The urgency of Pakistan’s textile industry cannot be overstated. It is currently grappling with serious issues such as the high cost of production, high interest rates, inadequate gas supply and soaring electricity tariff, leading to a production decline of over 30% in textile mills, with some mills shutting down. The exports are continuously downward, lagging far behind Bangladesh and India. The current share in world exports is stagnant at 1.6%, a mere $16 billion out of 1000 billion, while Bangladesh exports textiles worth $40 billion. The industry has invested five billion dollars in importing the latest machinery to keep up with modern trends, yet it still suffers from energy issues that hinder its growth. Immediate action is imperative to address these pressing issues.
Mr Zahid Mazhar, Chairman of APTMA—Southern Zone, and senior members at a press conference today stressed the government’s pivotal role in boosting exports and overcoming the trade deficit issue. APTMA underscores the importance of the government’s support in the form of an export-friendly policy for the textile industry. Your active participation is crucial in resolving the industry’s current urgent issues.
All Pakistan Textile Mills Association for Southern Zone has informed the government that the textile Industry is the backbone of the country’s economy and contributes to export earnings by 55%. Pakistan witnessed the highest-ever exports of goods of US$ 31.786 Billion in the year 2021-22, out of which the share of textile exports was US$ 19.33 Billion or 60.82%. Textile exports in the year 2022-23 dropped to US 16.50 Billion out of total exports of goods for 2022-23 of US $27.724 Billion, whereas it was US 16.66 Billion out of total exports of goods for 2023-24 of US 30.677 Billion. The government’s support is crucial to revive the industry’s performance.
The PM has set an ambitious target for the country’s exports to reach US$60 billion in the next three years. If achieved, this would be a significant milestone for our economy. With the right policies in place, the remarked that textile industry, which currently contributes 55% to our export earnings, could play a major role in this growth; maintaining a 55% share in the targeted exports, the share of textiles would be 33 Billion US$, a figure that, with the right policies in place, is within reach.
Several major factors are hindering the growth of the textile industry and its exports:
The supply and pricing of energy, including gas and electricity, pose significant challenges. Sindh and Balochistan’s export-oriented textile industries are particularly affected by inconsistent energy supply. The high energy costs, especially gas and electricity tariffs, are unsustainable and lead to the closure of industrial units.
The high industrial electricity tariff is mainly due to capacity payments to Independent Power Producers (IPPs), many of which operate at less than 30% of their production capacity. Despite a total installed electricity production capacity of 43,400 megawatts in Pakistan, only 13,000 megawatts are utilised out of the total 22,000 megawatts distribution capacity.
The fuel costs Rs. 10/Unit and Capacity Payment is Rs. 24/Unit. As a result, the total cost to the government amounts to Rs. 35/Unit, whereas the government charges Rs. 60/Unit.
The high-capacity payments to IPPs have had a detrimental impact on the country’s economy. Therefore, the government must review and possibly cancel contracts with unnecessary IPPs and conduct a Forensic Audit of IPPs receiving Rs. 1.95 Trillion against capacity payments. This is crucial for the betterment of the 240 million people in Pakistan. In 2015, capacity payments for 13,000 megawatts of electricity cost Pakistan Rs. 200 billion, while in 2024, the government paid Rs.2 trillion for capacity payments for the same 13,000 megawatts.
There are around 100 independent power producers (IPPs) in Pakistan, of which the government owns 52%, 28% are owned by the private sector, making 80% Pakistani-owned, and the rest are foreign companies that own 20%. The government has to purchase electricity from the cheapest producers without any capacity charges in the best interest of its people and to make its exporters competitive in the international market.
The mother of all evils is the capacity payment to IPPs, which should be discontinued immediately to make energy available regionally at competitive prices.
The textile industry faces several challenges that impact its growth and sustainability. One major issue is the inadequate electricity supply, which has led many textile mills to install gas-based power generation plants. However, the government is pressuring them to switch to grid electricity, even though the local electricity suppliers cannot provide uninterrupted power to the industry. As a result, the textile industry heavily depends on its gas-based power plants for electricity generation.
The cost of gas for the industry’s captive power plants is significantly high, especially when using a combination of indigenous gas and RLNG. This high cost has led to the closure of 30% of textile and apparel mills and threatens the remaining ones.
Pakistan’s gas and RLNG prices are nearly double those of regional competitors like India, Bangladesh, and Vietnam, making it challenging for the textile industry to compete.
The government’s plan to cut off the gas supply to captive power plants by January 2025 is impractical, as the current electricity network cannot meet the industry’s power requirements. This decision could lead to further closures and severely impact employment, exports, and the economy.
The high interest rate of 19.50% is another obstacle to industrial activity in Pakistan. To create a competitive environment for export-oriented industries, the government should consider aligning the interest rate with regional economies ranging from 6% to 7%. This would help reduce the cost of doing business and support the growth of the export sector, which is essential for addressing Pakistan’s balance of payment challenges.
Taxation measures in the Federal Budget 2024-25
The measures taken in the Federal Budget 2024-25 are anti-industry and anti-exports, and they will lead to deindustrialisation and discourage exports, especially textile exports, which are the lifeline of Pakistan’s economy. A high tax collection target is a burden on the existing taxpayers. No serious efforts have been made to broaden the tax base. The budget has failed to revive investment and provide a level playing field to the export sector, like textile exports, as export growth is the only sustainable way to balance the external account.
The government in the budget has withdrawn the facility of zero-rating sales tax on local inputs for export manufacturing through the export facilitation scheme (EFS). This regressive measure will not only make it impossible for the domestic producers of intermediate goods like yarn and cloth to supply for export manufacturing. Still, it will also reduce domestic value addition in exports, ultimately resulting in the deindustrialisation and transferring of industries from Pakistan to its regional competing countries like Bangladesh. This measure will result in stuck-up liquidity of the export-oriented sectors, which are already facing a severe liquidity crunch and will put an extra burden on SMEs as they have now to pay sales tax and wait several months for it to be refunded, if at all. This will lead to an increase in – the import of intermediary goods.
A 2% additional customs duty has been imposed on importing raw materials previously imported at 0% duty, such as Viscose/Lycra fibres, which are not produced in Pakistan. The entire supply chain would become unviable if this duty is not removed.
The requirement of SRO 350(I)/2024 to link up the entire supply chain to file sales tax returns has created havoc, as industries are blocked from filing their returns on time due to non-compliance with their suppliers. This results in disregarding the sales tax already paid and incurring penalties. Our members are facing monthly issues after the issuance of SRO 350, which puts undue pressure on them to continuously pursue their suppliers to file their sales tax returns on time. When buyers do not file their returns, their customers cannot claim input.
The increase in the tax rate from 1% (Final Tax) to 29% on profits and 2% as advance tax on export proceeds is one of the leading negative measures of the Federal Budget 2024-25.
The government has increased income tax rates for salaried individuals in the fiscal year 2024-25 budget. This would directly impact the take-home pay of the inflation-burdened salaried class. Furthermore, the incidence of tax on the salaried class in Pakistan is three times higher than in India.