Last week SDPI (the Sustainable Development Policy Institute) organised a “Consultative Dialogue on Textile & Garment Sector Outlook Amid Covid-19” through webinar, between the government, the World Bank (WB) and industry stakeholders. One must compliment Dr Vaqar Ahmed on his timely efforts and the way he successfully managed the whole event. The WB presentation and recommendations were well-researched, the private sector came prepared and contributed by highlighting some pertinent issues and especially Ms Batool from the FBR was very impressive in her knowledge of the industry and adopting a proactive stance; Her understanding, being up to date, patience, and a remarkably positive attitude to honestly addressing the genuine problems of the businesses involved must be lauded. While there were a lot of positives to take home vis-a-vis situation assessment, difficulties post COVID-19 and the long-term way forward, one felt that there needed to be more emphasis on the short-term, meaning post COVID-19. Where exactly does this industry stand today, what sort of existential threats it faces and what precisely needs to be done “now” to ensure that it remains sustainable and does not get eroded by global competition—the immediate term solutions. The WB recommendations, understandably so, focused more on future long-term strategy and how this industry needs to change to become productive going forward, however, the problem is immediate where quite a few of the present issues are primarily COVID-19 related and therefore also need to be addressed now (right away), that is if the industry is to survive or not shrink significantly. One was hoping to elaborate more on this aspect in the questions and answers session, but regrettably, the webinar never came to that, since time ran out!

Some realities: Pakistan’s two main international markets in textiles and garments are the European Union (EU) and the US. Take these two out and almost 75 percent of the total exports stutter (directly or indirectly) and nearly 50 percent of the capacity shuts down since like it or not, 75 percent of the installed capacity at home is export based. Unfortunately, with consumption in the EU and the US collapsing, the lack of demand has resulted in industry closures not just in Pakistan, but also in competing countries like Bangladesh, India, China, Vietnam, Myanmar and others. The Pakistani textile industry accounts for nearly 67 percent of national exports, 12 percent of GDP and 40 percent of industrial employment, so it is imperative that it gets back on its feet with all cylinders firing, sooner rather than later. To make this happen, we must understand that the recent global developments subsequently lead to two important phenomenon that have either already happened or are about to grip us very soon: One, as markets normalise, the competition is going to be even more fierce than before, because these countries will be eager to regain or improve upon their previously-held market shares and two, some countries will simply lose out owing to their government’s mistake that it did not support its respective industry during this interim period, which means that when the times comes, that country will simply not have the operational capacity anymore to get to its previous level.

So what precisely is required at this juncture? This takes us back to my opening observation that prudence requires that the government at present should ‘only’ be focusing on the short term, whereas, the long term can wait for now. This is the time to ensure that companies survive so that their infrastructure and the production installations do not get dismantled and they are in a position to restore the supply chain when the time comes. And the only way the government can do this is by making sure that these businesses stay liquid. Unfortunately, this is where our government’s efforts are falling short. In fact, on the contrary, the recent measures and the budget announcement work towards the very opposite. A cursory look around us and we see wage and furlough sharing schemes, direct support measures like outright cash grants to SME in some countries, reduction or waiving or deferring of taxes and levy contributions like social security, etc. are just some of the measures that others have taken and in comparison just put our efforts in this regard to shame. Only two come to mind, the SBP (State Bank of Pakistan) wage loan scheme and the mere announcement of moratorium on LTF’s principal amount. Also, at a time when these companies need cash, the stubbornness on maintaining the current unsustainable sales tax regime belies all logic. To tangibly help these companies, one would have liked to see either the restoration of zero-rating or at least the reduction of sales tax to 5 percent. The 250 billion (figure though is disputable) the government claims to have collected under this head in 2019-20 from the previously zero-rated sectors, even if true, is not only unlikely to be replicated this year, but in present times a lower rate is perhaps the only logical way to generate any significant revenue from this head without damaging the national exporting apparatus. At a time when it is necessary to provide the much-needed liquidity to our exporting companies, such levies instead act as a heavy toll on their working capital cycle by blocking almost 8/9 months (in most cases) of their total deployed capital.

What are the others doing—some comparisons: Make no mistake that this is the period to just survive and any product developments in these times are in overall terms going to be at best miniscule. Any delusions about quickly shifting to medical exports like PPEs, anti-microbial, etc. are ill-founded, as the process entails a long and time-consuming process of product development, compliances, certifications and trials, which can take at least 1 to 2 years, if successful. Implying that the need right now is to play to the strengths that we already have. This means ensuring competitiveness in our current exportable mix that is largely dependent on three inputs: Electricity, gas, financial cost and levies like sales tax. Now electricity in Bangladesh to the exporting sector is today available at 6cents, in India 8c, Myanmar 0.44c and in Europe itself at 1.80c, whereas, in Pakistan a big uncertainty looms, where the companies still do not know whether or not the previous tariff of 7.5c will be maintained or not and if increased, then to what. Why would western markets pay for our power inefficiencies? Similarly, gas in Bangladesh to the exporting industry is costing around $4.93/MMBtu, in India $3.23/MMBtu, in Myanmar $1/MMBtu and in Europe itself at $1.6/MMBtu—again the same question. The sales tax slab in Bangladesh is 15 percent with a guaranteed 30-day refund through the auspices of the central bank, in Vietnam 10 percent, in Taiwan 5 percent, and in Myanmar it is simply zero rating. Cotton prices today in India are on average 15/20 percent less than what are prevalent here in Pakistan. The comparisons in labor costs (after accounting for productivity) and finance costs tell a similar story.

To conclude, no one is saying that the Pakistani government should dole out cash to the exporting firms, but merely that it should resort to prudent policy measures that create an enabling environment for the Pakistani export manufacturers to survive during these extremely challenging times. One totally understands and perhaps even sympathises with the constraints the government faces due to COVID-19, but make no mistake that this is not the time to resort to coercive revenue collections, otherwise policymakers will just be playing with the very future of Pakistani exports.