GSP Plus status: Challenges & opportunities

In order to attract substantial amount of FDI in Pakistan, BOI must ensure the security of foreign assets and profits.

The grant of the GSP Plus status to Pakistan by the European Union (EU) has been welcomed by Pakistan as this is likely to increase Pakistan’s total exports by $2 billion (out of which, the increase in textile exports will be $650 million). The EU, being our third-largest export partner, has allowed 20 per cent of Pakistani products to enter 27 EU countries without any tariffs. With most of the tariff lines with tariff concessions belonging to the textile industry, it is likely to be the greatest beneficiary of the GSP Plus status. However, this will be conditional on the export performance of the industry, for which short-term policy interventions are needed.

Having said this, a number of challenges face the textile industry, the foremost being the need for diversification of its export base. Keeping in view the worsening energy crisis, this appears a major hindrance to expanding the product base for textile exports. Many textile units were closed down at the end of 2012, owing to shortage of power supply for a long time. Many textile units even moved to Bangladesh, Turkey and Sri Lanka due to tariff concessions, easy market access and adequate energy supply in these countries. Punjab-based textiles were particularly hard hit by the energy crisis, which contribute 75 per cent to the total textile industry. However, in March 2013, the export performance of these textile industries improved to a large extent, mainly as a result of the contribution of few large-scale textile industries developing their own power producing units.

Another challenge facing the textile industry is obsolete infrastructure. Diversification in the export base is not possible unless new and efficient production units are set up, which is not attainable in the short run. Moreover, foreign direct investment (FDI) in the textile sector has been on the decline for the last few years, which explains the poor condition of the textile infrastructure. According to the Board of Investment (BOI), FDI inflows in textiles have decreased from $29.8 million (2012) to $10 million (2013). Other factors adding to the misery of the industry include rapidly fluctuating prices of raw materials, increasing cost of production, bureaucratic hurdles faced by textile exporters and a tight monetary policy.

Keeping in view the current situation, it would be difficult to expand the export base of textile products on an adhoc basis. However, timely policy actions can help this sector enjoy the privileges of the GSP Plus status. First, the government can extend its support to small- and medium-scale textile units. Loans for working capital on low interest rate can be offered so as to make them operational. This would enhance the production capability of the existing production units. Moreover, financial support can be offered in establishing small-scale bio-fuel electricity generating plants or other alternative low-cost plants to ensure that production is sustainable.

Second, efforts should be made to attract FDI towards this sector. When the GSP Plus status was granted to Bangladesh, it attracted massive amounts of FDI. In order to attract a substantial amount of FDI in Pakistan, the BOI must ensure the security of foreign assets and profits. To attract FDI, Bangladesh had offered unconditional 100 per cent foreign equity for industrial investments. Tax exemptions of five to seven years were granted. Bangladeshi citizenship was also offered on investment of $75,000. The process of repatriation of capital investments was simplified and was allowed without any prior permission of any authority. Pakistan can also consider relaxing its investment policy in light of the aforementioned steps taken in Bangladesh.

The government can also refrain from intervening in setting the prices of raw materials and promote greater competition in the production of intermediate goods so that prices of inputs are lowered and small textile units can operate at a low cost. The replacement of exports from high duty countries to EU countries can also help. Outsourcing of the production process and the import of low-cost raw materials from India would also enable our textile industry to fully reap the benefits of the GSP Plus status.

Published in The Express Tribune, December 20^th, 2013.

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