Dynamics of documented and organised sector, The organised sector is mostly represented by listed and unlisted companies. This includes spinning and the entities, which are engaged in weaving and finishing also.
These enterprises contribute almost 80 percent of the country’s textile exports. Overall value of exports depends upon the composition of its value-added exports.
Raw cotton and yarn is least profitable whereas garments have the highest margin in USD terms. In Pakistan, the composition of exports is the main problem. Our exports do not have sufficient composition of value-added products like garments. Bangladesh, however, only deals in the garment.
This can be viewed from an independent analysis by a famous credit agency of Pakistan viz. PACRA, which in their report on textile for 2023 observed:
Why our exports still struggle to get meaningful boost?—I
Pakistan’s textile exports fell by ~1.4% in the 4MFY23 period to USD~5.9bln from the SPLY. This follows the successful FY22 year wherein exports accelerated by ~26% or to USD~19.3bln from the SPLY.
• Over the 4MFY23 period, ~58% more knitwear was exported giving rise to value growth of ~7% in USD terms.
• The other segment to contribute positively to exports in volumetric and USD terms was the readymade garments segment; exports rose by ~52% in volume terms and ~2%, respectively, in USD terms.
• Segments which witnessed a decline in export demand in the 4MFY23 period include the bedwear segment (comprising ~18% of exports). Export dispatches declined by ~22% in volumetric terms and ~10% in USD terms.
• The cotton yarn and cotton cloth segments, contributing ~5% and ~13% to export revenues, witnessed a decline of ~38% and ~23% in volumetric terms and ~28% and ~1% in USD terms, respectively.
• Going forward, we expect the situation to be not as favourable on the exports front and Pakistan may witness a dip in the FY23 year compared to the SPLY if worldwide recessionary conditions continue to persist for the remainder of the year.
The PACRA report further revealed that:
Portugal is Pakistan’s largest yarn customer followed by the US whereby ~5% and ~4%, respectively, of total yarn export revenue was generated in FY22.
Notably, Italy stepped up its exports orders in FY22 resulting in the country generating ~4% of yarn exports revenue for Pakistan. Another large export customer is Turkey with revenue contributing ~4% to yarn export revenue.
• Approximately ~18% of Pakistan’s cotton cloth exports are concentrated towards Bangladesh, which is a significant player in the global textile finished goods market.
• Other export destinations include European countries such as Turkey (~9%), Germany and Italy (~5% each), Netherlands (~4%) and Spain (~4%), as well as USA, ~13%. In FY22, export of cotton cloth increased by ~3.8% in volumetric terms and ~26.9% in USD terms.
Bangladesh, Vietnam, Thailand and China have been identified as value-added export locations. Reasonable money can only be made in value-added finished products, not intermediaries. Pakistan has shown improvement only in knitwear and ready-made garments mainly jeans, etc.
The question is whether or not Pakistan in the near future will be able to get out of this trap, especially when Bangladesh, Turkey, Vietnam, India and China have already outpaced Pakistan in finished products.
Bangladeshis are buying cloth from us to make garments. For example, we make a profit of 25 cents in a yard whereas their profit is $ 5 from that one yard of cloth. This is a permanent trap. In the author’s view, Pakistan is structurally not ready to outpace Bangladesh, India, Vietnam and Turkey in this field. Pakistan is already out of the tournament. There is a need to review our overall strategy in order to join the competition.
How many of us know that Portugal is one of the major importers of Pakistani yarn. The question is whether Pakistan can overcome the comparative advantage if the following is a remark about the Portugal’s textile industry by a European Journal:
“Is often said that “Portugal has one of the strongest textile industries in Europe”. Partly, this is a quirk of history: Portugal has been producing high quality garments since the 18th century. It has maintained this reputation through the centuries, expanding from a handful of family owned factories into more modernised facilities that still retain their proud artisanal history.
For that reason the label “Made in Portugal” is synonymous with premium quality textiles and expert craftsmanship.
This robust textile industry (and the fact that it is based in a politically stable country) also means that our partner factories are less vulnerable to global economic and logistical shocks. This was true of 2020 & 2021, which saw many companies experiencing delays due to freight and post-covid issues and 2022, which has seen the war between Russia and Ukraine rock the world’s access to affordable energy. In both situations, our factories have shown their resilience”.
The primary question for our textile industry is whether or not Pakistan will be able to enter the value-added markets with the present state of affairs of their costs, competitive analysis, investments made and social and economic issues.
Pakistanis in Bangladesh and Portugal
In the commercial world there is no particular destination of capital. Over time a substantial number of Pakistani businessmen have established ‘finishing units’ of textile in Bangladesh, Portugal and other countries. Bangladesh is the most favourite destination of Pakistani businesses for ‘denim’ and other textile items.
These companies are formed in the UAE and Singapore with a simple business model — import of cloth and other raw materials from Pakistan, manufacturing in Bangladesh and export to the USA and other destinations. The profits in USD remain in the UAE.
There is nothing wrong or illegal in this business model; however, if this trend continues Pakistan’s economy will be seriously affected as there will never be an incremental growth in our export to finance the imports.
The estimated earning in this field by Pakistani businessmen is around 10 to 30 billion USD over a period of ten years. Portugal has opened foreign nationality which provides another advantage for desperate Pakistanis.
On the one hand, we are asking for foreign investment whereas our own businessmen are investing in Bangladesh in textile and real estate in the UAE. These trends have to be reversed.
Transfer pricing
The conduit destinations, as identified in the diagram are jurisdictions where a possibility of onward shipment exists. These places are used to place a margin on exports outside the country. The countries prone to this system are the UAE, Sri Lanka, Thailand and China.
These locations provide easy transshipment facilities for onward journeys. The transfer pricing difference is parked outside the system in Pakistan.
In case if the amount is taken at USD 1 to 2 billion then it calculates around 7 to 9 percent of total exports of textiles. An item to be noted is the yarn-cloth export to China. The trade system with China is prone to heavy transfer pricing.
Pakistan is in a very strange position. It exports the coarse quality yarn to China whereas the fine quality yarn is imported. This therefore means that the ultimate quality premium is left in China or outside Pakistan.
Parking lot and presumptive tax
The export trade of Pakistan is effectively out of the tax system as income from exports is taxed on presumptive basis. The system is that if an entity exports USD 100,000 worth of goods the tax liability is 1 percent of the export proceeds being rupee equivalent to USD 1,000.
Actual profit may be USD 50,000 or a loss of USD 10,000. For tax that calculation is not relevant. There is no relevance of any expenditure. Exporters are not required to maintain and present any financial statements to the tax department.
In this manner an exporter who has actually earned Rs 5 million in the export business can show a white income not taxable at Rs 10 million for the reason that the tax liability is determined on sale proceeds not on the profit. In this manner the whole export business is an easy ‘conduit’ to whiten the black money. This can be explained through a simple example.
Two brothers, Mian Ghafoor and Mian Shakoor, have a shop in Azam Cloth Market, selling fabrics on wholesale basis and spinning mill exporting yarn. Since there are no books of the spinning mills therefore it is very easy to park profit on undeclared sales in Azam Cloth Market shop in the export business. All kosher and explainable.
This is the reason for the concentration of textile businesses to families and there is no foreign investor in that sector. This disease of presumptive tax on export was started in 1974. In India and other countries the exports are zero-rated with a requirement to present accounts for getting exemption. In Pakistan, the system is counter-productive.
Conclusion
A very complex and complicated aspect has been placed with these few paragraphs. This writer is fully aware of the facts that there is a need for further elaboration and description. This will be tried in the following articles. The conclusions drawn from the aforesaid paragraphs are:
1- Pakistan’s total export was USD 25 billion in 2013; USD 30 billion in 2022. No material increase;
2- Textile remains around 60 percent of total exports;
3- Bangladesh and India doubled their exports during that period;
4- Major part of Pakistan’s exports are still less value-added products;
5- Good quality raw cotton is not available. There is an import of cotton of USD 4 to 5 billion;
6- Spinning capacity is gradually becoming idle;
7- Enterprises making value-added products like denim jeans, knitwear are only player giving incremental growth;
8- Whole trade of textile is unorganised starting from Suttar Mandi to retail sale;
9- Flying invoices are prevalent to claim sales tax paid in organised sector but used in unorganised sector;
10- The countries having value addition capability like China, Bangladesh, Sri Lanka, Portugal, Turkey and other have so developed their value-added industry. Needless to say, establishing a value-added industry will be a formidable challenge or task for Pakistan;
11- Chances of transfer pricing and under-invoicing of exports cannot be overruled;
12- Tax contribution of the whole textile industry is much less than the real income;
13- Whole trade is in undocumented sector whereas export is subject to a presumptive rate not based on profit;
14- Export profit remains unaccounted for, providing a big loose end to whiten untaxed money. It should be zero rated on income.
This requires restructuring of the whole textile sector by the government if there has to be economic stability in the country. Minor corrections will not give results. We have to live in the textile business and should therefore try to prepare a long-term plan—from now till 2050.
(Concluded)
Copyright Business Recorder, 2023
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