Pakistan textile production and exports are poised to grow this year as displaced orders from Bangladesh shift here. The extent of this increase, however, hinges on how swiftly millers and the government can adapt to fully seize the opportunity.

Business sources claim, given the right policy environment, textile exports could surge from current $16.5 billion to $20.5bn, marking a record $4bn gain within a year. Government circles, however, are less optimistic, projecting an increase of $2bn to $3bn in textile exports for FY25.

The recent monetary policy statement touched on this potential, noting the brighter outlook for textile trade. It stated: “Export earnings are expected to remain stable as the growth in high value-added textiles is expected to compensate for the likely reduction in rice exports.”

Textile exports saw a modest increase of 0.9 per cent in FY24, rising to $16.55bn from $16.50bn the previous year, according to data from the Pakistan Bureau of Statistics.

Textile millers acknowledged a modest uptick in industrial activity, but many leaders voiced strong criticism, accusing the government of squandering their opportunity to make a mark in the global textiles market. They argued that stifling policies are squeezing the sector, leaving it unable to rise up to the challenge of becoming a reliable supply source for Western brands.

Pakistan’s textile industry is well-positioned to absorb Bangladesh’s displaced orders provided the government eases stifling policies

Stuck refunds and high taxation were cited as causing liquidity problems for businesses receiving new orders. Additionally, they expressed frustration over excessively high energy costs and uncertainty surrounding gas-based captive power plants.

Government officials assert they are doing everything within their means to support the textile sector, recognising the substantial investment in technology upgrades made over the last two years to stay competitive globally. They believe textile plants are operating at full capacity and highlighted companies like Style Textile, Interloop, Nishat, Artistic Milliners and Yunus Textiles among key beneficiaries of the diverted demand.

Addressing the frustration among textile exporters, Ali Pervaiz Malik, Minister of State for Finance, Revenue and Power, stated, “I remain in constant dialogue with them. The flow of refunds has improved after some temporary setbacks, and the deferred sales tax refunds are being addressed.

“The shift of captive power plants to the national grid is a continuing requirement from the previous IMF [International Monetary Fund] programme. Moreover, using captive power plants with a 30pc heat rate for a scarce fuel is not sustainable. The government is committed to working on a viable transition plan.

“As for taxation policy, most presumptive taxes have been dismantled in line with the principle of horizontal equity. The government intends to address any anomalies once advance tax data for the first quarter is available for exporters. We fully understand the critical role exports play in our economy, but the country cannot risk jeopardising the $7bn IMF programme,” he explained.

Khurram Mukhtar, Chief Patron, Pakistan Textile Exporters Association, expressed doubts about the government’s readiness to fully capitalise on the current opportunity. He noted that as textile exports surge, “Western buyers increasingly view Pakistan as a reliable supplier, offering comprehensive solutions.”

However, Mr Mukhtar emphasised that to scale up textile exports to $19bn in FY25 and potentially $25bn in two years, critical reforms are needed. High operational costs, particularly for energy and taxes, must be addressed. Additionally, working capital tied up in the refund regime needs to be released.

“Despite showing resilience with $1.64bn exports in August 2024, exporters face an undue burden from taxation and uncertainty around energy policy, especially reports of co-gen power plants shutting down, poses a major challenge. Does the government have a clear strategy to support the industry, or will it continue imposing hurdles that stifle its potential?” questioned Mr Mukhtar.

Shahid Sattar, Secretary General, All Pakistan Textile Mills Association has raised concerns about the sector’s viability. He pointed out that the textile and apparel industry operates on thin margins and is burdened by an 18pc tax on inputs, a 1.25pc minimum turnover tax, and a 1.25pc tax on export proceeds, including the Export Development Fund surcharge.

Mr Sattar also warned of the potential additional withholding taxes and severe cuts or freezes in sales tax refunds, which could further strain exporters.

He criticised the government for setting power tariffs above 15 cents/kWh, making grid electricity financially unviable compared to competitors in India, Bangladesh and Vietnam, who pay just six-nine cents/kWh.

With many in the sector relying on gas-fired captive power plants to survive, the government’s move to phase them out is seen as counterproductive. “Captive power is crucial to industrial processes globally, and reclassifying it under the industrial gas tariff category is essential. Penalising captive users with high gas tariffs, laden with cross-subsidies and the gas companies’ losses, amounts to self-sabotage,” Mr Sattar argued.

Mudassar Raza Siddiqui, DG Textiles, Ministry of Commerce, believes Pakistan’s textile and apparel industry is well-positioned to absorb displaced orders from Bangladesh and attract new business from existing and potential buyers. “The industry remains optimistic about a recovery in exports this fiscal year, with August 2024 showing a 13pc increase in textile and apparel exports compared to the same month in fiscal year 2023,” he stated.

While acknowledging the challenges, Mr Siddiqui emphasised the government’s ongoing efforts to ease pressure on exporters, noting: “The Ministry of Commerce recently released Rs2.5bn to clear verified claims under duty drawback schemes, with more efforts underway.” Jawad Paul, Secretary Commerce, agreed with the views expressed by the DG Textiles.

Published in Dawn, The Business and Finance Weekly, September 23rd, 2024