The textile sector of Pakistan is one of the vital economic drivers for the economy and constitutes 8.5% of the total GDP. Out of the total export earnings, around 60% come only from the export of textile products. The textile sector employs around 40% (19 million workers) of the total labor force and contributes 46% in total manufacturing of Pakistan. In aggregate, the textile and clothing sector supports around 29% of value-addition in manufacturing across Pakistan.
Moreover, Pakistan is the 8th largest exporter of cotton in Asia, and it has the largest yarn spinning capacity after India and China. The sector has some strong linkages with agriculture and cottage industries and the livelihood of around 25 million individuals, either directly or indirectly, depends upon the textile sector. Moreover, the inherent potential for higher value-addition at subsequent stages of the production chain further signifies the importance of the textile sector for Pakistan.
Having said that, the performance of the sector has suffered a lot over the last 10-15 years due to weak policy support. The export and growth performance of the sector suffered greatly due to high manufacturing expenses, recurrent power shortages, and flawed strategies. Resultantly, textile exports remained merely around $12.78 billion during 2020 (SBP).
The total production in the textile sector remained stagnant around 262,000 thousand square meters of cloth and 858,725 tons of yarn over the years. During the 4th quarter of 2020, the sector recorded around a 34% further decrease in production in both heads due to the COVID-19 pandemic. Yet, regaining the production steadiness position during the very next quarter indicates the resilience of the textile sector of Pakistan.
Although, substantial export earnings of Pakistan are based on textile products, its share in the international textile exports is much smaller. Out of a total US$ 792 billion of textile exports, Pakistan contributes merely 1.7%. While the share of China, India, and Vietnam stands around 34%, 4.6%, and 5% respectively. The textile products that Pakistan exports are diverse, ranging from cotton fiber to ready-made garments. However, except for the recent picking up, the growth till 2019 followed a downward trend.
Therefore, if Pakistan wants to increase textile exports from $12.78 billion to $26 billion, then the priority should be given to promote and export high value-added products. Out of the top 20 products with the highest unrealized export potential, 14 products are from the textile sector, reports International Trade Center (ITC) in one of its country reports on Pakistan. This shows the immense significance of textiles for kick-starting the economic wheel of the country.
However, the textile sector has outperformed during the current pandemic and recorded a 10.79% growth in exports during January 2021 over the corresponding month of last year (PBS). This recent extraordinary performance of the textile sector can partially be attributed to the regionally competitive energy tariff (RCET) policy that the government has adopted since late 2018.
What is RCET policy? Under the RCET policy, the government offers a regionally competitive RLNG/Gas tariff at the rate of $ 6.5/mmbtu and fixed electricity tariffs at 7.5 cents/kWh for export-oriented units of the zero-rated sectors since 2018. In September 2020, the electricity tariffs were revised from 7.5 cents/kWh to 9 cents/kWh. The sector still managed to perform well.
Pakistan has strong export potential in the textile sector. To unfold the inherent export potential of the textile sector, large investment in machinery, enhanced skill set, and product development is critical. However, success in these avenues is not possible in the absence of supporting policies from the government.
This is particularly true due to the fierce competition in textile products that our region observes. Resultantly, a slight relative difference in the factor costs brings a massive bearing on the country’s export performance. The same was true in the case of energy tariffs applied to the textile sector before the RCET policy. Being the leading component of conversion cost, regionally uncompetitive energy tariffs made our textile products uncompetitive, mentions Pakistan Institute of Development Economics (PIDE) in its latest study on the subject. That is why, the government, eventually offered RCET to the industry in late 2018, and the textile sector started showing signs of revival.
The textile sector is presently experiencing expansion and up-gradation, all because of the RCET policy that has turned profits from the business into positive territory. The sector is seeking more finances and asking for more technological up-gradation support.
Now, to optimize the full potential of the textile sector and retain as well as enhance the existing customer base, the consistent implementation of RCET policy is the need of the time. In contrast, some quarters are proposing the withdrawal of the RCET policy, while others are suggesting the moratorium of gas. With these whimsical policy signals, we would not be able to develop investors’ confidence, and reap the full potential benefits of the sector will remain a far-distant target.
