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Difficult year ahead for cotton industry.

Nearly all sectors of our economy have welcomed the 2004-05 budget presented by the Finance Minister, Shaukat Aziz. It is evident that having concentrated on bringing fiscal discipline to the economy, the minister is now ready to use the room thus created to inject some stimuli to start the growth march that targets the annual GDP growth rates of 8% by 2010. On the textile front the minister not only acceded to the longstanding demand of the industry for removal of sales tax on ginned cotton, the also agreed that the practice was blocking fifteen billion rupees of the industry. Sales tax on imported ginned cotton, however, has not been removed.

Exempting domestic cotton from sales tax and imposing the tax on imported cotton is a violation of National treatment principle of WTO and, therefor non-compliance of WTO. The government will have to remedy this situation sooner or later.

Son after formation of the Jamali Government an APTMA delegation met the Commerce Minister Humayun Akhtar who asked APTMA as to what was one single most important thing he could do for the textile industry. The APTMA delegation presented two requests:--Inclusion of polyester fibre in DTRE; removal of sales tax on ginned cotton.

Credit must, therefore, go to Humayun Akhtar for delivering on both counts within a short period of 1 and half years. Lowering of import duties on machinery, across the board, also bears the stamp of Humayun Akhtar, who since his days as Board of Investment chairman is a proponent of zero import duties on machinery. Humayun Akhtar's influence on the budget-making process is a healthy sign of the team effort by our economic management team. The Governor of the State Bank, Dr. Ishrat Husain, has also been working, what one can term, beyond the call of his duty. Industry, especially the textile industry, must recognize the pro-development and troubleshooting role of the governor and maintain information bridge with him.

All in all, after along long time, we not only have a good team but also an "inform" team. The textile industry has responded by pumping in investments, year after year, at the rate of one billion dollars per year and by continuously increasing the percentage of finished goods in the textile export package. Now the big question is, "is all this effort going to be sufficient to launch the industry into post-quota period"? Unfortunately, the answer is an emphatic No.

1. The year 2004-05 is going to be difficult for Pakistan's economy and the export target of $13.5 billion will not be achieved. Pakistan's exports will remain stuck at $12.5 billion level, while import will increase to $17 billion. Trade definitely will increase to $4.5 billion, putting great pressure on our current account balance.

2. The inflation rate will touch double digit. The economy is being steered into 3rd phase, i.e. domestic consumption driven as compared to import substitution phase of 1960s and then export driven phase of 1990s. Increased domestic consumption will out pace domestic supply and will fuel inflation. This will put pressure on interest rates and rupee-dollar parity.

3. The overall export target has to ride on the textile exports targeted over $9 billion. Last year's growth in textiles export was caused mostly by improvement in unit rates. This year the rate movement is going to be negative, thereby having a negative impact on our export value. The negative movement is going to be because of three reasons.

(a) Reduction in the price of primary items like cotton and cotton yarn.

(b) Removal of "quota-rental" component for the prices.

(c) Price slashing by China.

The textile sector will therefore be lucky to come out with 8 billion dollars exports in the year 2004-05.

4. There is going to be great confusion during the last three months of calender year 2004. Rules regarding "flexibility" in quota will not be clear. The importing countries will not clear consignment reaching their port in January 2005, but shipped in 2004, and not covered with a "visa". The U.S. Buyers will slow down their purchase, where they can or will demand substantial cut in prices. E.U. Buyers will be influenced by Pakistan's exit from next year.

5. Electricity distribution system in the country is extremely weak and overburdened and unable to support sustained growth. WAPDA cannot make up its mind whether it has extra power or it is short of power. As WAPDA chief goes around complaining of excessive number of electrical appliances sold, WAPDA distribution companies are discouraging in dustry from setting up self-power generation, regard less of extremely unreliable and poor quality WAPDA supply.

6. With the price cut pressure, our industry, which is already starved of profits, will see its margins further squeezed. The quota holders with substantial "wealth" in the form of quota value at the start of the calender year will see the value of this wealth come to naught.

7. China's price slashing has caught very one by surprise. In the recently integrated category 236 (socks) China increased its share of U.S. Import market from 2% to 50% and reduced the price by 50%. This trend is being witnessed in all categories where quota restriction is being removed.

8. The comparative advantage provided by domestic cotton is proving to be a misnomer. Pakistan, in the near future, will remain a cotton importing country. Our industry will get its cotton not at "export parity" price but at "import parity" price. Our industry is not viable at "import" parity price of cotton. The great comparative advantage will, therefore, turn into a competitive disadvantage.

9. The infrastructure inefficiency in Pakistan remains inefficient as before. One sees gas electricity generators sitting idle, waiting for gas. Another, having deposited WAPDA estimate of several million rupees, has been refused electricity connection and is also not being refunded his money even though he has abandoned the project. These industrialists have no resource, except court of law. The Monopoly Contract Authority has fined spinning mills for not having submitted data to the authority, so the MCA can ensure that spinning mills in Pakistan are not operating a monopoly. Perhaps, MCA after finding cement manufacturers a bit too hot to handle has decided to generate the mandatory spinning mills. The list is endless. The "irritants" committees set-up by Shaukat Aziz are long gone. The one desk policy by Liaquat Jatoi which replaced the one-window policy has been forgotten. The "focal points" of the Board of Investment have lost their focus. The provincial committees on investment have not even been bothered with. Meanwhile, sector industrialists can not even talk to a utility head even on telephone, to register their complaints.

10. With price slashing and hot competition, lack of trained man-power (supervisory and skilled workers) is going to catch up with our finished products industry. Although emergency measures are being taken by the government and the industry, we should expect some very difficult years while these efforts bear fruit.

11. The industry lack a proper commercial environment to operate. Yarn trade is an example. Seventy percent of yarn produced is sold domestically. Eighty percent of domestically-sold yarn is sold on credit. Yet, there is no buyer rating or credit insurance system. Banks are not comfortable with local L/C's. Fraught with the risk of domestic sales, the sellers add defat margins. A huge under ground market flourishes. With a squeeze of profit margins setting in, the market faces the risk of severe disruption.

12. The industry operates in a fragmented manner. Due to lack of a proper commercial environment and lack of "service" mentality, integrated units are in vogue, This has two effects on the industry.

(a) Operators, who are not large enough to set up integrated houses, will be squeezed out.

(b) Specialist operators have not been created. Thus we do not have large specialist groups in spinning, knitting, weaving, processing etc. This makes our product range very limited and off the shelf deliveries are impossible.

Post-quota scenario is going to be a "large order market". Our industry is not ready to handle such large orders at the required pace.

13. Calender year 2005 will see the expiry of market access concession provided by EU, squeezing our export to EU.

14. We have still not organized our defence of anticipated trade remedy actions like antidumping, countervail, safe-grants etc.

The list of industry's problems and inefficiencies is long. Cotton contamination, DTRE, effluent treatment, BT cotton, lack of recognized labs, lack of marketing strategies, excessive energy costs, etc. Our industry is not ready of post quota scenarios and it will not meet the 2004-05 export target.
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Author:Sheikh, Akber
Publication:Economic Review
Date:Jul 1, 2004
Words:1439
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