Middle Eastern Finance and Economics ISSN: 1450-2889 Issue 13 (2011) © EuroJournals Publishing, Inc. 2011
Textile Sector Performance of Pakistan
Farah Naz Naqvi Assistant Professor, Hailey College of Banking & Finance, University of the Punjab, Lahore, Pakistan E-mail: [email protected] Adeel Nasir Research Scholar, University of Central Punjab, Lahore, Pakistan Usman Yousaf Lecturer, Hailey College of Banking & Finance, University of the Punjab, Lahore, Pakistan E-mail: [email protected] Adnan Haider Branch Manager, Standard Chartered Bank. Lahore, Pakistan Muhammad Ahmad Assistant Professor, University of Central Punjab. Lahore, Pakistan Abstract This research paper prescribe the issues and challenges face by Pakistan textile industry before and after the MFA regime and it carries the laws and regulations by implementation of the WTO agreements and Pakistan maintain and grow its textile sector after considering WTO specifications, this paper also discusses the factors impedes the growth of the textile sector and also provide certain recommendations how to get though to these factors. This is the descriptive study, to conduct the empirical analysis a sample of thirty textile firms has taken, cloth production and yarn production from 1974 to 2009 is taken and draw some conclusion on the basis of graphical representations and moving averages. The theme of this paper is specifying the development of textile sector of Pakistan.
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Keywords: Textile Sector, MFA (Multifiber agreement), Growth, Quota, Issues.
1. Textile Sector Performance of Pakistan
Textile industry has always been the backbone of the Pakistan economy and it contributes many times in the development of Pakistan in terms of creation of job and earning from foreign trade. Last forty years are the indication of the Pakistan strength in this industry, currently Pakistan is the forth larger producer of cotton although the effects of global economic crises were swear on the textile industry all over the globe but still Pakistan maintained its development rout, Pakistan exports in 2008 were $17.9 billion and clothing trade was $3.9 billion. The major factor responsible for creating this kind of the boom is the WTO agreement which eradicate the quota restriction which were imposed in MFA regime (Economy Survey, 2009).
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Since the independence the textile sector is growing at the frequent pace and certain global and domestic factor are able to bring certain changes and with these changes Pakistan is losing its competitive advantage over other countries. the factors effecting the growth during nineties are as follows • Increase domestic prices due to the removal of duty on the raw cotton. • Leaf curl virus and its effects on the cotton crop reducing the supply substantially. • Government policies are not stable because of the frequent change in governments. • 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. • Global market competition and its fluctuations. After MFA, WTO has given us opportunity to compete in the global market at new level and provide us opportunity, because it has incepted new avenues for all the developing as well as developed countries to beat the rivals at global level.
2. Objectives
Major objectives of this research are as follows: • Look at the textile industry from different dimensions to improve its productivity and efficiency. • Rivals weaknesses should be taken into account, accordance with providing better services at global market. • Identify all the challenges faced by Pakistan to made better import and exports decisions. • Identify some issues that will help out Govt. to provide better policies and maintain better policies. • Identify the challenges imposed to Pakistan by the external world.
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3. Significance
This research paper significance is to provide the valuable information to the policy makers to seek out the opportunities which are provided with the eradication of the MFA restrictions and make certain decisions which deals the current problems faced by the textile sector successfully this research also provide certain avenues to the industrial executives, directors and stakeholders.
4. Problem Statement
“Is Pakistan able to maintain the textile sector pace in competitive internal and external environment and responding to challenges & opportunities provided by the globalization before and after MFA?”
5. Literature Review
“Textile industry has been the bulwark of Pakistan’s economy. It contributes more than 60% to the total export earnings of the country, accounts for 46% of the total manufacturing and provides employment to 38% of the manufacturing labor force. The availability of basic raw material for textile industry, cotton, has played a principal role in the growth of the industry” (SMEDA, 2005).
Jatinder & Ceasa (2008) provided the unfair quotas imposed by the developed nations on the developing nations and cause the market disruption. Marouani (2009) described that regional exporters face the negative formulation of the Multifiber agreement but it is not that much strong as expected. Considering the effects of MFA on Pakistan textile sector many studies has been explained. Chaudhry & Hamid (1988) estimated that Pakistan textile is in danger with the effects of MFA quota
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ristrictions, it lead the textile industry of Pakistan to no good and bring some harmfull effects, they also discuse the low technology and low production of the Pakistan textile and there effects on the available capacity. Khan & Mahmood (1996) studied and estimated that the Pakistan textile would ends up in banifit after elimination of the MFA regime, they added that Pakistan market access would improve by approximately sixty two percent and for clothing and textile is would go to about sixty seven percent. The end of MFA provide pakistan better opportunity. In 2007 after closure of quota restriction the federal minister of commerce put a light on textile progress in Pakistan said that the textile exports were increased by 6% from 2006 to 2007 and also there has been seen a double export in some products. There are opportunities for Pakistan as added by the Minister, but he also mentioned some concerns about the backwardness of Technology and low quality of products and maintained the statement that only thing that would provide the competitive advantage is the investment in Research and Development, quality and investment in machinery if we want give competition after MFA regime.
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The main crops of Pakistan are classified into food crops and non-food crops. The food crops include wheat, rice, maize, coarse grains, grams and other pulses. The cash crops are cotton, sugarcane, tobacco, mustard and sesame. The total area, yield and production of each crop is now discussed under separate heads. (A) FOODS CROPS (1) Wheat: Wheat is the principal food crop of the people. It ...
Certain stakeholder are more careful and they don’t have any clearance about the benefits maintained by the WTO agreement because of the lack of clarity, there are certain reports provided by WTO, ADB and World Bank which favors the WTO agreement but the investigation at academic level is not that much convincing which makes certain stakeholders unsecured. Pakistan poor industrial base is one of the major challenges to Pakistan which hinders its progress even after eradication of the quota restrictions. The literature indicate swear and harmful effects of the MFA regime on the Pakistan sector industrial base. Many research studies provide the depress effects of MFA regime on Pakistan industrial base how they made the closure of the huge installed capacity after 1974. Due to those effects the industry of Pakistan backfires in many areas and that’s why can’t able to enjoy the quota-free regime as much as other countries. At the international level the trade of clothing showed more success that the trade of textile for last twenty years and there is the significance change in world trade to which is the fact but in contrast Pakistan has been failed to increase its share in global market in spite the fact that it is growing and progressing at the rapid pace.
Asim (2003) indicated the concerns of the Pakistani exporters about the misinterpretation of the WTO regime and its effects on the textile industry. He added that escalation of the MFA on one side would ease the exporters in terms of dealing with the international competitors. On the other side Pakistan is uneasy with the competition provided by the major countries like china, India and Bangladesh. On the whole he examined that on the elimination of the quota restriction Pakistan will maintain the positive trend and yarn and cotton demand would enhanced. The facilities and capability of Pakistan is very much to meet its requirements for fabrics, made ups, yarn and clothing but the difference is made when its come to the value added clothing products. This is one of the reason many researchers has pointed out which may hinders the progress of Pakistan textile in the Post-quota regime. For the past decade or so Pakistan ability to compete in the value added product has been seen limited which is the major drawback and show the incapability of Pakistan textile to enjoy the benefits as compare to other countries. There is a very little doubt that the Pakistan could not able to compete in global market after quota restriction during 2005 it was recorded that Pakistan had reached its record export of textile products since two decades which shows the clear competitiveness of Pakistan but there are other issues relating to Pakistan exports that is the non-tariff barriers by the developed countries like countervailing and antidumping duties imposing restrictions on the basis of labor and environmental standards examples as we can see the antidumping by USA in 1997 and Europe in 2003. European Union and United states are always been the major importers of Pakistan textile and clothing items but the reduction in imports have been noticed from the last couple of years. The issue which influence Pakistan exports the lobbyist prevailing in USA who impedes the imports of USA with the developing nations. I have highlighted some main impediments concerning
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the growth of textile and clothing industry of Pakistan but there are some other issues which has there own importance in damaging the structure of textile industry of Pakistan main are as follows. a) Reduced quality of finish goods due to contamination of cotton. b) Backward technology power looms redeemed quality fabrics. c) Insufficient output provided by the labor in private as well as public sector. d) Lack of regional trade associations.
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6. Data Collection and Methodology
6.1. Comparison with other trading countries Pakistan right now lagging behind in the competition with the other trading nations like China, India and South Korea we saw that the WTO agreement did not benefited Pakistan in rival with the other top trading nations and Pakistan is somehow unable to capture the global market as much as competitor do. “The European textile sector facing large number of competitor businesses so in order to improve themselves they need to improve methodologies more than one variable” (Nicholas & Wassenhove, 2006).
“Comparative study of the export performance of the Spanish and Italian businesses refer that investment in R&D and export experiences are been the keys for explaining the performance of textile sector in both countries” (Eusebio, Anbreu, & Belbeze, 2007).
“Pakistan’s share of the US textile market is dropping. China tops the US market with a share of 36 per cent followed by Bangladesh 21 per cent, India 18 per cent, Morocco 19 per cent and Pakistan 13 per cent. South Korea has lost 20 per cent of the US market. In the European market, China tops again with a share of 29 per cent, Vietnam 28 per cent, India 19 per cent and Pakistan only 1.5 per cent while the Philippines had lost 11 per cent of the market (Rohail, 2008)”. Considering analysis of two years before and after the dismissal of MFA, by looking at the table 1 which indicates the textile industry share in the world textile trading. Pakistan share has been increasing since 2004 and it declines substantially in 2007 and 2008, same conditions applied for Bangladesh that means after the removal of the quota system there is not enough benefit for the developing countries may be it is due to the standards mentioned by the WTO before entering into the world market.
2004 2005 2006 2007 2008 Source: TCP Pakistan 3.22% 3.54 3.49 3.17 3.02 China 17.58 20.52 22.76 24.06 27.41 India 3.69 4.23 4.17 4.13 4.36 Bangladesh 0.31 0.35 0.7 0.42 0.37
On the other hand India and China are able to make its way up in the competition; china had been the dominating in world as the leading exporter. China enhances its value of textile output to over 10 percent in 2009 and maintains growth of 25.4 percent year after year to 133.1 billion Yuan.
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Pakistan % 46 44 44 41 35 China % 6 5 5 5 5 India % 9 8 7 7 6 Bangladesh % 7 11 13 7 6
2004 2005 2006 2007 2008 Source: TCP
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Table 2 indicates the share of country textile exports portion in national exports. Pakistan has the very significant portion of textile in the nation exports China has only 5% share in 2008 and 4% share in 2009 but they are still leading the world export markets, India share declines from 9% to 6% and Bangladesh show some progress in 2005 and 2006 but significantly dropped in 2007 and 2008. Considering the table 1, Pakistan share in world export market is not that much which after quota restriction should increased. 6.2. Impact on Pakistan Textile Industry In spite of all expectations and pessimism, Pakistan’s textile industry has proven to be quite flexible. Latest statistics have shown increased exports both in terms of quantities as well as value. The end of MFA quota restriction would benefit the Pakistan textile growth but the immense macroeconomic crisis reduced what could be achieved by Pakistan. “Six months after the ending of the Multi-Fiber Agreement (MFA) which synchronized trade in textiles and clothing for 30 years, a rise in exports from Pakistan’s textile industry is driving the country’s highest economic growth in 20 years” (Europress business review, 2005).
According to above statement there was a great progress in the textile growth after the quota restrictions had been lifted and information from the industrial source was that there was not a decrease in orders for the textile sector, power breakdowns and utilities cost had restricted the output of many textile sector. 6.3. Performance of Pakistan Textile Sector Figure 1 show the total profit after taxes of all the thirty textile firms selected from spinning, weaving and composite textile sector of Pakistan and results clearly shows that there is the substantial growth in the textile industry in 2008 which shows the after effects of the MFA. As shown in figure 1 that from 2001 to 2004 there was a predictable low growth but after 2005 there are many textile units who perform well and with the end of the quota restrictions they are able to provide their products all over the world, but still many textile units from 2007 to 2009 got defaulted because of the economic shocks like utilities expenses and electricity shortages, but still those who perform shows the results in 2008. The total profits of selected thirty companies had gone up to 5890.159 million dollars which is almost 300 present increases from the year 2007 these results shown by the sample of thirty companies are not seem to provide the overview of Pakistan textile position, because in the year 2009 the growth got immensely decrease by ninety seven present as compared to 2008. For measuring the performance of the textile sector of Pakistan, I have choose the sample of thirty companies from all the textile sectors and measure the return groom each unit from 2001 to 2009 and find out whether there is the growth in profits or decline after the elimination of quota restrictions. Figure one shows the total profit after taxes of all the thirty textile firms selected from spinning, composite and weaving textile sector of Pakistan and there is a clearance in th conclusive decigram which shows the substantial increase in the textile industry in 2008. As shown in figure 1 that 2001 to 2004 there was a predictable low growth but after 2005 there are many textile units who perform well and with the end of the quota restrictions they are able to provide their products all over the world, but still many textile units from 2007 to 2009 got defaulted because of the economic shocks like utilities expenses and electricity shortages.
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Figure 1: Total return of the companies for 10 years
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For 2009 there was a sharp decrease, the main factors that caused that decreased were; the high business cost, increase in gas and electricity rates. The rate of interest on bank loans was from 19% to 20% and there was a problem of load shedding as well (Sheikh, 2009).
Figure 2 provides the two years moving average from 2001 to 2009 which shows the upward trend from 2004 to 2005 then faces the decline and then increased in 2008. Figure 2 shows that with selected sample there is a positive growth with the ending of the MFA regime.
Figure 2: Two year moving average of thirty companies return
For overall performance further study I have conducted on the basis of three year moving average of yarn and cloth production from 1974 to 2009, multi-fiber agreement was implemented from 1974 to 1994 but quota system continues, the quota restrictions were lifted at 1 January 2005. Figure 3 shows three year moving average of yarn production from 1974 to 2009, there is consistent increase in the production of yarn from 1974 which is the progress made by Pakistan in textile sector taking about the current situation.
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Figure 3: Yarn production three year moving average
Pakistan yarn production is intended to increase in 2010, this is pointed out by the experts that the growth in textile sector is not the monetary phenomena it tends to increase in coming years. 10.5 million spindles are right now working in Pakistan out of 12 million of total capacity (Ahmad, 2010) Figure 4 shows the three year moving average, which provide the overall performance of the cloth production in Pakistan, in accordance with the figure 4 there was a good start and then there is the increasing trend from 2000 to 2009, which shows that Pakistan have some progress in cloth production in Pakistan, in accordance with the figure 4 there was a good start and then there is the increasing trend from 2000 to 2009, which shows that Pakistan have some progressin cloth production.
Figure 4: Cloth production three year moving average
“Production of cloth in mill sector increased from 568 million sq. meters in 2001-02 to 1106 million sq. meters in 2007-08, thus showing an average increase of 28% per anum. Out of total production of 1016 million sq. miters cloth during 2007-08 in mill sector, 57% produced in grey form , 30% dyed and printed, and 13% blended and bleached” (Memon, 2009)
7. Conclusions & Recommendations
According to my findings and analysis, currently the biggest threat the Pakistan textile industry is facing is to maintain its competitive position against its competitors and increase its share in world exports but there are other issues which directly or indirectly affect the progress of the textile sector.
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These issues are underutilization of technology, lack of skills, insufficient production and energy problems etc. To control and minimize the above mentioned problems, the following suggestions are recommended for the development of textile sector. • Textile firms should consider long term planning while making their objectives. • Provide high quality yarn to encourage local weavers and knitting units. • Attention should be provided to value addition and high quality production rather than raw material. • Programs should be maintained to enhance the oversees production. • Government and financial institutions should extend the financing to cottage and medium sectors because of there large contribution towards textile growth. • For management and workers effective training programs should be conducted to increase productivity. • Quality standards should be applied to cope up with the international standards. • Incentive in terms of taxes should be given to textile sectors for its promotion. • Large population is consisting of females in Pakistan, so the women participation should be encouraged by the government as well as by the society. This mentioned objection can be obtained only by the combine understanding of the manufacturers, knitting units, weavers processing, farmers, garments and ginners. Long term strategies should be made by the government to enhance the growth of the textile industry because the textile and clothing sector alone is contributing to the economy to the great extend. If we are able to improve this particular sector we will increase our position in the world textile and grow our economy with great pace.
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