Industry Analysis & Outlook Of Textile Sector In Pakistan

Abstract

Textile industry is the backbone of Pakistan's economy as the total share of textile sector in the Pakistan’s economy along with its contribution in foreign exchange, exports, employment, investment and value added makes it the single largest manufacturing sector for Pakistan. It contributes more than 60% to the total export earnings of the country, accounts for 46% of the total manufacturing. It also provides employment to 38% of the manufacturing labor force and 9% of GDP. Textile exports of Pakistan have been crossed the US $ 10 billion mark in the fiscal year 2009-10 with the support of intensive growth in cotton yarn. Total textile export of Pakistan recorded at US $ 10.244 billion as compared to US $ 9.572 billion in the previous year. The percentage growth is around 7%. During June, textile products exports increase by 9.81 percent to $921 million as compared to $839 million recorded last year. For the year under consideration, cotton yarn exports increased to $1.417 billion, recording 27.13 percent growth, as against to $1.114 billion in the previous year. (The Nation, 2010) Textile industry of Pakistan ranked 4th in the production of cotton which contributes 46% of the total manufacturing so the availability of raw material and cheap labor are important in the growth of textile. Textile industry has been established since before the Pakistan’s Independence. Increase in production of textile products and expansion of textile units have been impressive since 1947. Textile industry is the great source of generating income for Pakistan and it plays an enormous role in country’s GDP. The growth in the textile sector has been impressive during the four decades after independence (with an imbalance in favor of low value added products). Now It seems like the textile industry is growing, yes it is growing but with a slow pace as compared to the previous decade. The growth will be much more than this but certain factors restraint the growth of textile in Pakistan. Pakistan is one of the largest textile producer and exporter in the world ranked 8th in Asia as a major exporter of textile. But now a day Pakistan’s textile industry is going through a toughest period due to several issues and challenges. There is need to do quality improvements within limited resources and The All Pakistan Textile Mills Association (APTMA) is currently working on this issue to create the awareness in SME’s regarding quality maximization and cost effectiveness. APTMA also highlighted the key issues/ hurdles regarding the growth in textile industry, which are Government policies, energy crisis, material costs and its availability, taxes (VAT, GST), interest rate, global financial crisis etc. Pakistan is facing so many issues regarding every aspect in these days from unemployment, food crisis, and energy crisis to security issues. As Pakistan’s economy is based on agriculture and textile so if these sectors are not performing very well then all the other sectors will suffer. The Pakistani textile industry depends on domestic agriculture to supply its raw materials, thus the success of the cotton crop is critical to the health of the textile industry. This project will highlight the issues and clear the picture of textile industry. A study on textile sector analysis (Amir Fayyaz, 2007), shows that Pakistan's economy is suffering due to the constant increase in negative balance of trade. That shows we are more importing than exports which is not good for the economy. Textile sector of Pakistan is working in both ways, meeting the demand for local market plus it has the contribution of more than 60% of exports. Although Government wants to utilize all resources to establish a solid export base and decrease this negative balance of trade but it’s not easy for them. There are three main segments in textile industry; Upper stream includes raw cotton and spinning sectors, Midstream consist Weaving and finishing-dyeing (processing) sectors, and finally downstream which include Made-ups, Readymade garments and knitwear sectors. 1.2 Problem Statement Identify and analyze those factors which created downturn in textile industry, Industry analysis and the out look of Textile Sector in Pakistan. 1.3 Objectives of the study The objective of this study is to analyze those factors who had affected the performance of textile industry. Main focused areas are

• Historical Performance Analysis of Textile Industry • Impact of recession • Energy Crisis in Pakistan • WTO and Anti-dumping duties • VAT (Value Added Tax) • High Cost of Production Aim for doing Industry Analysis is to analyze the business environment in Pakistan especially for the textile sector. To access the environment, two models are used for this purpose • Porter’s Five Forces Model • PEST (Political, Economic, Social, & Technological) Analysis

Chapter 2 Research methodology

The research methodology that will be adopted will be interpretive and analytical. Before conducting the research the issues of textile industry will be studied in great detail. This will be done in order to understand the impact of these factors would have on textile industry. The aim of this research is to highlight these factors and their impact in the textile industry. The sample size taken into consideration is the whole industry because the research in done for the industry that how these factor affected the textile industry as a whole. Also the industry analysis has been done through two model which emphasis on the business environment especially for the textile sector.. The data will be taken through the previous researches, published articles, through regulatory bodies, Asian Development Bank, Economic Survey of Pakistan and also from Textile industry professionals. Qualitative data would be gathered in order to find out the potential benefits, variation in profitability of textile, balance of trade, contribution in exports, employment, and foreign exchange of Pakistan. In order to do so semi structured interviews will be conducted. On the basis of this data the involvement of these factors and influence on textile industry will be determined. Textile industry exists since before Pakistan’s Independence so a lot of research has been conducted on this. But some of the factors are relatively new like WTO regime, VAT (Value Added Tax) and energy crisis so the research for these factors has been conducted relatively less. This is why semi structured interviews are being conducted.

CHAPTER 3 LITERATURE REVIEW

Textile industry has been the backbone of Pakistan economy. Position of Pakistan Textile exports in Asia is at number 8th.In the total production of the country textile accounts for 46 %. More than 60% of the country export earnings are from textile sector and contribution to the total GDP is 8.5%. It provides employment to 15 million manufacturing labor force which is about 38% of nation’s workforce. According to the APTMA figures Pakistani textile exports have declined by 20% in 2008. The textile sector is under a serious threat of high cost of finance due to nation’s tight monetary policy, continuing crises of power and gas, international market access, decrease in FDI, Global economic slowdown.

A recent study on textile sector faces new challenges (Aftab A. Khan and Mehreen khan, 2010) shows that the Pakistan textile industry earnings in the country total exports accounts for (US $ 9.6 billion). At present growth rate of the textile sector is facing a great decline. Pakistan failure or being unable to make satisfactory development in the global market and rivals has taken a wonderful advantage of this opportunity. A little encouragement for the textile sector as, (APTMA) chairman said the exports of value added products have increases. Therefore this shows that we are on the right track, but researches says this increment is not enough for the textile sector that enables this industry to remove the trade imbalance or achieve the maximum exports level. Because if we look at the exports pattern in the last few years. This sector shows 8% negative growth in 2006 and continuous negative growth by 5% in 2007 than 20% decline in 2008. Author also discusses the reasons of crisis in this sector. Low quality of cotton due to lack of (R&D) in this sector, higher production cost as compared to other competitor nations like India, china and Bangladesh because of obsolete technology and equipment, higher interest rate, high inflation rate, continuous depreciation of Pakistani currency lead to rise in the cost of imported inputs. Pakistan textile exports have declining in last three years as exporters unable to market their products effectively since buyers are not visiting Pakistan due to numerous reasons in which the most important is security threat. Textile exporters also demanding rightfully to reduce the KIBOR rate to 8% just to avoid the declining trend of exports. Moreover major cause for the default loans in this sector is significant increase in markup rates.

Author’s also point out the other crisis indicators like Energy crisis causes the reduction in the textile production capacity up to 30%, Gas-load shedding ,tight monetary policy, provisions like minimum tax on the local sales and 1% with holding tax on imported products creates problems for this industry. Lack of foreign investment due to country unstable/unpredictable conditions, According to (APTMA) this sector required RS.1, 400 Billion just to achieve the exports target given by the govt. till 2010. The purpose of the study was to analyze the step by step reasons for the crisis in textile sector and to present the true picture of this sector.

In another study on textile sector analysis (Abida Mukhtar, 2008,) shows that Pakistan textile industry facing problems due to huge confronted challenges. All Pakistan Textile Mills Association (APTMA) identified the factors that results in the decline of textile industry those are high interest rates and cost of inputs, non conducive government policies, and non-guaranteed energy supplies. The inability of the textile sector to upgrade or improve their equipment and machinery causes the decline in their competitiveness. Moreover author also highlighted that the Pakistan textile sector faces intense competition from Indian, China and Bangladesh. Author is of the view that in order to remain competitive or sustain its position internationally (APTMA) needs to upgrade the technology, improve the quality of its products and in-depth and effective Research and Development (R&D) is required. New Pakistani govt. should accept this challenge to retain its position as a profitable textile sector and need to take the serious decisions. Like to build and implement the effective long lasting strategy that could provide the industry an edge over the rivals.

According to south Asia investor review (Riaz Haq, 2009) is of the view that Pakistan has the diverse economy and textile sector is the major contributor to the national economy in terms of exports and employment