There is a lot of excitement here and quite rightly so, about Pakistan qualifying for the GSP+ Scheme, hopefully sometimes in January 2014. The status will entitle Pakistani textiles to a duty free entry into the European Union (EU) and will significantly add to our export competitiveness vis-à-vis our traditional competitors like India, Bangladesh, China, Turkey and Egypt. Assuming that the proposal does go through smoothly from the EU Parliament, the facility should then be in place within about 30 days from its approval, bearing a retrospective effect dating from January 01, 2014. Naturally, the present government is hailing it as a feather in its cap (the fact is that the preparatory and submission work was in fact done by the previous government in coordination with private sector associations) and one is seeing that permutations are already afoot amidst claims on how, owing to this development, they will suddenly double Pakistani exports in the coming year. My take on things, however, would be slightly different and a shade more conservative. While the facility will certainly go a long way in positively affecting our textile exports in the coming years, one needs to be careful cum cautious in assessing on what the actual net effect be on increase in Pakistan’s textile exports in underlying US Dollar terms.

There are four main reasons for such prudence. First, we must account for the Pak Rupee’s devaluation in recent months - a trend which is likely to continue over the next fiscal year – which in dollar value term means that since our average cost per kilogram of textiles in dollar-term goes down, we simply have to export more in an equivalent dollar value to be able to fill the resultant gap. An exercise, which is compounded by the fact, that buyers generally seek price reductions on the basis of a declining trend rather than only the actual percentage of the devaluation. And this also, without taking into consideration the inflationary effects on the cost of production at home due to the exporting country’s currency devaluation. Second, this facility if adopted by the EU will not only cover Pakistan. Bangladesh already enjoys this status and India & Myanmar are also likely to qualify along with us. Third, quite a few of our main ticket export items to the EU are already covered in the special (zero) duty access facility (covering 75 categories) being enjoyed by Pakistan since the last two years and due to expire on December 31, 2013. Fourth, our textile exports to EU at best account for around forty per cent of our textile exports and the overall impact on our total national exports will be much smaller than being touted. Fifth, and the most important, the textile exports per se are likely to come under pressure and lose value if, as being presently envisaged, cotton prices were to collapse or significantly come down in the coming months. In fact if this happens the textile exports in dollar terms, in all likelihood, may even register a decline during the next year!

Ironically, when it comes to the outlook on ‘Cotton Futures’, there is not much that Pakistan can do, but to instead wait and watch the policy choices to be undertaken by the Chinese officials in the coming few weeks. Cotton futures in China are sliding as a result of worries that the government may release its huge stockpiles of the cotton fiber in an effort to reduce imports. The benchmark May cotton contract on the Zhengzhou Commodity Exchange, in central China’s Hunan Province, is down 1.6% since mid October and touched a one-month intraday low of 18,640 Yuan ($3,055) per metric ton on the first Monday of November ’13. The contract hit a three-month low during the first week of November, tracking a 7.9% drop for cotton futures on New York’s ICE exchange since the middle of October ’13. Since late 2011, China has bought cotton from local farmers at above market prices to boost their incomes, resulting in a state reserve that traders and analysts estimate is around 10 million tons. The Chinese government agency that is in charge of stockpiling the fiber – the China National Cotton Reserves Corporation (CNCRC) – has called for a special meeting this month, and investors are speculating about what this might mean. As a precursor to what the CNCRC is likely to decide a parallel report by the largest importer of cotton yarn from Pakistan and India, M/s Icotton Limited, has been released that believes that it is only a matter of time before CNCRC starts to release the cotton reserves and this is why international cotton prices have been falling and are likely to fall further in the coming months.

A potential release from Beijing’s stockpiles may lead to a supply glut in China, given that cotton at present is being harvested, and this would likely reduce Chinese cotton imports from the USA, China’s top cotton supplier. Reduced shipments to China, the world’s largest cotton importer, would pressure global cotton futures further. Since late 2011, the CNCRC has been buying cotton in September, when the harvest begins, and has continued purchases through March. So far this year, it has bought significantly less (15%) cotton than at this time in 2012. This means more Chinese cotton will be entering the open market, which will further push down prices. One does not have to go too far back in the history of cotton trade and spot prices to find out that global cotton prices were trading at nearly half the current price just a few years back. With the western demand (main driver of textile value-added imports/exports) of textiles visibly suppressed and a brewing raw material (cotton) supply situation that is likely to drive prices down, the coming year for Pakistan’s textile exports can, on the contrary, will be quite challenging. Unless the outlook changes course, one feels that merely to sustain our exports in dollar terms will be quite a task, let alone doubling them over the coming twelve months. And it is this upcoming challenge what the Pak Textile Ministry should be planning for, because at the end of the day only the prevalent market realities will determine how Pakistani textiles exports will fare in the months ahead.    

The writer is an entrepreneur and   economic analyst.

kamal.monnoo@gmail.com