Relying On Textiles
March 11, 2009 Pakistan’s textile sector was already finding it difficult to maintain their production efficiency due to, first, the power shortage and abnormal increase in its tariff rate. Secondly, problems arose because of the liquidity crunch because a sizeable amount of money from the market was transferred to the United Arab Emirates (UAE) during the once lucrative real estate business boom. Then, as a result of the global economic meltdown and an all time high in oil and food commodities prices, all of Pakistan’s economic indicators started to deteriorate. The country’s foreign exchange reserves went down to an alarmingly low level of 6.8 billion USD, the Pakistani Rupee (Rs) devalued sharply by about 30%, the Karachi Stock Exchange collapsed by 58% and its capitalization came down from $75 billion USD in April of 2008 to $23 billion USD in December of 2008. Banks were the major losers in these changes because of their direct and indirect investment in equities, Certified Fund Specialist (CFS) financing, the decline in deposit growths, an increased occurrence of bad loans and increasing asset quality concerns.
The reliance on the textile sector as the mainstay of Pakistan’s economy came under severe pressure because there was no government or bank support given to the sector; on the contrary, banks squeezed their existing credit facilities and restricted the issuance of letter of credits, even if the credit space was available. There is not much to add on to the liquidity position of the spinning mills, which went from bad to worse because of the banks’ strict policies for finance.
The spinning industry, as the largest stake holder in the country’s textile sector, suffered proportionately high costs because many of the mills were caught unexpectedly in fixing their large volume of “on call” buying of raw cotton from Brazil and other growths at high prices before the crash of the NYF. On average, about 25% of the value of the mills’ inventories of raw cotton and yarn came down; huge stocks of unsold yarn are piling up, incurring heavy carrying cost. Both high financial costs and power shortages are resulting in the limitation of production and the difficulties in appropriate deliveries against their sale commitments. Almost all export oriented mills were using financing in U.S. Dollars to minimize financial cost, but due to the sudden and sharp devaluation of the Rs, mills incurred an average 15% net loss while adjusting these finance.
Some serious issues regarding contract sanctity and distressed cargoes are also being raised on both the export and the import sides. Cotton consumption this year is expected to reduce by over 10%, whereas a growing share of imported cotton may be slashed by about 30%. In order to get a better return in the sowing of a wheat crop, cotton growers in Pakistan resorted to early termination of their cotton crops, equivalent to the loss of about 500,000 bales. The drastic decline in Pakistan’s cotton prices, by about 30% in line with the falling international price, was the catalyst for this action. This decline of cotton prices, together with sharp devaluation of the Pakistan Rupee, should be a positive factor for exporters of low end products, where fair demand still persists. In this instance, one can find good potential for Pakistan’s textile sector in 2009.
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