The Export Facilitation Scheme (EFS) was introduced with the objective of fostering national exports and augmenting the inflow of foreign exchange into the country.
By facilitating the export of cotton-based products, the scheme has indeed resulted in a substantial influx of dollars, which is crucial for the economic stability of Pakistan.
However, despite the apparent benefits of the scheme, it has introduced several challenges that are adversely affecting the local cotton industry, requiring urgent attention and corrective measures.
Under the current structure of EFS, imported yarn, raw cotton, and fabric are exempted from sales tax, while domestically produced cotton, yarn, and fabric are subject to an 18 percent sales tax.
This disparity has created significant difficulties for the local textile industry, as the imposition of taxes on locally produced goods, while imported products remain tax-free, has placed an unfair burden on domestic producers.
As a result, local spinners, ginners, and the weaving sector have faced severe operational challenges, impacting their competitiveness in the market.
The consequences of this tax discrepancy are far-reaching. Ginners have reduced their purchase of seed cotton, and the weaving sector is increasingly opting for imported yarn due to its affordability and superior quality.
This has led to a direct negative impact on local businesses, while also reducing the prices paid to farmers for their produce, thus threatening the long-term sustainability of the local cotton industry.
Although spinners utilising imported cotton may be benefiting from the scheme, their growing dependence on imported materials is placing immense strain on the local supply chain, potentially leading to an industrial crisis.
Moreover, quality issues within the local cotton industry have exacerbated the situation. Contamination in ginning processes and the mixing of inferior fibers are resulting in lower-quality yarn, which is not meeting the stringent demands of the global weaving sector.
Consequently, Pakistani yarn is losing its competitive edge in international markets, further diminishing demand for Pakistani textile products. The cost of production in Pakistan is another significant factor contributing to the challenges faced by the local industry.
Rising energy costs and ongoing power supply issues are substantially increasing production costs, which in turn hinder Pakistan’s ability to compete on a global scale. In contrast, countries like the United States, Brazil, India, and China —with lower energy costs and more stable power supplies—enjoy a production cost advantage.
This results in products from these countries being not only cheaper but also of higher quality, making it increasingly difficult for Pakistani manufacturers to remain competitive in global markets.
While large textile groups with composite units are reaping the benefits of EFS by increasing their exports and generating foreign exchange, they are also contributing to the marginalization of the local cotton industry. These groups tend to rely more on imported yarn and are less engaged with the local cotton market, exacerbating the challenges faced by local farmers and smaller textile businesses.
Their growing global presence presents a challenge to the local industry, as they benefit from economies of scale and favorable tax conditions while the local sector struggles to remain viable. Internally, there is significant division within the All Pakistan Textile Mills Association (APTMA) regarding the EFS.
While some factions support the scheme, citing its benefits for national exports, others oppose it, arguing that it is undermining the local industry. Furthermore, certain commercial traders are exploiting the scheme by selling imported cotton products in the domestic market instead of utilizing them for exports, which further disrupts the local market and negatively impacts local producers.
Given the current challenges, it is imperative for policymakers to take swift and decisive action. Immediate reforms are necessary to improve the quality of locally produced yarn by implementing stringent quality standards in the ginning process. Additionally, providing technical assistance to farmers to enhance cotton quality could significantly improve the global competitiveness of Pakistani cotton.
Addressing the sales tax exemption on imported yarn and fabric under the EFS is crucial to leveling the playing field for domestic producers.
The government should consider providing greater support to locally produced yarn and fabric, thereby encouraging the growth and sustainability of the local textile sector. Furthermore, providing the local industry with access to advanced technologies and modern machinery, while working to reduce production costs, will help improve the overall quality of production and ensure that local yarn meets the demands of global markets.
By focusing on these areas, Pakistan can significantly improve its position in the global textile industry, ensuring that the domestic market remains competitive.
In conclusion, a well-structured reform of the Export Facilitation Scheme (EFS) could provide significant benefits for Pakistan’s economy. By creating an environment that supports local production, enhances quality, and ensures fair competition, the scheme has the potential to not only strengthen the domestic cotton industry but also increase demand for Pakistani products in international markets, thereby boosting exports and facilitating higher foreign exchange inflows.
Copyright Business Recorder, 2025
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