Windfall benefits: As rupee slides, mills look to increase market share

Textile sector leads charge as market access and demand expected to rise .

KARACHI:

While the negative consequences of the rupee’s devaluation against the dollar cannot be underestimated, export-oriented sections of the Pakistan economy seem set to reap benefits of a widening exchange rate difference.

The rupee has declined by around 8% since the beginning of 2013. In the last two months alone, the devaluation in the rupee against the greenback is around 4%.

However, with a share of over 50% in the country’s total exports, the textile industry has many reasons to be optimistic in fiscal year 2013-14.



Although the gas tariff for captive power plants increased 17.4% and electricity rates for industrial units went up 57% in recent months, analysts expect the outlook for the textile industry to remain largely positive in the current fiscal year.

According to Pearl Securities, a brokerage house based in Karachi, the textile industry has great potential for further growth in both production and export because of its inherent competitiveness in producing conventional products. “In fiscal 2014, we expect the industry to maintain strong performance due to possible Generalised System of Preferences (GSP)-Plus status with the European Union (EU),” it said in a research note issued to clients on Thursday.

GSP-Plus is a trade arrangement that allows exporters from developing countries, like Pakistan, to export goods to the EU while paying either very low or no duties at all. However, in order to get the GSP-Plus status, a country must effectively implement as many as 27 international conventions on environment issues, good governance and human and labour rights.

While the standard GSP – which will remain effective until the end of 2013 – allows 176 developing countries and territories to enjoy easy access to the EU, the upcoming GSP+ will be limited to 89 low and lower middle-income countries, including Pakistan. Hence, like many other countries, Pakistan too has pinned its hopes on EU legislatures, whose nod is required for the grant of the GSP+ status.

Currently, Pakistan has only 1.5% of the global market share in textiles, which leaves the industry with great possibility for growth. Observers believe Pakistan’s textile exports will likely double in the next five years to $26 billion if the country receives the GSP+ status.

Another reason for analysts to be upbeat about the textile industry is China’s cotton policy. Cotton prices in China have been increasing, causing Chinese textile manufacturers to import the commodity. “This fared well for Pakistan’s textile exports of cotton yarn, and performance in fiscal 2014 is dependent on China’s retention of the current policy. We expect the policy to be maintained, as China is now looking to invest in Pakistan’s ginning and spinning segments,” it noted.

To put it in perspective, Pakistan exported raw cotton worth $24.6 million in August as opposed to $4 million in the same month of 2012, showing a year-on-year increase of 504.2%. Similarly, the annual growth rate was 18.1% for the export of cotton year over the same period.

As for exports to the United States (US) market − which accounts for 19% of the total export bill of Pakistan despite heavy duty barriers − analysts at Taurus Securities, a brokerage house associated with National Bank of Pakistan, believe the textile industry will get a major boost in the likely event of the government successfully securing duty-free access package with the US. Duty-free access to the US textile market will challenge the textile industry of Bangladesh, which exports goods in excess of $4.5 billion to the US, Taurus Securities said in a separate report issued on Thursday.

“With the United States suspending Bangladesh’s GSP status as a result of the poor labour conditions in Bangladesh, Pakistan can further strengthen its position by challenging Bangladesh’s dominance in the US market before the suspension is taken off,” it added.

Published in The Express Tribune, October 4^th, 2013.

Like Business on Facebook, follow @TribuneBiz on Twitter to stay informed and join in the conversation.