Pakistan Feeling The Squeeze

By Abid Hussain|February 2, 2009

Textile Sector

The Pakistan textile industry is currently struggling with the same issues which have dogged the textile and clothing manufacturers worldwide during the last few months. The unprecedented rise in cost of doing business, along with increase in raw material costs, has squeezed textile manufacturers’ margins very hard. Manufacturers continue to complain that sales prices have not increased commensurately. Rising energy charges, particularly, are making the current business climate very difficult to operate in. In this scenario, Pakistan’s textile industry has been stunned by the government’s recent decision to increase gas charges by almost 68% for those textile mills which meet their own power requirements through gas generators. The textile industry has protested vociferously against this extraordinary rise and has claimed that the industry would be crippled if these charges are reversed. Though the government has assured some kind of relief, no official announcement has been made at the time of writing this article. In addition to this, the government has yet to clarify its intentions on its research and development subsidy, which has been suspended since July 1. R&D used to provide 3-6% assistance to downstream textile sectors, and it has been there for the last few years. Even before this rise in gas price and withdrawal of R&D support, the local textile industry has struggled through much of the 2007/08 season due to persistent problems with energy supply throughout the year, unstable law and order conditions, a squeeze on margins due to a rise in raw material prices and reliance on greater cotton imports due to a lower than expected local cotton crop.

Textile exports – which are the backbone of the country’s exports and account to as much as 65% of the overall country exports – were showing impressive growth until the 2006/07 year, but have fallen this year. This is despite the fact that the Pak Rupee, which remained stable during the last few years, has depreciated against the U.S. dollar by almost 12% since the beginning of 2008. Although the depreciation of the Pak Rupee has boosted the value of textile exports, its volatility has created a degree of uncertainty for the local textile sector. Particularly the pricing of raw cotton imports has become very difficult due to the rising U.S. dollar.

Raw Cotton Market

After showing impressive growth during the last 3-4 years, Pakistan’s cotton production declined during the 2007/08 season. Cotton production declined from an all time high of 14.6 million 170-kg bales in 2004/05 season to 11.35 million during the current season. This was despite the sown acreage has altered very little during the last few years. The fall in production was attributed to low yields due to extensive damage by pest infestations and unfavorable weather conditions. Local trade sources have been urging the government to introduce certified genetically modified seeds during the last few years, but the government has only managed to sign a letter of intent with Monsanto a few months back. Meanwhile, in the absence of certified seeds, sowing of illegally imported Bt seed is rampant throughout Pakistan and it has brought enormous cost to the country as these illegal seeds have been unable to stop pest infestations. For the 2008/09 season, the government has a fixed cotton production target of 14.11 million bales from a sown acreage of 3.2 million hectares. At the time of writing this article, when the bulk of the sowing has just been completed, local crop observers estimate that the sowing target has fallen short by around 5-10%. While production estimates from most observers and local trade sources are between 12-12.5 million bales.