The dream of 200% growth in textile exports

KARACHI:

Pakistan continues to face the challenge of weak exports. This had a negative impact on the country’s trade balance, current account and foreign exchange reserves.

The modest scale and sluggish export growth are major factors that lead the country to frequently seek bailouts from the International Monetary Fund (IMF).

Pakistan’s export profile is not only limited in size but also lacks diversity. The textile industry bears the brunt of this responsibility, accounting for nearly half of the country’s total exports of goods and services in the last fiscal year, according to data from the State Bank of Pakistan (SBP).

During the latter stages of the pandemic, the textile industry saw a significant rise, taking market share as competitors in India and Bangladesh were forced to close to control the spread of the virus. Government incentives and subsidies played a key role in this growth, with textile exports growing by 12.6% in 2019 and 28% in 2020.

Unfortunately, this upward trend did not continue. In the face of economic challenges and political crises, the textile sector experienced a downturn, with exports declining by 9.8% in 23 and a further 6.3% in the first four months of this year 24.

However, the Commerce Ministry’s Export Advisory Council (EAC), which includes top executives from the textile industry, has suggested an extremely ambitious export target. They suggest that, with the right mix of incentives and reduced trade barriers, Pakistan’s textile exports could soar to $50 billion within five years.

This target far exceeds the $16.6 billion in textile exports recorded last year and even surpasses Pakistan’s total exports of goods and services of $35.5 billion.

It appears that the EAC is looking to increase textile exports by a staggering 200% over last year’s figures, a target that could herald a period of economic prosperity for Pakistan.

However, it is vital for policymakers to take a broader perspective, considering both the historical performance of the textile industry and the current global business climate before providing incentives.

It is important to note that while the textile industry has seen impressive growth in the recent past, this growth has been significantly impacted by the pandemic’s disruption to global supply chains. A longer-term perspective reveals a rather disappointing picture of the sector’s performance.

SBP data shows that from FY11 to FY20, Pakistan’s textile exports remained stagnant, hovering between $12 billion and $13 billion. The pandemic provided a boost, lifting textile exports to $18.4 billion by the 22nd year. However, this increase represents a modest growth of just 44% over 10 years.

Hence, an important question arises: Is it still possible for Pakistan’s textile sector to achieve 200% growth in exports in the next five years, given that it managed only 44% growth in the last decade in a more favorable economic environment? This question becomes important when we think about the advantages that the sector previously enjoyed.

Historically, the textile industry in Pakistan has benefited from various incentives such as easy access to soft loans, refinancing facilities and subsidized energy rates.

Reading Textile industry unveils $50 billion export plan

The textile industry also operated during what is often referred to as the “era of free money,” an era that began after the global financial crisis of 2008, when global central banks cut interest rates and pursued expansionary monetary policies.

This era was characterized by reduced borrowing costs and increased demand, which supported business growth.

At the same time, the global economy, which includes Pakistan’s key trading partners such as the US, China and the UK, has seen strong growth. This period of economic recovery followed the global financial crisis of 2008-09 and continued until the onset of the Covid-induced recession in 2020.

Despite these favorable global conditions, the development of Pakistan’s textile sector during this period was particularly poor.

Now, the textile industry of Pakistan is facing a tough business environment. With the State Bank setting interest rates at a record 22%, the cost of borrowing is higher than ever.

At the same time, the global economic slowdown and the impending recession in some of Pakistan’s trading partners, such as the United Kingdom, signal a possible decline in demand for textiles. This is a big challenge for the textile industry, which has to face economic difficulties both domestically and internationally.

The industry is likely to look for incentives such as tax breaks, reduced energy costs and affordable financing to boost its ambition to increase its exports to $50 billion. However, the onus is on policymakers to assess the feasibility of this goal.

Given the current situation, it seems increasingly likely that the textile industry will struggle to even maintain its current export volume, let alone achieve unprecedented growth rates.

The textile industry is undoubtedly vital to Pakistan’s economy. It needs the right incentives. However, the government’s limited financial resources require careful allocation, ensuring that they benefit sectors with the highest potential for growth and employment.

Policymakers must conduct a thorough cost-benefit analysis before incentivizing any sector.

Incentives should also be given to other sectors such as the oil refining industry. This could boost the development of the oil sector, spawning other value-added industries (such as petrochemicals), contributing significantly to the economy.

Boosting refining capacity could not only improve energy security, but also transform oil refining into an export-oriented industry, offering significant geopolitical advantages, as we have seen with India.

Another option could be the granting of loans on favorable terms to individuals for home purchases. This bottom-up approach (as opposed to the outcome of other economic policies) could have a more direct impact on the masses. Such a plan could revitalize the construction and real estate industries, which, like textiles, are labor intensive.

Policymakers need to carefully assess the potential of different sectors before providing incentives, especially considering the country’s challenging economic situation, the history of the textile industry and the global business environment.

THE AUTHOR IS A CORPORATE CONSULTANT SPECIALIZING IN BUSINESS AND FINANCIAL ISSUES

Published in The Express Tribune, December 18^u2023.

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