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Department of Economics University of Karachi Performance of Textile Sector

Submitted by: Muhammad Usama Abbasi Seat no: EP0805056 Submitted to: Dr. Abdul Waheed 27 September 2011

Acknowledgement

By the grace of Almighty Allah, I become able to prepare research on Pakistans textile industry which will help to rectify some crises in this sector. I would also indebted to my friends and family, by whom motivation and guidelines, I become able to complete this research. I have prepare my project with full consideration and high efforts. However To Err is human, and criticism is necessary for better work. I would appreciate those who identify my mistakes and make comments on my project for betterment. Thanks

With best regards M.Usama Abbasi Author of Project

Dedication

I dedicate this to my Beloved Parent for all their love & attention which has made it possible for me to make it up to this point and as well as my professor Dr. Abdul Waheed, who bestowed me with the courage by his unmatchable style and by best possible teaching.

Abstract
The purpose of this report is to identify and analyze issues and problems which is being faced by Pakistan in the area of textile sector of the economy. The report focuses on the challenges faced by the country in implementing its WTO commitments and the challenges faced during energy crises in country and challenges during global financial crises. Apart from suggestion on how to deal with the internal challenges, the report also take into account what kind of strategy and action Pakistan should adopt to strengthen this Sector which is also a backbone of Pakistan economy. Statistics, facts and figures were collected from economic survey, statistic division of Pakistan along with WTO statistics in textile oriented import and exports of Pakistan to analyze problems and issues in textile industry of Pakistan. During analysis I found that the major threat to Pakistans textile sector are sustaining its competitive place against its competitor place and keep its target market as well as improve its share in whole world export. Research also indicates that there are some issues which directly or indirectly harmful on textile sector. Issues are energy crises in a country ( in form of fuel, electricity), lack of skills, obsolete technology usage and inefficient production. In the end after conclusion, some suggestions are recommended for the improvement in Textile industry in Pakistan which should be implemented on the priority basis.

BRIEF CONTENTS
1. Introduction. 6-7 2. Review of literature.. 7-12 3. Analysis . 1 3-15 4. Conclusion . 1 5-16 5. Recommendations .. 16-18

LIST OF ABBREVIATIONS
WTO APTMA EU SMEDA WB NAFTA LDCs World Trade Organization All Pakistan Textile Mills Association European Union Short and Medium Enterprise Development Authority World Bank North American Free Trade Area Less Developed Countries

Performance of Textile Sector


Introduction:
Textile Industry is one of the prime and mature industry in Pakistan. It ranks amongst the top 5 textile industries in the world. Cotton is the basic raw material for textile industry which plays vital role in the growth of this industry. Pakistan is the 4th largest producer and 3rd largest consumer of cotton in the world. Despite its inherent strength, the Industry is losing its competitiveness to other countries especially to South East Asian countries. To cater to the rising demand and challenges the industry is in urgent need of financial and technological investments. According to recent economic survey of Pakistan, the Pakistans textile industry contributes almost 60 percent of the countrys total exports, the industry contributes around 46 percent of the total output produced in the country. The textile industry of Pakistan contributes 8.5 percent of the GDP and employs 38 percent of the workforce in the manufacturing sector. In Asia, Pakistan is 8th largest exporter of textile products. Textile industry in Pakistan seems to be main driving force for the economic growth of country that there is no substitute for this industry which can help in earning such a big amount of foreign exchange. The top buyers of Pakistani textile goods are: USA, EU, Gulf region, UK, Hong Kong, Japan, Korea, Saudi Arabia, Italy, Turkey, Germany, Norway, France, Canada, Sweden, and Australia.

All Pakistan Textile Mills Association (APTMA) is the principal organization that determines the rules and regulations in the Pakistan Textile Industry .Textile industry of Pakistan is currently passing through crucial stage and is facing several challenges such as it also unable to meet local
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and international demand due to currently prevailing energy crises in the country also the economic and social condition of country is not good. The government should emphasizes on energy crises, they should assure all forms of energy to the textile sector of country.. There is also a big need of improving the quality of its products by value addition in its products. Pakistan imported its Textile machinery mainly from countries like Switzerland, Germany, Japan, China and Belgium. Also there is lack of efficient training and development program. Our main competitor in primary textile products with the advantage of large engineering segment in this region are China, Bangladesh and India. The only country in this region without strong engineering base is Pakistan and our dependence upon outside engineering industry keeps our cost of production higher with low engineering skills The Industry shows remarkable growth in last 4 decade before 9/11 but has faced downfall in last decade with various textile mills and industries fails to contribute in economy of Pakistan and sustain profitability because of increase in raw material prices and due to power shortage in country. All these thing caused closure of textile mills in Faisalabad, causes unemployment and shifting of customer preferences to other South Asian countries like India, China and Bangladesh. Also there is shifting of mills to Bangladesh due to energy crises and law & order conditions in the country.

Review of Literature:
Textile industry has been the bulwark of Pakistans economy. It contributes more than 60% of the total export earning of the country, accounts for 46% of the total manufacturing and provides

employment to 38% of the manufacturing labor force. The availability of basic raw material for textile industry, cotton, has played a vital role in the growth of the industry (SMEDA 2006). Although there is so much issues about textile growth bu Chairman of APTMA (Mr. Muhammad Iqbal Ibrahim) in his annual review 2007-08 tells in his speech that Export of textile products has reached $ 10.62 billion in the year 2007-08 from $ 5.5 billion in the year 2003-04 i.e. an increase of $ 5.12 billion in value term or by 93% and it still have the potential to beat this rate of growth in future.

The question is what we need to do to maintain or improve the growth of this industry?

The way international trade is evolving is neither free nor fair. There is continued downward pressure of unit prices of textile goods, while the raw material prices and cost of doing business are increasing drastically.

Even though, Textile Industry of Pakistan is indeed passing through a very crucial juncture due to the prevailing socio-economic and political climate. In particular, the Textile sector is exposed to extreme competition after the phasing out of quota besides facing resistance from developed countries in the name of Social Compliance, Environmental & Effluent Treatment Plants, AntiDumping, Counter-Veiling and Safeguard Accusations. To increase competitiveness and quality of products, textile industry requires investment in technology for meeting the new challenges. Over the last few years the textile sector has invested about US$ 6.0 billion in modernization and higher value addition, but due to continuous rise in cost of doing business resulting from enhancement in the cotton prices, utilities, inflation and bank refinancing rate on exports, Pakistan is becoming uncompetitive and loosing share in the international market.

I strongly feel that the time now is to address questions like why our Industry is vulnerable to these cyclical downturns, why can't we sustain growth and economic performance on a sustainable basis. We need to chalk down a strategy to diagnose and solve issues with a longterm perspective to meet the challenging tasks of the textile sector.

When we talk about issues and evaluate them, we see that these are not new, they have been in existence since a very long time now and relates to fundamentals of the textile business. As the premier industry association of the country, APTMA is very well aware of its commitment to act as a partner in national development. We have helped to set up and support two institutions of technical excellence in textile engineering and design namely National Textile University & Textile Institute of Pakistan and also contribute towards agricultural research vis--vis cotton. Altaf Katchi (CEO of Axa International Pakistan) stated in his article Pakistan's Textile Industry Gearing Up for Growth that Pakistan's textile industry is emerging as a major player after the global economic meltdown in 2008. The financial and economic meltdown has resulted in a permanent closure of many mills not only in the EU and the US but also in textile producing countries like Turkey, Brazil and a few South American countries. As a consequence, this has brought great opportunities for the textile sector in developing countries like Pakistan.

The foundations for the industry in Pakistan have always been very strong. Being major cotton producing country and having a large, modern and efficient spinning and weaving industry as well as the availability of man power are the strong pillars of the industry in Pakistan. The economic meltdown was a wakeup call for the value-added industry that survival was for the
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fittest; it also opened up new opportunities left by the closures in other parts of the world.

The industry found openings in the higher-end products that were no longer produced in the West. Textile products originating from Pakistan may have been viewed in the past as cheap or low cost products, but that perception is changing fast. Mr. Majyd Aziz Balagamwala (Ex-chairman Karacahi Chamber of Commerce and Industry) stated that The new government must now become very pro-active in the promotion of textiles, both in the domestic market as well as in the global marketplace. When a couple of years ago, the textile industry faced immense pressure from all fronts that added up into a precarious position resulting in demands for a level-playing field vis--vis regional competitors and when these demands reached a crescendo, the government set up a committee of stakeholders for finding a plausible and workable package to get the textile industry out of the quagmire. The Zubair Motiwala Commission developed and presented a broad-based package for the Prime Ministers decision. Resultantly, on July 15, 2006 the ECC of the Cabinet announced the Rs 25 billion textile package. Further progress was made by the SBP decision and by the efforts of the Textile Ministry to broad-base the R&D subsidy regime.

The textile sector of Pakistan appreciated and acknowledged the sagacious and far-reaching decisions by the government to boost the textile sector and assist in its rehabilitation and its capability to sustain itself in the global market. Inspite of these incentives and measures, the textile sector continued to face difficulties since the regional competitors went a step ahead to maintain their position and their status. It is crucial that all the components of the textile sector be encouraged and should be appropriately satisfied that they have been adequately backed by
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the government. It is therefore imperative that the government must resolve on a priority basis the residual issues that still impact negatively on these components of the textile sector. This would definitely ensue into more employment, more exports, and more industrialization. The vision that Pakistan would be a major player in the global textile market would then surely be a reality. The recently elected government is at a vantage position to ensure that Pakistans textile industry continues to be the economic engine and propel the nation into a prosperous country.

Rana Muhammad Farooq Saeed Khan (former Minister for Textile Industry) in his textile policy speech on 12th August 2010, representing TEXTILE POLICY 2009-14 stated that The Textiles Policy represents a new beginning for the textiles sector. Through this policy, the government has not only set out a development road map but has provided necessary support without which accelerated progress of textiles in Pakistan is not possible. It is now the responsibility of the private entrepreneur and the business leaders, exporters, labor and all others affiliated with this industry to transform the policy vision into reality. The exports target of $25 billion is ambitious but not beyond our potential. It is essential that we depend on our own resources and neutralize the debt burden. Textiles offer a unique and realistic opportunity to strengthen our economy for its sustainable growth. I appeal to our collective nationalism, specially of all those associated with the textile sector to seize the opportunities enshrined in the policy and endeavor to achieve our collective and individual goals. This alone will give reality to the dream nurtured by our beloved leader, Shaheed Benazir Bhutto, for Pakistan to earn its rightful economic, social and political place in the comity of nations.

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Pakistan Textile journal in its September 2011 edition reported that Textile exports is expecting to $13.0 billion in 2011-12.Weak demand and higher output has depressed world cotton prices and will cost Pakistan more than $1 billion in key textile exports for the fiscal year 2011-12, despite an expected bumper crop, said industry officials.

Despite severe losses to the cotton crop by 2010's floods, the value of Pakistan's textile exports in 2010-11 rose 35% to $13.80 billion from $10.22 billion the previous year, mainly because of globally high cotton prices.

Pakistani manufacturers of ready-made garments, valued at $1.77 billion in exports last year, fear exports will drop further, citing a significant fall in Christmas demand because of cotton price volatility and Pakistan's chronic energy crisis making foreign buyers reluctant to place orders.

The International Cotton Advisory Committee said world cotton production would rise 8% to 26.9 million tonnes for the year. The extra production is expected to drive down prices.

Cotton prices, which doubled and peaked at $2.27 per pound in the first quarter of 2011 on tight supplies and robust demand, have since fallen to less than half that level, where they remain.

Analysts, who expect the country's textile exports to total between $12.8 billion and $13.0 billion in 2011-12, say the impact of the turmoil from the US downgrade on Pakistani textile exports would not be much. Pakistan is expecting a bumper crop of more than 15 million bales. Some industry officials say the increased volume will offset some of the negative impact of a price fall.

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Analysis:
To explore my hypothesis, I took a collected data and statistics from WTO website, Economic survey of Pakistan 2011, APTMA, Ministry of Textile, Pakistan Textile Journal ( various editions), and Federal Bureau of Statistics Pakistan for the period of 11 years (2000-10).I collected basic information and data on basic variables like imports, exports, GDP & openness of Pakistan Economy.

The textile & clothing trade globally increased from US$ 355.0 billion in 2000 to US$ 613.1 billion in 2008 but it contracted to US$ 527.1 billion in 2009 due to global financial crises. World Clothing trade is growing at a faster rate as we can see that it increases US$ 197.7 billion in 2000 to US$ 316.0 billion in 2009.Moreover, World Textile Export stretched out from US$ 157.3 billion to US$ 250.2 in 2008 but contracted to US$ 211.0 billion in 2009.This is mainly because of global financial crises in late 2007.The weaker demand in the developed economies limited the expansion of global trade. Pakistan exported textiles worth US$ 6.5 billion and clothing worth US$ 3.0 billion in 2009 as compared to textile worth US$ 7.2 billion and US$ 3.9
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in 2008.We shared 1.88% of world trade in 2000 and reaches at peak as 2.23% in 2005 but contracted to 1.80% due to global financial meltdown. Domestically power and gas outages and ever rising cost of doing business have deteriorated capacity utilization in domestic textile and clothing industry. The global shortage in availability of cotton was due to floods in big producers and consumers of cotton country like Pakistan and China, flood driven crop failures in these countries. However demand of imported cotton soared after flood damaged crops. Foreign demand of Pakistan yarn has risen exceptionally. Chinese, the fiercest competitor of Pakistan in the world market, have acquired huge quantities of yarn from Pakistan, which caused problem by increasing demand domestically.

The prices of the raw cotton globally have increased and touched 2$/Lb, the raw cotton prices as per KCA spot rate have varied from Rs.7,116 /40 Kg minimum to Rs. 12,475 /40 Kg maximum. Currently prices range is of the Rs.10,500 or around US$ 1.5/ Lb. Based on the high cost of cotton all textile goods fetched high price resulting increased in Textile products export from US$ 7664 in 2009-10 to US$ 9956 in 2010-11 implying an increase of 29.9 percent.

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Above table 3.6 shows the Import of textile machinery during 2001-11 in Pakistan. Textile industry invested substantially in BMR for improving production quality and for value addition. We can see that 2001 to 2005 import of machinery increased every year and during 2004-05 a very huge investment in textile sector in shape of value addition of technological machinery. But after 2005 we see that there is declining in investment in machinery which may be because of less knowledge about latest technology or may be due to prevailing energy crises in country which caused shifting of industries to our competitor like Bangladesh. But in 2010-11 due to TEXTILE CITY project and due to TEXTILE POLICY 2009-14 by ministry of Textile we can see investment of US$ 365.5 on textile machinery in July- March 2010-11.

Conclusion:
From my analysis and findings, my point of view is at present the major threat to Pakistans textile sector are sustaining its competitive place against its competitor place and keep its target market as well as improve its share in whole world export. Textile trade in world is estimated around US$ 300 billion currently. Industry experts predict that by 2014 when the facilities in the West will close down and they will source their textiles from more proficient areas of the world resulting in the trade volume of around US$ 800 billion. Pakistan's share of the current trade volume is around 3.5%. If we are to maintain our current share of this larger pie, our textile exports alone are potentially targeted to reach US$ 28 billion. But there are some issues which directly or indirectly effects injurious on textile sector. Issues are energy crises in a country ( in form of fuel, electricity), lack of skills, obsolete technology usage and inefficient production etc. The Textile sector is bared to intense competition after the phasing out of quota besides facing resistance from developed countries in the name of Social Compliance, Environmental &

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Effluent Treatment Plants, Anti-Dumping, Counter-Veiling and Safeguard Accusations. To enhance quality of products and its competitiveness, textile industry requires investment in technology for meeting the new challenges. To tackle above cited problems & issues following suggestions are recommended for development and revival of whole textile sector.

Recommendations:
To get better-managed cotton by introducing latest technology in seed breeding to produce crossbreed and immediate arrangements to be made to replace the present poor quality deteriorated seed by new and capable ranges of seed. An arrangement needs to be finalized on a war footing basis to introduce culture of Bt Cotton Seed in Pakistan with the target to increase production of Cotton up to 20 million bales in next 3-5 years. Have all restrictions and blockages removed to make Wahga an resourceful point for cotton imports from India Implementation of modern technology for harvesting of cotton crop to minimize losses. Pakistan is passing through most difficult phase of its energy crises, which is great threat for its export oriented textile units. So government should emphasizes on power generation in priority basis because due to power crises industries are bearing heavy loses every year also mills owners are shifting their business to other regions like China & Bangladesh because of energy problems.

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Coal based power generation to be explored on a priority basis, utilizing the abundant availability of coal reserves.

Subsidies to be announce on Power and energy for Industrialist in Faisalabad city which is also a biggest textile center of a country and also for Karachi city which is Economic hub.

The gas tariffs for textiles units should be freezed at the current level for atleast next 3-5 years.

Shift to the production of high quality and give more attention to value addition rather than raw form.

There is a lack of communication between different stakeholders, government and different textile bodies should arrange meetings monthly or quarterly basis to check, maintain and identifying weak and strong points.

There should be a Free Trade Agreement (FTA) with the European Union, USA and other Markets.

We should rely on Trade Instead of Aid. Preferential Treatment to Regional Competitors Government should announce exemption on some export income on those products which has competitiveness such as cotton yarn and abolishing the tax incentives will promote the supply of cotton yarn to high value added sectors.

Training center in garment for women should be established as our more than 50% population consist of women, they can play a vital role in textile growth. Government should ensure greater access for women to the textile training and

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educational programs with a focus in the areas of fashion designing, knitting and sewing techniques. Banks & government should enhance flow of financing from large units to medium and small sectors because their contribution is more. The above cited objectives can only be achieved, if there is mutual understanding between farmers, grinners, spinning mills, weavers processing, knitting units, garment manufacturers and government.

References:
1. Government of Pakistan, (2011). Economic Survey 2010- 11. 2. APTMA, Chairmans Review by Mr. Muhammad Iqbal Ibrahim 2007-08 3. EPB , (various editions), Export bulletin.(Monthly) Government of Pakistan. 4. Majyd Aziz Balagamwala ( Ex- President Karachi Chamber of Commerce and Industry) article Pakistans textile Industry Needs Resurrection 2011. 5. Altaf Katchi (CEO of Axa International, Pakistan.) Pakistan's Textile Industry Gearing Up for Growth December 2010. 6. Ministry of Textile website. 7. Federal Bureau of Statistics 2000-10. 8. World Trade Organization (WTO) website. 9. State bank of Pakistan, imports and exports (BOP, SBP) from SBP website. 10. International finance corporation (IFC) 2011.Annaual report on textile fabrics.

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