BY

On the last day of September, 1995, while the business community was busy either filing their income-tax returns or was involved in street demonstrations against the government, the Federal Minister of Commerce, Chaudary Ahmad Mukhtar, was inaugurating the Fashion Apparel Fair 1995 at the Sheraton Hotel in Karachi. During his inaugural speech, the Minister revealed that on Monday, October 02, 1995, he will give some good news to the textile sector. True to his words, the Minister came on national television network to present a 17 point textile package which was approved by the Cabinet.

The decision to announce the package was ostensibly taken for two very vital reasons. The textile industry was passing thru a severe crisis primarily because of external factors, and secondly, this industry is the mainstay of the country’s economy and that it was essential to spruce it up with fiscal and monetary incentives. It should be noted here that the textile industry provides over 60 % of all export earnings. Thus the government was induced to come out with this package.

The salient features of this package can be summarized as follows :

1. Those banks which have extended loans to the spinning and weaving factories are now allowed to determine on their own whether they want to reduce the mark-up rates or to freeze the payable mark-up to make the project viable.
2. The recommendations of the committee headed by the Chairman, Pakistan Banking Council regarding the revival of sick or closed industries will be accepted by the banks / DFIs without further scrutiny or review. This committee will also encourage and enter into out-of-court settlements, especially in cases where the courts have granted decrees against the textile mills. These will be on a case to case basis and on the merits of that particular case. The Commerce Ministry will be kept informed about the settled cases.
3. PBC would not be allowed to restructure or reschedule the loans of those spinning mills whose conversion cost for 10 lbs of 20 count single yarn exceeds Rs 110.00. The units which do not come up to this criteria may be considered for liquidation, unless the management itself wants to inject additional equity to make the project viable.
4. The commercial banks would make the payments of duty-drawback claims within the following parameters :

1. Depending upon the bank / client relationship, the banks will process the claims and make payment to the exporters upon receipt of bank credit advise (BCA).
2. After making payment to the exporters, the bank will file the claim with the State Bank of Pakistan who will release the funds within 48 hours of submission of the claim and will debit the accounts of Customs.
3. At the time of submission of claims with the bank, the exporter will also submit a guarantee acceptable by the bank to the extent of the value of claims. In case any bank has overpaid for whatever reason, Customs will advise the SBP who will invoke the bank guarantee and recover from the exporting clients.

5. Refinance borrowings have been exempted from the payment of excise duty or if this is not legally possible, the duty would be included in the export rebate.
6. Considering the existing non-refundable taxes paid by the exporters (particularly the cascading with-holding taxes), those who are entitled to zero-rate tariffs / dues on their imported inputs, the existing duty-drawback would be revised upward by CBR, over and above the existing rates of duty-drawback by the following percentages :

1. Yarn : 00.60 %
2. Grey cloth : 02.50 %
3. Bleach, dyed, printed fabric: 04.75 %
4. All textile made-ups and garments : 04.75 %

7. Duty-drawback rates in respect of poly cotton cloth and poly made-ups notified by the CBR vide SRO No: 677 (1), dated June 11. 1995 would remain operative till the end of December 1995, and the implementation of the subsequent notification issued on August 16, 1995 will remain in abeyance. During this period. CBR would appoint consultants who will review the duty-drawback rates in consultation with trade. Final decision will be taken by the Finance Ministry.
8. The question of delinking CBR notification No: 962 and 722 would be re-examined and the decision would be taken by end of October 1995.
9. Existing rate of drawback rebate of excise duty on yarn would be re-examined by CBR with a view to allow increase for the wastage at different stages of production.
10. The cotton export contracts would be registered with the Export Promotion Bureau on fulfillment of the following conditions :

1. An irrevocable letter of credit would be opened by the buyer within 21 days of registration of contract.
2. The shipment of the contracted quantity of cotton would be completed within six months of the registration of the contract failing which penalty equivalent to 10 % of the FOB value of the contract would be imposed. The letter of credit will have a red clause to this effect.

11. The Board of Administration of Export Development Fund would extend coverage of the payment of freight concession and may make the following items eligible for freight concession at a rate of 50 % :

1. [a] comforters [b] quilted pillow covers [c] kitchen sets [d] quilted bedspreads [e] sleeping bags [f] down proof jackets [g] mattress protectors [h] quilted shirts [I] foam cushion [j] curtains [k] orthopedic pillows [l] bag in bag.
2. Exporters will be eligible to use any air or shipping line to claim the freight concessions.

12. Freight concession at a reduced rate of 25 % would be allowed from EDF on the export of non-quota woolen and silk products.
13. Existing exemption from the payment of Export Development Surcharge on the export of fabrics, made-ups, and garments would continue upto June 30,1996.
14. Concession on freight would be given from EDF and no claim would be made on the budget.
15. Import of quilt making machines and packaging machines has been allowed at a duty rate of 10 % without any sales tax.
16. In case of slow moving items over-programming would be allowed in quota management, and the condition of forfeiture of security deposit for the last quarter of the quota year 1995 has been done away with.
17. The Commerce Ministry would submit its report to the Government on the revival of hedge trading in cotton, in the light of the advise of the Council of Islamic Ideology.

The general feeling is that the government has made a sincere attempt this time to come out ahead in tackling the textile crisis. The reaction of APTMA and the various Associations has been positive. This gives further credence to the pragmatic efforts of the government which has generally been seen to be wary of the textile lobby. Recently, the government had also reduced duty by 70 % on the ring frames, an issue pending for many years.

The need to bring out this package resulted from the dwindling export figures, the two bad years in the cotton crop position, the onslaught by the traditional world trade competitors to snatch away the country’s share, the Indian and Bangladesh decisions to devalue their currencies, the high financial cost prevailing in Pakistan, the abnormal increase in utility rates these past months, and the carried forward losses of many spinning and weaving units.

The textile package has been received very favorably by the industry. Some pertinent views as reported by the newspapers are verbatim presented :

FPCCI Acting President Humayun Sayeed : The implementation of this package will go a long way in resolving the difficulties faced by textile industry. It was propitious and timely in the sense that the textile industry, the vital sector of the national economy, was beset with a prolonged crisis due mainly to failure of the cotton crop during last several years. If the package is implemented in true spirit, in would certainly help in revival of this premier industry.

KCCI President Haji Shafiqur Rehman : The package would help improve the liquidity and viability of premier textile industry and thus avert the crisis being faced by it over a long time. The most redeeming feature of the package was to allow rebate thru banks and financial institutions. This has met the long-standing demand of the Chamber and other trade bodies and would do away with the long-drawn procedure of rebate payment. He observed that the upward revision in the rate of rebates was also a welcome measure. He believed that the removal of excise duty from refinance borrowing, rescheduling and refixing of interest rates by the banks were indeed positive measures which would improve the liquidity and financial position of the textile sector.

Pakistan Commercial Exporters of Towel Association : They particularly welcome the government’s move to enhance the duty-drawback to level which the exporters pay surcharges at various stages.They also welcome the abolition of central excise duty on export refinance. The government’s move of payment of duty-drawback claims by the scheduled banks is also most welcome and it will go a long way to minimize the liquidity crunch faced by the exporters due to the delay in the release of such funds by the Customs authorities.

Pakistan Cotton Fashion Apparel Association Chairman, Jehangir Anwer : He lauded the package as a very timely measure to save the textile sector from a severe crisis. He complimented the Prime Minister and the Commerce Minister for the generous relief provided to the textile export sector. He commended the removal of the excise duty, he praised the decision to allow banks to pay the duty-drawback, he applauded the exemption of garments from EDS, etc. He hoped that the government will look after the interests of the textile ancillary in the same spirit as for the spinners and weavers, in respect of financial restructuring of the ancillary units, including outstanding loans.

Faisalabad Dry Port Trust Chairman, Mian Latif, Pakistan Cloth Exports Association Chairman, Zahid Anwer, and Vice Chairman, Ch. M. Siddique : In a joint statement they have congratulated the government and said that the package not only accommodated certain demands made by the industry from time to time but also brought much relief to the hard pressed textile sector. It is very comprehensive and would be beneficial to all. They were highly appreciative of the measures to allow the commercial banks to make payments of duty-drawback claims. In their opinion the package would not only help diversify the exports of the country but would also boost the export volume of non-quota items. The exporters would now be able to work single-mindedly and make efforts for bringing more foreign exchange for the country.

KCCI Former Vice Chairman, Haji Shakoor Khatri : He welcomed the package and said that the industry really needed it. He said that the textile industry was suffering due to the shortage of cotton and cotton yarn, which were being exported at the cost of the ancillary industry. He urged the government not to allow export of cotton and yarn as the ancillary industry which adds value to the textile products badly need basic raw material for making fabrics, garments, and made-ups.

Towel Manufacturers Association Chairman, S.M.Obaid : He welcomed the package. He also said that the benefits of these incentives should be passed on to the valuable customers abroad by reduction in prices, and if it is not done by the local manufacturers, the objectives of these incentives could not be achieved.

Apparel Manufacturers and Exporters Welfare Forum Chairman, Naim Anwer : He said that the package, although a step in the right direction is not enough to fully revive the industry as most of the things have come too little and too late. He said that a compensatory rebate of atleast 10 % was expected by the business community considering the currency rate of the Indian rupee against the US dollar, and that the export of cotton would be suspended until the size of the cotton crop was not determined.

Council of Textile Associations Convenor, S.M.A.Rizvi : He complimented the government for the relief package for the sinking textile sector, but noted that there is no mention of the financial needs of the ancillary industries. He also expressed the hope that value-added textiles will take full advantage of this package and instead of passing on these concessions to the foreign importers, they will improve the quality of their products which will help them fetch better prices.

Pakistan Yarn Merchants Association Chairman, Iqbal Mangrani : He welcomed the package and particularly mentioned the increase in rebate which he demanded should be applicable with retrospective effect i.e. from July 01, 1995, because relevant with-holding tax and other such taxes have been in practice from current fiscal year and hence revised rebate rates should be applicable accordingly to counter the effects of the with-holding tax and this effort will naturally place a positive impact on the exports. He also appreciated the other measures taken by the government, especially the payments of duty-drawback thru banks so that the exporters can get rid of customs malpractice.

Pakistan Yarn Merchants Association Zonal Chairman, Rafiq Ebrahim : He welcomed the package and said that it will increase the export of value added made-ups and the export of cotton yarn will decrease as a result of increased domestic use of yarn. He also appreciated the linkage of yarn export with EPB. He said that it will curb mismanagement in export of yarn, and that the genuine exporters would get the benefit of the steps and malpractice will be reduced. He said that Pakistan exports 500 to 600 million kg of yarn annually, making it the seventh largest yarn producer. He said that the package would reduce the gap between spinning and weaving.

FPCCI Industrial Relief Committee Chairman, Farooq Shaikh : He appreciated the decision of the government to exempt the excise duty on refinance borrowings and putting registration condition for the export of raw cotton to eliminate fake and speculative registration of cotton export contracts. He was of the opinion that basically the spinning and downstream industry has to be made viable to compete internationally. The disparity of Pak Rupees vis a vis the US dollar and the higher interest rates coupled with higher input cost of electric and various direct and indirect taxes has to be brought in line to keep the industry viable. The rescheduling / restructuring of the loans should be a one-time remedy and the viability has to be a continuous process for any industry. He said that the IRC has, in collaboration with PBC, reviewed over 362 cases amounting to over Rs 20 billion. There were still over 500 cases in the pipeline waiting for relief packages.

All Pakistan Textile Mills Association Chairman, Anwar Tata : He appreciated the government’s efforts to save the textile industry which has been facing crisis for the last four years. He said that most of the demands of APTMA have been accepted by the government and that the package has been prepared in consultation with the textile industry. The package contains measures to remedy the basic irritants such as outstanding loans and payments in installments. He said that the package has removed the anomalies of the last 15 years in government policies rather than giving any fresh financial concessions to the industry. He said that it used to take 6-12 months to get the duty-drawback payments even after spending "speed money" at the rate of 2.50 %. He said over Rs 5 billion in duty-drawback claims are usually blocked by the government machinery and no interest ever paid. He said that over 120 mills were fully closed and 50 were partially functioning. The total closed capacity amounted to about 2.54 million spindles and 65,000 rotors. This is roughly 30 % of spinning and 50 % of rotors installed capacity. Out of 151 textile units whose annual accounts for 1993-94 were analyzed, 79 had pre-tax losses. He said that the foreign exchange earning from cotton sector was over US$ 4.50 billion which accounts for 60 % of the total exports of Pakistan. However, APTMA was of the view that the electricity tariff has not been reduced, which practically amounted to pulling the legs of the industry. Restriction on opening a letter of credit within 21 days and condition for the shipment of the goods within six months were also criticized. The government will deduct 10 % of the amount if the shipment is not made within six months. It involves higher risk for the buyers who will not like to take such risks which in turn may reduce the quantum of exports.

Karachi Cotton Association Chairman, Abdul Sattar Balagamwala : He criticized the package and expressed serious concern over the provisions relating to the sale and shipment of raw cotton in the package which virtually bans the export of cotton. He said that no foreign buyer would agree to the incorporation of a Red Clause in the letter of credit, imposing a 10 % penalty on him for no fault of his, in case of non-shipment. Delays may be caused due to actions beyond the control of the shippers (such as strikes), and no buyer will accept such a penalty and would prefer going to other cotton suppliers who do not have such clauses in the letter of credit, and that these are against the normal commercial practices and conventions. This clause is unrealistic, unworkable, and inconsistent with the free trading policy announced by the government. He said that the export of cotton is allowed without any duty or restriction and is committed to continue for three years under the Trade Policy 1995-96 as announced by the Commerce Minister on July 03, 1995. The government has reneged on its commitment to allow free trade in cotton without any restrictions. The beneficial effects of the free trade policy have been totally nullified by the amendments brought out in the cotton policy which are bound to disrupt the marketing of cotton leading to a severe cotton crisis. The Association is surprised that within a short period of time, the free trading policy has been drastically amended and virtually withdrawn without consulting KCA which has put the export trade of cotton in jeopardy and shattered the confidence of the foreign buyers in the credibility of the policy. It appears that the government has given little consideration to the Pakistani cotton farmers, ginners, and exporters who all have received a rude shock from this package. He warned that the government must realize the consequence of this retrograde policy which may lead to severe financial and adverse repercussions in marketing of cotton in this country.

The package has been welcomed by the APTMA and the ancillary industries while the KCA has its misgivings. The fallout from the package was witnessed in the cotton prices which went down by over Rs 100 recently. The textile sector is demanding that the relevant SROs be issued immediately. The Commerce Minister observed that it would take about a fortnight to get all the relevant SROs issued. He stressed the need for arresting the decline in the textile exports and requested the fullest cooperation of the textile sector in achieving the objectives of the government with regard to increasing the exports.

It should also be noted that the onus now rests with the glorified spinning sector to come up to expectations and initiate steps essential for its survival, in fact, the very survival of this vital industry. There is need to beef up their marketing efforts and that there is an imperative need to strive for value-added exports because without a substantial increase in value-addition, the Pakistany export figures will remain dismally low and that the country will continue to suffer the ramifications of the burgeoning trade deficit. Furthermore, there is a big clamor for devaluing the rupee. Although the government has not announced any such steps, the rupee value is gradually sinking. This has aroused suspicion that the government will allow this sliding to counter the effects of the devaluation of the Indian Rupee and the Banglkadeshi Taka.

This latest textile package is a boost to the industry. The captains of APTMA should understand that the government is not obliged to protect an industry in crisis or to pull the industry out from the quagmire. However, considering the above factors, the government has provided a lot of breathing space to the textile industry to come out of the morass. It is the national duty of the spinning and weaving sector to strive for more valued exports and to refrain from concentrating on run-of-the-mill yarn and cloth, something that never gives a good price. The emphasis should be on fine counts of yarn with a view to supply these to the local textile ancillary units so that the country can export more value-added products, resulting in a substantial increase in export figures

In the meantime, the government is getting positive mileage from laudatory advertisements being released daily by APTMA and the ancillary industries welcoming the package and applauding the sagacity of the Prime Minister and Commerce Minister. It sounds so corny !