Fawad Ijaz Khan is the Patron-in-Chief and the Founder Chairman of Pakistan Leather Garments Manufacturers and Exporters Association (PLGMEA) founded in 1998. He is also the Chairman and Chief Executive Officer of Ideal (Pvt) Limited, which is a leading company engaged in the manufacturing and export of leather garments and leather goods. He is a member of ADRC (Customs) of Federal Board of Revenue.

Previously, he has been two-time member of Prime Minister’s Committee on Development of Exports of Pakistan. He was the member of Business Persons Council formed by the Prime Minister in 2009 and has served as a member of different committees of government departments like Customs, Sales tax, Income Tax, Ministry of Commerce, Industries, State Bank of Pakistan etc. during last 36 years. In the leather sector, he was Chairman Pakistan Tanners Association (Southern Zone) in 1991-92; and Founder Chairman Pakistan Leather Garments Manufacturers and Exporters Association in 1998.

Following are the edited transcripts of a recent conversation BR Research had with Fawad Ijaz Khan:

BR Research: Can you give us an overview of the leather sector and its performance over the years.

Fawad Ijaz Khan: Total exports of leather industry from Pakistan were $833 million during 2020-21. Total exports of leather garments and goods during 2020-21 was (leather garments $286 and leather goods $17 million) $303 million which was more than 16 percent over 2019-20. The share of leather garments and goods is 36 percent in total exports of leather industry. Other sectors of export in leather industry are leather gloves $260 (31%) leather $162 (19%) and leather footwear $108 (13%). Export of leather garments and goods is in the range of $268 to $420 million in the last 10 years. Global market size of leather garments and goods is $7 billion, and Pakistan’s share is four percent. The overall global leather market size was estimated close to $400 billion in 2020 where leather footwear makes up the largest share (around 50 percent) followed by automobile and household upholstery, garments, gloves and other leather goods.

In the last decade, most of the leather exports from Pakistan were primarily affected by 9/11 incident when countries refused to buy from Pakistan and orders shifted to India. The situation started improving in the last few years due to improvement in law & order situation. Today, leather exports growth is primarily reflecting in the value-added segment. We are hopeful that this will increase in the coming years.

BRR: How has Covid-19 pandemic impacted leather exports and demand?

FIK: Effects of Covid-19 started to appear in Pakistan from March 2020 onwards. Almost 18 months have passed and still our exports of leather garments and goods have increased. However, if there would not have been any Covid-19, our exports could have further increased by around 10 percent. But the international demand has definitely decreased. We largely took the share from decline in exports from India where situation of Covid-19 is not good.

BRR: What is Pakistan’s key and prospective export markets?

FIK: Our main exports are in USA, Germany, UK, Spain Netherlands, and France. Russia is one prospective market where very few exporters operate, and it’s fit the two eligibility criteria we have: market size/demand and cold weather. Japan is another country with potential for Pakistan’s leather exports. The challenge there however is that Japanese are very quality conscious. Also, after 9/11, there were travel restrictions by Japan and it was only two years ago that we did an exhibition in Tokyo with TDAP’s subsidy that yielded some good results but that was affected by Covid-19 pandemic last year.

BRR: What is the foreign investment trend in the leather sector?

FIK: There is no foreign investment in our sector at the moment. However, many exporters have strong linkages with the buyers where orders are placed on a regular basis.

The sector dynamics have changed tremendously. Thirty years ago, the main distribution channel for leather garments used by importers who used to sell to the specialty retail shops. That market has now been captured by big brands and chain stores that are selling these leather garments directly through their buying offices in the country. They get their products made as per their conditions and specification, which leaves little incentive for these large brands to invest in production facilities in Pakistan. So, the potential for foreign investment is not colossal in our sector. Moreover, foreign investment comes in sectors where there is scope for technology transfer; leather industry is labor intensive and skills-driven rather than technical knowhow.

BRR: If FDI in the sector is not a key factor for growth, what government policies do you think are needed to spur export growth?

FIK: Present government is very supportive of the export industry. Razak Dawood, Adviser for Commerce and Investment, and Sualeh Ahmad Faruqi, Federal Secretary Commerce keep a constant touch with the export associations and helping them getting their problems solved. The Govt should always announce the trade policy before announcing the Federal Budget. In this way federal budget can incorporate the financial impact of initiatives of trade policy. Unfortunately, in Pakistan trade policy is announced after the budget and this is the reason last trade policies were mostly failures because funds were not disbursed for the schemes announced in the trade polices because these funds were not adequately provided in the Federal Budget. The government has still not announced Strategic Trade Policy Framework (STPF). The other option is the supplementary grants, which depends on whether the finance ministry can take out that money; in the last year and a half, funds have not been available due to Covid-19 related expenditure.

Also, the DLTL scheme expired on 30th June 2021. Since it is part of the trade policy, its renewal also remains to be seen. We are assured by Ministry of Commerce that this scheme will continue from July 1st, 2021, but unfortunately there is anxiety among exporters for not announcing this scheme. In the old DLTL scheme we were getting two percent after shipment and another two percent at the end of year if we increase our export by 10 percent. There is a lot of uncertainly on how an exporter should account for this four percent amid the expiration DLTL and verbal assurance by the government for its continuation.

Because of Covid-19 both air and sea freights have increased from 300 to 500 percent. This is a huge increase for the exporters. Our association has requested the Ministry of Commerce to give freight subsidy on air shipments. The procedure of issuance of NOC in case of use of fur trimmings in leather garments is very complicated and time consuming from Ministry of Climate Change which is badly effecting export of leather garments with fur trimmings. We have requested the government to make the procedure simple for issuance of NOC.

BRR: What about the refunds process? How efficient is it in the leather industry?

FIK: The situation of refunds has improved significantly. Now we are getting Customs Duty Drawback amount directly in our bank account after realization of export proceeds. However sometimes 20 to 30 percent of the amount is not credited and goes into the folders of respective export collectorates by the risk management system of Customs. We are in touch with the Director RMS Customs to minimize sending claims for processing to the export collectorates. The government did not accept our proposal in last budget to give zero-rated status to five zero-rated sectors. Although we are getting monthly sales tax refunds on time it takes a long time when we pay sales tax on our inputs and time when we get refund after making the shipment. This time sometimes can be from 5 to 6 months and therefore a huge amount is blocked of the exporters. Our proposal to the government is that we should get the sales tax refunds after consumption of our inputs rather than the shipments date as used to be done in previous Sales Tax Regime.

The current position of income tax refunds is very bad. The RTOs just don’t want to pay the income tax refunds in spite of clear instructions from FBR. The DLTL refunds for non-textile sector are paid by State Bank of Pakistan for all claims approved till 30th June 2021. Our association is constantly following up with the Ministry of Commerce for payment of time barred DLTL claims under different DLTL regimes amounting to Rs200.00 million.

BRR: What role is TDAP playing in facilitating the leather trade in the country?

FIK: Unfortunately, we are not happy with the role of TDAP. There is no willingness and initiative by their officials. Our Association is very unhappy with the role of TDAP in executing the implementation of Ministry of Commerce initiatives under different schemes of EDF Board. Despite our best efforts TDAP is not releasing our funds under refunds of lab testing charges and against our Business Centre Project in Sialkot. TDAP staff is too scared of FIA officials and are not willing to process any refunds if they are not 100 percent satisfied. In the past lot of corruption took place in payment of refunds in TDAP and lot of cases were filed by FIA against its officials.

There is a need to completely make TDAP an effective organization, and the head of TDAP should be some prominent exporter and not some retired government officer.

BRR: So, what are the key prospects and threats for the country’s leather sector and trade?

FIK: The exports of leather goods from Pakistan are only $16 million. As compared to these exports in India is $1.12 billion. Out of all the finished leather used in the world for made-ups the highest percentage is footwear followed by goods.

Therefore, there is a huge potential to increase exports of leather goods from Pakistan. Main items of exports from Pakistan are ladies and gents’ handbags, wallets, belts and small leather items. Unfortunately, very few companies are making leather goods for exports. Making leather goods is more skillful than making leather jackets. You need specialized machinery and expertise to make leather goods. Most of the factories don’t have the proper machinery and expertise to make leather goods. Our Association has arranged a visit of two Italian technicians who will come to Pakistan and help our factories in giving us training in production. They will train the workers and also give us technical and mechanical guidance.

There are also good prospects in exports of leather garments. We expect an export business of $325 during 2021-22 which will be an increase of 14 percent over 2020-21.

However, the recent situation arising in Afghanistan can be not good for our exports. Fortunately, our foreign buyers in the last 2 to 3 years were happy with the law-and-order situation in Pakistan and were not afraid to give us orders but now situation is very volatile in Afghanistan, and this can have adverse situation for Pakistan.

The threats for our exports of leather garments are continuous improvement in the quality of artificial leather for garments. There is also a continuous lobby in the world not to kill animals and not using leather for apparel. Therefore, new forms of materials like vegan leather are developed for making garments.

We all hope that Covid-19 would soon finish so that we start making regular exports. At the moment we are not able to exhibit in international trade fairs and meet our customers since last 18 months.

BRR: There are key environmental concerns regarding the leather sector. how do you deal with them?

FIK: Leather garments factories don’t pose a hazard to environment. However, the tanneries discharge a lot of effluent. Most of the tanneries in Karachi are located in Korangi where we have a common effluent treatment plant. This plant is at the moment undergoing upgradation and hopefully afterwards the international audit agencies will be able to approve the performance of this plant and many tanneries who wish to apply for LWG certification will get the LWG certification. In Sialkot we are making a separate tannery zone with its own treatment plant from the funding by Ministry of Commerce.

Many big brands and stores buying leather garments from us are insisting that the tannery producing our leather should be LWG (Leather Working Group) certified. In Pakistan at the moment there are only three tanneries making garment leather which are LWG certified. In India there are many LWG certified tanneries. Also, more customers are getting strict in social/environment compliances and therefore most exporters are not able to pass customers audit and as a result not getting orders.

BRR: Majority of the leather industry is in the SME sector. How easy or difficult is it for seeking bank loans?

FIK: In terms of number of exporters, around 80 percent are in the SME sector. The SBP has just announced new policy for financing to SME sector. This is a good policy where exporters can get financing from banks without giving collateral security. The maximum limit of Rs10 million is too small. This limit should be increased to Rs50 million.

BRR: What are PLGMEA’s future plans for boosting sector’s exports?

FIK: There should be more production of leather goods in Pakistan like India and the production capacity of leather garment factories should increase. Our Association should give more emphasis on skill development of workers in the areas of pattern making, cutting, stitching and general production management. There is a severe shortage of skill labour force in our Industry.