The textile industry plays a crucial role in Pakistan's economic health - but mismanagement and unfavourable political and global conditions have seen the sector take a nosedive in the Nineties. Now the industry stands at a crossroads - will it continue along its current negative trajectory or can it turn its fortunes around?
Over the next two weeks, just-style will publish three features taken from Textile Vision 2005 - an in-depth analysis of the state of the Pakistani textile industry from spinning through to WTO and textile quota issues. The report, written by analysts at the Pakistan government's Small and Medium Enterprise Development Agency (SMEDA), is also for sale for £200 ($298) in our Knowledge Store.Click here for more details.

The textile industry has been the bulwark of Pakistan's economy. It contributes more than 60 per cent to the total export earnings of the country, accounts for 46 per cent of the total manufacturing and provides employment to 38 per cent of the manufacturing labour force. The availability of basic raw material for textile industry, cotton, has played a principal role in the growth of the industry.

However, the industry is facing a major crisis, say SMEDA analysts. The growth in the textile sector was impressive during the four decades after independence - although excessively geared towards low value added products - but stagnation, prompted by changes in the global markets and negative domestic factors, has set in.
With the movement of textile production from developed countries towards less developed countries, Pakistani producers are losing their competitive advantage.

The negative Nineties
During the nineties a combination of factors adversely affected the industry, mainly:

  • Removal of export duty on raw cotton, increasing domestic prices to international levels and beyond.
  • Infestation of the cotton crop by leaf curl virus, reducing supply sharply and increasing prices.
  • Frequent changes in governments, creating inconsistency in the policies of government and financial institutions.
  • Rapid expansion of the installed industry in the hands of new entrants who did not have the managerial skills or the liquidity base to succeed.
  • Rapidly changing global markets, especially the shift towards synthetic fibres.
  • Growing hostility from external sectors, such as geopolitical factors that have affected Pakistan's image and credit worthiness, creating macro level impediments for the country as a whole.

As a consequence, many textile units suffered, creating a huge infected loan portfolio with the banks. In reaction, the banks withheld financing from the textile industry either for BMR (balancing, modernisation and replacement) or expansion. This restraint was exacerbated by the State bank's tightening of prudential regulations.

The industry was unable to keep pace with technological advancements and began to lose out on competitive advantage. Its survival became dependant upon the availability of quotas and regulatory protections granted to it by the Government

Stagnation sets in
Stagnancy has set into the textile industry over the past four years. Exports, which reached $6.1bn in 1996, dropped to $4.9bn in 1998 and there is a danger that this could be the harbinger of a collapse in the near future.
Since 1994 textile exports have hovered around $5.5bn mark while world exports grew at the rate of about four per cent in the Nineties. A booming clothing sector was the main reason for this - it increased from $97bn in 1990 to $177bn in 1998.

Pakistan's stagnancy indicates a negative trend of losing markets to competitors. The main reasons for failure to retain share of world exports are:

  • Narrow export product base limited to a narrow geographical spread.
  • Pakistan's export focus has been on low-value added yarns and fabrics rather than high value added garments and made-ups.
  • Low unit price realisation of products even in the lower value products.
  • The serious constraint of domestic non-availability of uncontaminated cotton.
  • Major growth stimulants have come from man-made fibres, an area where Pakistan has remained rather inactive.
  • Lack of focus on trained manpower in high-value added product industries.
    In the face of this depressing scenario, the Multi Fibre Agreement (MFA) phase out presents a very serious threat to the export viability of Pakistan's textile industry. Unless timely crisis management is undertaken, the country's largest export sector may face a premature demise.

The silver lining to this situation is that this threat may be turned into an opportunity with the elimination of quotas in importing countries. If Pakistan can realign its textile industry and provide the missing links, the inherent comparative advantage (of domestic cotton production) can be realised as a competitive edge in the world markets.

Strategic Approach
In order to formulate a long-term textile strategy and recommend policy interventions, it was vital to conduct a thorough analysis across the textile value chain. The textile sector consists of numerous sub-sectors, each having its own distinct characteristics based on the types of inputs, technology and human resource requirements.

The diversity of sub-sectors, starting from cotton and man-made fibres through garments and made-ups at the end of the value chain, requires that a multi-dimensional approach of sectoral analysis be adopted.

Although each textile sub-sector has been treated in its entirety with its specific strengths and weaknesses, integration of strategic approach for the entire value chain has been set as the underlying guideline.
The fundamental approach is based on the following logical steps:-
  1. The fundamental strength of the textile sector lies in domestic cotton production and the availability of relatively cheap labour.
  2. Strategy development was worked from both ends of the chain. International market trends and demands were evaluated in order to set ultimate objectives (for example Pakistan must move from eighth to fifth position among the top Asian textile exporting countries. At the same time, final product development must also be based on the development of domestic resources of fibre, cotton and synthetics.
  3. In the past, inter-sectorial linkages were based on almost parasitical dependencies that created cushions for certain industries to lean on and remain uncompetitive globally. These weaknesses eventually became an impediment to textile exports. Pakistan's genetically good cotton is contaminated, ginned poorly, spun into low value yarns and woven into low value fabrics. The garments industry has been stifled by these weaknesses in the upstream supply of raw materials. Future strategies will aim to cure these anomalies.
  4. The ultimate objective is to create a value chain integration that begins with high quality cotton and moves through all the intermediary stages of production to high quality garments and made-ups. However, this would require each component of the chain to be highly efficient and globally competitive which would not be possible if they were to be left tethered together through regulatory compulsions.
    Hence it is necessary to disengage all the sub-sectors of the textile industry through liberalisation of imports and export restrictions, with due protections against unfair trade practices from competitors.
  5. Each sub-sector will have to re-align its dynamics to be globally competitive in itself even if it means disintegration of the value chain in the short term, for example some sectors will depend on imported raw materials for value addition. As the weak links are filled up through domestic industry upgradation, a natural integration will re-emerge between textile sub-sectors that would be based on economic viability rather than regulations.
  6. The main driver of the strategy is the development of the apparel and made-ups sectors that will create the pull for the upstream sectors to upgrade themselves into higher value products. Pakistan has been stranded in the production and export of textile raw materials like yarn and greycloth for others to do the value addition.
    The new strategy will push the textiles to move into the final value added product lines in developed markets like Hong Kong, Japan, the EU and USA, where the growth rates are phenomenal.
  7. A major impetus for this paradigm shift will have to come from the removal of a serious impediment in the form of a cumbersome, fickle and even exploitative Government regulatory framework. Given the dynamism of Pakistani entrepreneurs, simple elimination of regulatory impediments and a modicum of consistency in policies will generate considerable momentum. However, other infrastructural interventions will be required too.
  8. The report recommends five major strategies:
  • Production of good quality cotton ex-ginning factory, contamination free and meeting A-Index standards.
  • Upgradation of technology from ginning upwards to apparel manufacturing.
  • Human resource development to meet quality needs of the industry right across the value chain.
  • Focused and aggressive targeting of potential markets.
  • Development of an integrated, high-powered command centre for steering these strategies to their realisation.

The report envisions three scenarios for development: low road, achievable and high road. The realisation of these targets is contingent upon a set of variables. The combination of variables attended to in the implementation of the Vision strategy will determine which of the scenarios materialises in the year-2005. This study provides the benchmarks to be followed in implementation. Major variables are investors' perceptions about country image, investment availability, investments in infrastructure, elimination of regulatory impediments and global compliance to WTO agreements. The above targets are based on cotton production of 16 million bales in the year 2005 in the high road scenario.

Low road scenario:
  • Exports will maintain historic trends in terms of share in importing countries(1993- 98).
  • Export product mix and markets unchanged.

    Achievable scenario:

  • Exports growth rate will match each importing country's growth rate of unit imports.
  • Unit exports to Middle East market will grow at three per cent annually.
  • Capture 0.5 per cent share in Japan and Hong Kong garment markets.
  • Unit price for cotton yarn to grow at three per cent and fabric at four per cent annually
  • Average unit price of garments & made-ups will increase seven per cent annually.
  • One hundred per cent synthetic garments' share in the total garment exports will increase from three per cent to thirty per cent in line with world trends.
  • Spinning will have the capacity to process 13 million bales of cotton.

    High road scenario:

  • Value added products (garments/made-ups) to be the engine of export growth (20 per cent annually).
  • Extra push in womenswear and woven garment exports.
  • Fifty per cent of the total fabric required will be imported.
  • Maintain 55:45 processed to unprocessed fabric export.
  • Total cotton production taken at 16 million bales out of which 3 million bales to be exported.