Pakistan’s textile industry is on an upward trajectory with the addition of $500 million per month through extra capacity. This was made possible thanks to the TERF (Temporary Economic Refinancing Facility) and its support for 100 new projects.

However, even the current capacity is not fully utilized due to power supply and quality constraints over the past 6 months, costing Pakistan around $300 million in lost production/exports per month.

The global apparel market is expected to reach $843.13 billion in 2026 at a compound annual growth rate (CAGR) of 8.6%, but Pakistan’s textile industry has not captured a sufficient level of this demand , given its potential and existing capacity to add $10 billion. per year to exports.

The textile industry faces countless opportunities to capture a larger market share, but state reforms in the areas of energy, technological upgrading, diversification and value addition will be necessary. to enhance the sector’s potential and facilitate economic growth at unprecedented levels.

It is relevant to note the exemplary management of Pakistani exporters in the face of disruptions such as the COVID-19 pandemic and its better performance compared to its regional competitor, Bangladesh.

To maintain the current momentum, the textile sector has embarked on unprecedented value addition by pledging to set up 1,000 garment factories. Each factory will consist of 500 sewing machines for an investment of 7 million dollars; capable of producing garments for exports of $20 million a year, while generating employment for 700 workers.

The total investment would be US$7 billion, generating annual exports of US$20 billion and providing jobs for over 700,000 workers. A thousand garment factories are being set up near major textile-producing towns.

This commitment depends on strong and sustained political support. Although recognized as the backbone of the economy from the start, the textile sector has suffered from a period of weak political support over the years. In order to grow at scale and reach its target of $50 billion in exports over the next 4 years, the textile sector needs:

  • Adequate energy supply at regionally competitive rates

  • Availability of working capital

  • 500 new entrepreneurs

  • TERF-type facility of Rs 500 billion ($2 billion) to facilitate investments

  • Leverage ratio of 80:20 which includes construction and infrastructure as 50% of the cost of garment factories is spent on these items.

It is important to note that the textile sector has seen its order books well filled in recent years, despite countless setbacks due to external challenges – inflation, high interest rates, war in Ukraine, lockdowns and technological changes.

By identifying major setbacks and gaining political support and facilitation from the government at unprecedented levels, the sector has managed to meet the majority of demand, increase production and improve its logistics network. These results have been tangible and have had a major impact on economic growth projections for the coming year.

The garment industry has become one of Pakistan’s largest small industries, with significant demand both at home and abroad. In terms of quality, Pakistani products can greatly benefit from technological upgrading.

Advances in electronics equipment and manufacturing can exponentially improve our exports and facilitate entry into high performance apparel and MMFs. This will also enable the sector to meet its needs in terms of added value and diversification of the export mix.

Pakistan is the 4th producer and the 3rd consumer of cotton in the world. However, this major sector faces frequent obstacles such as import restrictions on critical inputs and long delays in the approval of import permits. Meanwhile, most South Asian economies have optimized their production of goods and services in which they have a competitive advantage and have further diversified their export baskets to enter an abundance of untapped markets.

They also drew on high-tech products with high added value. The demand for MMF-based garments has grown exponentially, due to the convenience it offers. However, cotton and textiles in Pakistan suffer from a lack of quality research and application. We need to reduce the focus on commodities and make the long-awaited shift to the secondary and tertiary sectors – manufactured, non-traditional goods and value-added services.

That said, the textile sector is highly sensitive to power outages and quality issues, so given Pakistan’s struggling energy sector, these issues have swelled into a large-scale impediment to its growth and made it difficult to meet costs, not to mention meeting much-needed revenue goals. which could allow modernization and expansion.

A long-term energy tariff policy with a clear charging mechanism is an essential element to ensure moving forward, so that the performance of the textile sector can be freed from the problems created by an unstable and uncompetitive energy supply.

On top of that, issues of grid-connected electricity, quality, transmission and availability, and an expensive energy mix abound. The export industry cannot pass on the consequences of taxation and institutional inefficiencies to international buyers. 5 to 7% of the incidences of various local provincial and federal taxes are not zero-rated on exports. Growing circular debt is a direct result of these long-standing issues not being addressed.

More specific issues to address include working capital requirements. In FY22, the total amount withheld by the FBR (Federal Board of Revenue) as sales tax on domestic sales was Rs 50 billion out of the Rs 249 billion collected. More than Rs 250 billion of industry liquidity remains with the FBR at any given time through this collection and reimbursement mechanism.

Sales tax is consumption-based, which inflates inventory and capital costs, which is a barrier to new projects, as the capital cost increases by 20% and reimbursement can only occur after commercial operations. Additionally, there are numerous technical errors and inefficiencies in FBR’s FASTER sales tax refund system that require immediate correction.

According to an IMF (International Monetary Fund) report, the cascading effect of the GST has harmed the competitiveness of Pakistani exporters as there is currently no systemic method to ensure that all taxes paid on inputs can be charged to a final sale. This huge cycle of sales tax collection and refunds, exporters are suffering in the form of pending and deferred deferred refunds. The cost of collecting and reimbursing sales tax far exceeds the revenue collected.

Competing textile economies have opened up their markets, thereby securing large market shares. In line with this strategy, Pakistan should formulate its trade policies with a view to increasing market access, on a reciprocal basis, with the openness of the Pakistani market also expected to increase. There must be a dedicated effort to promote private investment in the industry, which naturally depends on supporting interest rates, as well as a reputation for never compromising on quality.

Export-oriented industries in Pakistan are at least 25% more productive than non-export-oriented firms, and their productivity increases with increased economic activity as well as greater foreign exposure and alliances. However, systemic inefficiencies cannot be exported, so they must be mitigated from all inputs before results can be seen.

Since exports in Pakistan are labor intensive, expanding this industry is a surefire way to ensure large-scale job creation, as well as increased foreign exchange to pay necessary imports.

The problem has not been a lack of policy development, but rather the implementation of policies to alleviate the disadvantages that have persisted over the years. With greater emphasis on policy implementation, there can be a tangible impact in terms of sustainable development and economic growth, significantly improving the position of Pakistan’s textile industry and exports over the past 4 coming years.

Copyright Business Recorder, 2022