NationalVOLUME 16 ISSUE # 08

Textile policy: Betting on the wrong horse?

The government expects the textile sector to earn over $20 billion by 2025, under the new textile policy. It has announced incentives worth Rs838 billion over the next five years for the industry after lowering electricity and gas tariffs. The policy aims to create jobs and earn more revenue. However, questions are being raised about the sector’s ability to perform without critical reforms.

The incentives for the industry are not new. All past governments had pinned hopes on the sector to create jobs and revenue. It was showered with huge incentives in the past, but it failed to perform and reform itself and proved to be a black hole of incentives. According to the draft policy, the government will provide consistent, long-term policies for the foreseeable future, providing electricity and gas at low rates. The government will extend fiscal incentives of Rs838 billion for the next five years. Realising the potential of value-addition in each segment of the textiles and apparel supply-chain and inherited know-how of products and markets by the private sector, the Commerce Ministry has decided to set the target of value added and textiles at $20.865 billion, of which $ 16.294 billion will be the value-added sector and $4.571 billion for the textile sector.

According to the Commerce Ministry, ambitious targets were set and financial commitments of Rs188 billion and Rs65 billion, respectively, for the first (2009-14) and the second (2014-19) textile policy were made by the then governments to achieve them. However, commitments were not fulfilled and timely payments were not made in financial support schemes. Further, funds were not allocated for public sector development under infrastructure, vocational training, productivity and compliance-related programmes. The new policy will face the same challenges.

The new textile policy aims to address shortcomings in the previous policies and a multi-pronged strategy will be devised to fulfill the commitments. The present government has disbursed Rs97 billion in pending liabilities of previous governments in two years, while the two past governments only disbursed Rs68 billion. Customs duty drawback rates will be revised. The government will revitalise Pakistan Textile City Limited and Karachi Garment City Limited. A training programme will be launched, especially on industrial stitching, and mostly for women. The marketing strategy will be reviewed and the first ever e-commerce policy is under implementation in phases and it would provide an open access to textiles and apparel manufacturers and exporters to tap available business opportunities across the globe. Amazon has already started registering Pakistan manufacturers and exporters, including textiles.

The draft policy states that due to high tariffs on value-added products, domestic manufacturers end up importing more man-made fibres (MMF) rather than fabric, while countries, such as Vietnam and Cambodia, import MMF fabric and export high value-added products. Tariff rationalization is imperative to ensure equal distribution of profits and encourage the industry for investment to improve productivity. As Pakistan is a major supplier of greige/semi-processed raw materials, there is a need to make a shift towards value-added products i.e. garments, made-ups and functional, technical textile products. In the absence of modern infrastructure facilities, the industry has to invest in infrastructure-related components, captive power generation and effluent treatment plants. It needs to be covered through development of modern textiles and garments parks.

The textile and apparel sector could not attract foreign direct investment because of inconsistent policies, including the exchange rate, lack of infrastructure facilities and availability of energy at competitive rates. A big challenge will be to restore the confidence of international investors by implementation of the textiles policy in letter and spirit. Pakistan has recently been able to bag a favorable deal in the Pak-China Free Trade Agreement phase-II. Development of the Gwadar Port and projects under the China-Pakistan Economic Corridor (CPEC) will also provide a launching pad to attract investment in the textiles and apparel value-chain.

The major issues of the textiles and apparel value-chain relate to other ministries and organisations and few subjects have also been devolved to the provinces. A better collaboration among various stakeholders (government ministries, organisations and provinces) is needed for proper implementation of the textiles policy. Moreover, provinces are required to either offer additional benefits to manufacturers for investment in their respective provinces or at least provide them a conducive environment.

A looming challenge is the textiles and apparel sector demand for the restoration of a zero-rating regime, and release of delayed refund payments by the government. It is crucial if exporters are to enhance capacities and production. A timely refund mechanism is essential to address the liquidity crunch of exporters, otherwise, the government must restore the zero-rating regime. One of the important reasons for not fully utilising the export potential in the textiles and apparel value-chain is inconsistent policies, especially in availability and pricing of energy and raw materials, taxation, refunds and regulatory regimes. Therefore, the Ministry of Commerce will have to ensure that energy prices remain consistent, regionally competitive and rationalised among provinces.

Experts say the sector was also heavily incentivised in the past but if failed to reform itself and deliver. Despite all the money, special financing and tax rates it has received over the years, it continues to work with the same outdated machinery, little follow through on value-addition, and simply unacceptable levels of vertical integration. Instead, the government should have looked for ways to transform the textile sector and make it more adaptable to the demands of modern day commerce. The sector will have to come up with an actionable plan to justify the incentives.

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