their money and invest in expansion.

He said according to central bank private sector credit stood at Rs570 billion, of which Rs470 billion was
working capital, which was usually invested in real estate and stock market. “Only Rs100 billion would be
spent on import of plant and machinery. Having said that, with 14 percent markup and US dollar hedging
at over Rs150, import of plant and machinery is not feasible at all.”

It may be mentioned here that textile machinery imports in February 2019 declined 20.75 percent to
$29.308 million, while the imports of textile machinery declined 11.52 percent to $338.298 million in eight
months of the current fiscal year. Textile exports constitute over 50 percent of the country’s overall
exports.

In February, cotton yarn exports decreased 10 percent year-on-year to $108.36 million;

knitwear exports rose 11.45 percent to $215.396 million; bedwear exports increased 1.92 percent to
$175.405 million; readymade garments exports surged 5.93 percent to $225.89 million while cotton cloth
fetched $177.051 million in February, up 0.43 percent over the same month a year earlier.

An industrialist said Pakistan’s exports were largely dependent on imported inputs. “Fluctuation in rupee
value and costlier utilities rendered Pakistan’s products uncompetitive in the international markets.”

Furthermore, the perennial issues plaguing the sector remain largely unaddressed, where lack of
availability of system gas and costlier RLNG have forced several smaller mills to close operations, another
negative for textile exports for the year.

“We expect the performance of textile sector to remain upbeat in the coming months owing to
government’s commitment towards the improvement of the sector. The decrease in duties on raw
material, concessionary gas and electricity prices along with the withdrawal of duties on imported cotton
would likely to have positive impact on country’s textile exports,” Taimor Asif at Pearl Securities said.

Furthermore, analysts expect the impact of rupee depreciation to start reflecting in 2HFY19 as the its
impact usually comes with a lag. Furthermore, as per news flows Pakistani firms received good response
at recently held Heimtextil 2019, as the sector related developments have enhanced competitiveness of
Pakistani products internationally.
The textile industry is the mainstay of Pakistan’s economy:
Cotton textiles and apparel historically were the focus of the industry, mainly because of the large amount
of cotton grown in the country. In fact, Pakistan currently ranks fourth among world cotton producers and
third among world cotton consumers.

Cotton being the prime crop of Pakistan makes the textile industry the most significant industry of the
country.

The spinning industry being the sole consumer of cotton worth $5 billion, sustains the largest cash crop
of the Pakistan.

The textile industry contributes more than 60% of the export earnings of the country.

During the 1990s, Pakistan’s textile manufacturing sector developed manifolds. Now, it constitutes 46%
of the total manufacturing, provides 38% of the manufacturing labor force, shares 9% in GDP and also has
the potential to meet the challenges of the highly competitive global market especially after the removal
of trade barriers under W.T.O. regime.

Hence, the country is facing much stronger competition not only from the regional competitors (Asian—
China, India, Bangladesh etc.) but from the global level competitors from American and European textile
players with the support of much advanced infrastructure and improved systematic operations.

Pakistan’s textile industry provides 9% of the global textile needs and ranked at world’s number 10 textile
producers.

Pakistan’s textile industry, based on locally-grown cotton, produces cotton yarn, cotton cloth, and made-
up textiles and apparel. Market for imported textile machinery and equipment in Pakistan is directly
proportional to the overall strength of the local textile industry.

In order to revitalize this sector, the Government of Pakistan (GOP) has formulated “Textile Vision 2007”.
According to that “vision”, Government of Pakistan plans was to spend Pakistan Rupees 331 billion (USD
1.00 equals Rs. 92 at the current exchange rate) in the textile industry in order to attain fifth position as a
leading Asian textile exporter and to increase the exports to USD 13.815 billion by 2007.

To achieve this goal, it is expected that new investment is more than Pak. Rupees 333 billion will be
required in different sub-sectors of textile industry. Pakistan is the eighth largest textile exporter from
Asia. This is in spite of serious problems being faced by the local textile industry.

Operational competitiveness can be defined as the ability of firm to design, produce and or market
products superior to those offered by competitors, considering the price and non-price qualities. For
instance, the negligible local production of textile machinery mainly comprises of spindles and ring cups
for the spinning industry, power looms for the weaving industry, simple dyeing and finishing equipment,
knitting and sewing machines and accessories such as rubber cots plastic bobbins and wire for carding
machines.

In other words, the local industry desperately requires more modern machinery and techniques to
compete in an increasingly competitive industry. In additional to the basic problems, the textile industry
is also extremely affected by the national instability due to the recent judicial, political, economic, energy
and security issues.

Research efforts have brought many interesting perspectives and frameworks at the country’s industry,
and firm level.

China’s current progress in textiles and the continuing shift of its focus on downstream sectors gives an
opportunity to Pakistan to fill up the area in spinning and weaving being vacated by China.

Pakistan needs 15 Million Bales of Cotton for Textile consumption whereasitproduces only 10 Million Bales
on average. In next 5 years demand will surge to 20 Million bales which require special attention towards
related agriculture sector including but not limited to availability of quality seeds and fertilizers. Energy
cost is a major input cost of per spindle work for producing a yarn of any count. Reportedly, subsidized
electricity rate of Rs.10-11 per unit is available to Export based Textile Units however this is almost 30-
35% of per spindle per month cost of production which is around Rs.30 (This varies with economies of
scale). This means that previous government rhetoric of providing electricity doesn’t suits to
manufacturing units which require cheaper electricity that could have been produced from increasing
renewable energy sources specially from Water, Wind and Solar.

It is not justifiable to put all responsibility on government for the performance of Textile sector.
Government is already providing Billions of Rupees through export Package, duty draw backs, relaxation
for import for export purpose, tax rebates, special electricity rate and preferential interest rate regime for
working capital requirements and to import machinery. Yet the fact is that despite of this support Textile
industry is not able to increase its export share which requires some effort from the industry as well. First
of all, Textile owners need to inject further equity by raising capital with a mix of using banking credits in
high interest rate scenario. It will reduce their finance cost which will result in bottom line to
grow.Secondly, Textile managers should focus on value added products which have a larger market with
built in high marginsinstead of making basic products and depending on other income through investing
activities. Last but not the least, Textile industry can encourage and support farmers to grow high yield
cotton together with Government of Pakistan through helping farmer to procure better seed and
fertilizers.

Recent Trade War between USA and China together with protest against low wages in Bangladesh is
blessing in disguise for value added segment of Pakistan, as buyers of Textile products across the world
are thinking to diversify their supplier countries. Though Bangladesh is a major buyer of Yarn from Pakistan
and slowdown in their economy can affect export of this basic textile product yet this is a high time for
shifting towards value added products to get more share of export with better margins.
Moreover Free Trade Agreement with China is being revised through which additional export of Textile
Goods to brotherly country may bemade. In longer run cash subsidies are not sustainable for economy
which has huge loans to repay. The government role here should be like a facilitator throughout the value
chain while the entrepreneurs should put effort to enter into those segments of this value chain which
can bring business with good margins. This value chain starts from production of cotton to final value
added textile product where combination of Government Support together with efforts from
Entrepreneur to come out of its comfort zone, that is to be heavily dependent on spinning units, can fetch
results as stated in Textile Policy.

Textile industry continues to disappoint with its inefficiency

in 2018:
LAHORE: The year 2018 has been another disappointing year for our textile sector that failed to deliver
despite 29 percent depreciation of rupee during this calendar year, as the industry is plagued with
inefficient technology and low-skilled workforce.

It is worth noting that the rupee was valued Rs109 against the US dollar on January 1, 2018 the existing
dollar rate of Rs140 is 29 percent higher than it was at the start of year. Pakistani exports have not picked
up in recent months despite high devaluation of rupee.

The exports in fact declined in the month of November 2018 by over six percent compared with November
2017. The exports are unlikely to surge under the current circumstances. The decline in energy and power
rates at best can stem the decline, but is unlikely to boost exports.

The mills in basic textiles are still closing. Last week, a weaving mill called it a day in Punjab despite
lucrative concessions from the federal government. The total number of mills that have closed down is
over 125; majority closed in 2018.

The international market has not been responsive during most of the year. The US sanctions against China
equally hit Pakistani textile exports, as most of our yarn and fabric goes to that country.

The value-added textile exports did increase, but the growth was no way near the devaluation of the
rupee. In fact, the exports of both readymade garments and knitwear increased robustly in quantity but
there was a sharp decline in per unit value. The value-added textile sector is facing efficiency and
sustainability issues.

International Finance Corporation, a member of the World Bank Group, has signed an agreement with
leading global apparel company, Gap Inc in Pakistan to boost resource efficiency in its operations and
drive long-term sustainability.

This programme, if successfully implemented, may boost value-added exports in future. Under the
agreement—the first of its kind in Pakistan’s textile industry—IFC’s Advisory Services will assess the use
of resources at Gap Inc’s supplier factories in the country, and help them implement efficiency measures
to reduce the use of water, energy, chemicals, and other resources. This will also help Gap Inc improve
competitiveness and sustainability.

The perception of the country has also not improved and there are reports that some US importers are
reluctant to place repeat orders with Pakistani exporters, probably on lobbying from anti-Pakistan forces.

Textile sector is also facing shortage of skilled hands. In four years, the sector fired most of their best
hands due to decrease in exports. Many of them have either changed profession or are self employed in
different sectors. Most of them are not in a position to take the risk of rejoining the industry that dumped
them; they are content with what they are earning regularly.

While government policies did play a role in increasing the plight of the textile sector, the industry itself
increased the stress due to its lethargic attitude towards achieving efficiencies. Perhaps several decades
long textile exclusive facilitations by the government played a role in making the sector complacent.

They expected a bailout package from the government. They did not upgrade technology nor did they
improve efficiencies.

Take the case of the spinning industry, where 90 percent of the spindles are power inefficient because of
old technology. The new high tech spindles consume 40 percent less power. Had efficient technology been
used, the industry would have survived high power and energy prices in the past 5 years. The present
government, realised the high power and gas rates, and rationalised. But the technology was still old,
which meant it ended up subsidising power inefficiency to the tune of 40 percent.

This subsidy should have been conditional. The government should have asked each industry to improve
power efficiency by at least 10 percent per year, which meant technology upgrade of ten percent each
year.

This way the government would not have had to increase the subsidy even if the exporting industry grew
by 10 percent. In case of failure to improve power efficiency, a tariff penalty of 5 percent should have
been slapped on the defaulting mills. This would force the exporters to improve efficiency, or else subsidy
would increase every year. If we look at the current scenario the textile sector, the competitiveness of the
textile sector stands fully restored. The only handicap now is their obsolete technology and general
inefficiencies (IFC has jumped in to remove these inefficiencies).

The other parameters are ideal for any industrial sector in Pakistan. The minimum wage of Rs15,000 that
was equivalent to almost $150/month a year back is now equivalent to $105/month. This minimum wage
is only $10 higher than that of minimum wage in Bangladesh.

Indian worker gets minimum wage of $175 per month that is $60 higher than current minimum wage in
Pakistan. The minimum wage in China is $240 and Vietnam is $145.

Rupee devaluation is icing on the cake. Water charges for industries in Pakistan are half than the charges
borne by industries in China, India, and Bangladesh. The power and energy rates are at par or lower than
most competing economies.
The domestic textile sector lost another advantage of procuring its main input - cotton - from local
production that continues to decline. The decline in cotton production that was an institutional failure,
also stressed domestic textile industry.

In 2012-13 Pakistan produced 12.88 million bales from 2.8 million hectares. In 2017, the cotton sowing
area was reduced to 2.41 million hectares while the production declined more sharply to 10.73 million
bales. Cotton productivity declined in Punjab from 701 kg/hectare in 2012-13 to 664 kg in 2016-17. The
projections for 2018 crop are also not very bright.

Pakistan’s textile industry: challenges and opportunities:

International economists urge that the textile is the most significant manufacturing sector and has the
longest production chain, with inherent potential for value addition at each stage of processing, from
cotton to ginning, spinning, fabric, dyeing and finishing, made-ups and garments. They have also reported
that the present global apparel market is worth US$ 1.7 trillion, and it amounts to 2 percent of the
world’s GDP. EU, USA and China are the world’s largest apparel markets with a combined share of almost
54 percent. The major 8 apparel consuming nations form a dominating share of 70 percent of the
worldwide apparel market size.

In Pakistan, textile sector contributes approximately one-fourth of industrial value-added and offers
employment to about 40 percent of industrial labor force. Barring seasonal and cyclical fluctuations,
textiles products have sustained an average share of about 60 percent in nationwide exports. Pakistan’s
textile experts also mention that the ancillary textile industry adds cotton spinning, fabric processing,
home textiles, cotton cloth, cotton yarn, cotton fabric, towels, hosiery and knitwear and readymade
garments, these components are being produced both in the large scale manufacturing organized sector
also as in the unorganized cottage/small and medium units.

Global Apparel Market Size (US$ Bn.)

Region 2015 CAGR Projected 2025

1 EU 28 350 1% 390

2 USA 315 2% 385

3 China 237 10% 615

 4 Japan 93 1% 105

5 India 59 12% 180

6 Brazil 56 5% 90

7 Russia 40 3% 55

8 Canada 25 2% 30

Others 510 4% 750

Total 1685 4% 2600

Economic advisor mentioned in the economic report of Pakistan that the spinning sector which is the
backbone in the ranking of textile production. Presently, as per record of Textiles Commissioner’s
Organization (TCO), it comprises 517 textile units (40 composite units and 477 spinning units) with 13.414
million spindles and 199 thousand rotors installed and 11.338 million spindles and 127 thousand rotors in
operation with capacity utilization of 84.5 percent and 64 percent respectively. The government statistics
also show that the issues of the power loom sector evolve chiefly because of to the poor technology and
scarcity of quality yarn. It is also calculated that the looms installed in cotton textile mills are 9,084 and
Looms worked were 6,384. Moreover, the production of cotton cloth has stayed stagnant which slightly
raised by 0.03 percent while the exports in term of quantity slightly declined by 0.80 percent whereas in
value term grew by 0.04 percent.

Being value added segment of textile industry made-up sector comprises different sub groups namely
towels, tents & canvas, cotton bags, bedwear hosiery, knitwear & readymade garments counting fashion
apparels. The government statistics also revealed that the industry sustains directly livelihood of 210,000
skilled workers and 490,000 unskilled workers. Another 350,000 people benefit in allied cottage
industries. Thus, the industry offers directly and indirectly sustenance to well over a million people.
Knitwear exports consists of knitted and processed fabrics knitted garments; knitted bed sheets, socks
etc. and has the largest share 35 percent in textile exports.

Pakistani textile experts also said that the readymade garment industry has emerged as one of the
significant small scale industries in the country. Its products have large demand both at home and abroad.
The local requirements of readymade garments are approximately totally met by this industry. They have
also recorded that most of the machines utilized by this industry are imported or domestically
made/assembled. Exports rose from 22.708 million dozens to 25.621 million dozen in many types of
readymade garments worth US$ 1695.557 million during Jul-Feb FY 2018 as against to US$ 1499.472
million during Jul-Feb FY 2017, thus explaining a rise of 13.08 percent in terms of value and 12.83 percent
in term of quantity.

Furthermore, statistics also show that there are about 10,000 towel looms including shuttle and shuttle
less in Pakistan in both organized and unorganized sector. This industry is dominantly export-based and
its growth has all the time depended on export outlets. The production capacity of the canvas/tents is
more than 100 million sq. meters. In term of quantity during July-February FY2018 it was registered at
20.239 thousand dozen as against to 33.919 thousand dozen during the corresponding period previous
year thus explaining decline of 40.33 percent. Even in value term it declined by 39.49 percent. It is
recorded that during July-Feb FY 2018, synthetic textile fabrics value $ 197.280 million were exported as
against to $ 109.552 million during the corresponding period which is explaining a rise of 80.08 percent
as against to last year. In quantity term the exports of synthetic rose by 108.53 percent.

The government has finally conceded that the conflict between its trade and monetary policies was one
of the key reasons behind the continuously declining exports, as nearly 45 products lost competitiveness
in the international market since 2013.

In a comprehensive report to parliament, the Ministry of Commerce candidly explained what went wrong
with exports during the tenure of the current government.

There is a long list of endogenous and exogenous factors that are affecting Pakistan’s export
competitiveness in the region.

On the endogenous side the most important factor is the conflict between the tariff policy and monetary
policy. Currency appreciation in relation to competitors like India and Bangladesh is affecting
competitiveness. Moreover, import tariff on the export inputs has further added to the cost of production.

Secondly, Pakistan’s exports are highly concentrated in limited items like cotton and cotton
manufacturers, leather, rice and a few more products. These constitute more than 72 per cent of total
exports during 2016-17 with cotton and cotton manufacturers alone contributing 60.1pc.

Besides this narrow export basket, exports are also dominated by primary and intermediate goods rather
than value-added finished products; for instance 74pc of food items and 40pc textile exports are primary
commodities.

In a comprehensive report to parliament, the Ministry of Commerce candidly explained what went wrong
with exports during the tenure of the current government

There are also multiple supply side cons traints — severe shortage of energy supply, poor quality of
infrastructure, outdated technology, lack of export culture, and weak contract enforcements.

Investment in export sectors has remained disturbingly low, as a cut-throat competition with emerging
players such as Bangladesh and Vietnam has made margins fairly unattractive.
As a result of low levels of investment, exporters are not geared to position themselves against changing
consumer preferences in partner countries.

Diversifying the export market is a major irritant in the enhancement of export proceeds. More than 50pc
exports rely on only six markets — the United States, China, Afghanistan, United Arab Emirates, Britain
and Germany.

Trade potential in regional markets remained highly under-exploited. These markets are the natural
extension of the domestic market due to similarity of consumption patterns, short lead time and low
delivery costs.

A third factor is the low production of certain commodities that have a high local demand. For instance,
local demand for cement has increased while its availability as surpluses reduced for exports purposes.

At a World Bank seminar on export competitiveness, Secretary Commerce Younus Dagha — while
admitting that Pakistan’s competitiveness has been under immense pressure for some time — said the
government was taking all possible measures to transform the export-related challenges into
opportunities.

“Investment in human resource and agriculture is imperative to make our products more competitive in
international markets”, he said.

The commerce ministry report also listed exogenous factors that contribute in declining exports. A major
factor constraining export growth has been the slowdown in the economies of Pakistan’s major importing
partners— China, and the EU. Stagnation in these economies led to low demand for Pakistani goods.

According to the WTO, total world exports declined by 3.3pc in 2016. In a few of Pakistan’s major
importing partners’ economies, a shift in demand has been noticed.

Secretary Commerce Younus Dagha said the government was taking all possible measures to transform
export-related challenges into opportunities

China has continued to reduce its demand for Pakistani yarn and fabric as competing countries are
undercutting their prices significantly. Moreover, China is now more inclined towards high-tech products
instead of low-tech products like textiles and footwear.

A change in taste and preferences in global demand has also been seen. The market for man-made fibre
products is expanding at a fast pace whereas Pakistan’s textile exports remain predominately based on
cotton.

Another factor hurting exports is the depreciation in major currencies. The Euro is approaching parity with
the dollar and has depreciated 11pc since the start of 2015. As a result of this depreciation, Pakistan’s
exports competitiveness has been affected in the European market.
On the other hand, export of basmati and non-basmati rice varieties declined mainly because of a shift in
demand from key markets like Saudi Arabia and UAE, away from Pakistani rice to other countries. The
demand for cement also dropped mainly due to low demand from South Africa and Afghanistan.

But contrary to these factors, SDPI Deputy Executive Director, Dr Vaqar Ahmad, explained the different
dynamics of export competitiveness in Pakistan and said that to improve, both the public and private
sector would need to collectively find solutions.

“These may include regulatory constraints faced by businesses, rising cost of doing business in several key
sectors and anti-export bias seen in the prevalent tax and tariff structure”, he said.

The limited entry of Pakistani enterprises in the global value and supply chains, insufficient trade
facilitation measures as well as a lack of synchronised support from various government bodies at federal
and provincial level, uncertain availability of export credit for small and medium enterprises, and an
exchange rate regime — which is not based on economic fundamentals — were the key areas that needed
work, Dr Vaqar said.

Conclusion:
After studying the above report, it could be said that Pakistan, as a country, has to invest heavily in the
research and development of its textile and agriculture sectors. Textile is the major sector of its
economy and a proper management for its development will eventually result in the progress of the
country in long-run. This will also help to develop local infrastructure of local industry and will boost
employment ratio and improve GDP and exports as well.