Pakistan is deindustrializing prematurely. The premature deindustrialization of Pakistan is contributing to an increase in Pakistan’s trade deficit. With the country deindustrializing, the share of exports in GDP has gone down from 13.0 percent in 2006 to 8.7 percent in 2019. Additionally, Pakistan’s share in global exports went down from 0.16 percent in 2005 to 0.13 percent in 2019. Clearly, Pakistan hasn’t kept up with global demand for manufactured/value-added products.
The textile sector is a major manufacturing and export sector for Pakistan. To begin the process of reversing the premature deindustrialization of Pakistan and for increasing the contribution of manufacturing in GDP, it is important to start with a sector in which Pakistan has a global presence. In 2018, textiles contributed 8.5 percent to the GDP, 25.0 percent to industrial value-addition and employed 40.0 percent of the industrial labor force.
As part of PBC’s Make-in-Pakistan initiative, an initiative which aims to revive manufacturing in Pakistan, leading to jobs, an increase in value-added exports, import-substitution initially of labor-intensive products and an increase in tax collection. The PBC has published reports on the Knitted Apparel and Denim Apparel sectors with the purpose of identifying key impediments to achieving export competitiveness. This report titled “Strengthening the Export Competitiveness of Pakistan’s Towels and Terry Made-ups Sector” is part of the PBC’s Make-in-Pakistan Series and relies on existing secondary research supplemented with field interviews of firms in the towel industry.
A significant portion of Pakistan’s exports comprises of textiles. In 2018, textiles contributed 59.9 percent to Pakistan’s exports. Pakistan’s total exports of textiles in calendar 2018 amounted to $13.7 billion. In 2018, Cotton (raw, waste, yarn, thread & cloth) was the major contributor at 25.4 percent to Pakistan’s textile exports. Knitted garments contributed 20.7 percent while woven apparel contributed a further 18.5 percent to Pakistan’s textile group exports. Bed ware was the fourth largest export in the textile group contributing 16.6 percent. In made-ups, the towel’s subsector commands the second-largest share after bed ware in terms of exports with a 9.6 percent share.
Source: ITC, Trade Map
Pakistan has been ranked as the second-largest exporter of towels with exports of $1.3 billion in 2018. China has been a dominant player in this sector since 2001. China, with exports of $4.7 billion, dominated the global market for towels in 2018. Global exports of textiles and towels have increased substantially after the end of the MFA quota regime. The MFA shaped global competitiveness for many countries, and in Pakistan’s case, only 20-25 companies were able to export in the MFA phase. In the post-quota regime, many exporters, especially SME’s, took time to get on track. Despite the significant exports of towels, Pakistan lags behind its peers. Bangladesh’s exports grew from $91.9 million in 2006 (post MFA) to $275.1 million in 2018 (exports increased by 199.3 percent). Similarly, Viet Nam’s exports grew from $96.6 million in 2006 to $306.4 million in 2018 (exports increased by 218.2 percent). Pakistan’s exports, on the other hand, grew from $864.3 million in 2006 to $1,328.8 million in 2018 (exports increased by only 53.7 percent). If Pakistan does not maintain the same rate of progress as our competitors, our export share in global trade will continue to decline.
Pakistan’s exports of towels and terry made-ups suffer from market concentration. Out of the $1.3 billion worth of towel exports, nearly 90 percent went to two markets; the USA (57.6 percent) and the EU (32.7 percent). It would be better for Pakistan to tap non-traditional markets such as the Russian Federation, Chile, Korea and Mexico for market expansion. These markets have witnessed higher growth over 2014–18, as shown by their CAGRs (2014-18).
Pakistan’s underperformance in exports can be attributed to a number of factors given below:
- Supply-side and Productivity Constraints:
- Quality, Price and Availability of Cotton.
- Reliance on Imported Polyester and other MMFs.
- Labour Productivity and Skill Development for Job Creation.
- Limited Access to Technology and Outdated Machinery
- Low Capacity Utilization Preventing Economies of Scale.
- Ineffective Market Expansion Strategies for Trade Promotion:
- Lack of Market Penetration.
- Ineffective Strategies for Image Building and Brand Development.
- Towel industry as a whole has been lacking in potential foreign collaborations and joint ventures.
- Business Environment and Trade Related Issues:
- Automated Mechanism for Tax-based Export Incentives.
- Effect of Exchange Rate Movements on Exports.
- Harassment by Different Government Agencies.
- Limited Access to Credit hampers Investment in Working Capital.
- Socio-Economic and Environment Issues:
- Business Compliance with International Standards.
- Installation of Common Effluent Treatment Plants (CETPs).
Although, the Government of Pakistan has in the past announced a number of textile policies and sector specific incentives to tackle these issues, they have not been successful due to poor implementation.
In order to devise a strategy to increase Pakistan’s towels and terry made-ups exports, 21 exporters were interviewed to share their views on the policy framework required to make Pakistan a major player in the global towel market.
Following were suggested to enhance export competitiveness of Pakistan’s towels and terry made-ups sector:
- Despite being one of the top cotton-producing countries in the world, the cotton crop in Pakistan is not at par with the world in terms of yield. According to the Economic Survey of Pakistan 2019-20, the total seed requirement was 57,205 metric tonnes. However, the amount of seeds locally available and imported was 21,844 metric tonnes. It is recommended that emphasis needs to be on improving cotton seeds and adopting better farm management techniques through the transfer of technology. Improving the yields of the cash crop will help the manufacturers in the entire value chain enhance competitiveness.
- The government imposes a regulatory duty on imports of cotton and yarn, putting towel manufacturers out of the international market by protecting the spinning sector. However, with the devaluation, the spinners will already be getting a much higher price for their cotton in the global market. There is certainly no requirement to impose a duty on cotton and cotton yarn.
- The sugar mills owners have established their sugar mills in close proximity to the areas where cotton was grown. As a result, the growers started growing sugarcane instead of cotton. The government must start from the base and encourage growers to grow cotton by incentivizing the growing of cotton and do away with the support prices for sugarcane.
- To promote the exports of high value-added embroidered towels, Pakistan needs to focus more on the production of towels made from man-made materials blended in cotton to increase the towel’s aesthetic effects. Therefore, to increase the production of artistic towels, manufacturers must use low percentages of white and high proportions of dyed yarns using MMFs and cotton both. Hence, it is suggested that the government may abstain from increasing custom duty on polyester to promote value-addition and competitiveness in the international market.
- The towel industry of Pakistan is highly labor-intensive. However, the limited availability of skilled labour force hinders quality, productivity and value for growth in exports. It is recommended that training staff be given exposure to the international syllabus and to make course content more relevant to the challenges that the industry faces today.
- There is a need to make considerable investments in the areas of processing to catch up with our competitors like India and Bangladesh. Technology adoption rates are low in Pakistan as investment in technology is risky and not subsidized sufficiently. By installing modern processing machinery, it is possible to achieve a high average unit price for Pakistani towels in the global market. To compete in global markets, Pakistani manufacturers must upgrade both technology and processing. Upgradation should be funded through either tax incentives or lower rates of mark-up for capital investments. The government formulated a Technology Upgradation Fund (TUF) scheme to facilitate the textile sector. Still, the exporters complain that this scheme has not been effective because it does not reduce the risks associated with technology adoption. Furthermore, chemicals and dyes used in textiles should be zero-rated as well, to make technological investment more attractive.
- To move into the higher end of the markets, towel manufacturers need to produce towels using dyed yarns, which fetch better prices than piece-dyed towels. The printing aspect will add another dollar to the value of the towel. The value addition in the form of reactive printing on towels is currently being done by only a few manufacturers in Pakistan. Hence, it is suggested that the government may abstain from imposing custom duty on reactive dyes (CD: 16 percent) to promote value-addition and competitiveness in the international market.
- The fairs being arranged locally should be well-advertised throughout the world to attract international customers and should also be included in the regular world exhibition calendar.
- In order to improve unit prices, more international brands should be invited to Pakistan as more foreign investment and joint ventures are being attracted successfully by our competitors. It is suggested that a ‘Brand Fund’ should be introduced to achieve the desired results. With the help of this fund, full support should be provided to the manufacturers and exporters who invest in building their brands.
- It is important to promote foreign collaborations and joint ventures to improve trade in marketing and manufacturing processes, to introduce new technology and build brands. This will lead to an improvement in Pakistan’s image and a rise in the unit values compared to the current values.
- To mitigate the impact of COVID-19 on the towel industry and to sustain employment and exports of the country, sales tax “zero rating” should immediately be restored for 5 export-oriented sectors to support the already struggling export sector and ensure that their liquidity issues are resolved. The rebate and sales tax refund structure should be audited based on the input-output coefficients and timely adjustments are made to maintain exporters’ competitiveness in the international market.
- The government should provide incentives and boost lending to the private sector by reducing the export refinance rate in order to improve the competitiveness of the towel sector.
- To retain the towel industry’s competitiveness amidst the COVID-19 crisis, the government must extend the concessionary rates for utilities for the next three years.
- Environment, Health and Safety (EHS) and Corporate Social Responsibility (CSR) practices are not an integral part of doing business in the towel sector. The government needs to help spread awareness regarding EHS laws, especially in the SME sector.
- The world is moving to zero discharge of hazardous water, for which Common Effluent Treatment Plants (CETPs) have to be installed. There should be a common treatment facility for all units, especially SMEs, and the government should subsidize and incentivize the installation of the treatment plants.
The PBC is a private sector not-for-profit advocacy platform set-up in 2005 by 14 (now 82) of Pakistan’s largest businesses. PBC’s research-based advocacy supports measures which improve Pakistani industry’s regional and global competitiveness. More information about the PBC, its members, objectives and activities can be found on its website: www.pbc.org.pk