A TROUBLING TREND: TEXTILE EXPORTS DOWN AGAIN.

UNCLAS ISLAMABAD 001396 SIPDIS SENSITIVE SIPDIS E.O. 12958: N/A TAGS: ETRD EINV ECON PK SUBJECT: A TROUBLING TREND: TEXTILE EXPORTS DOWN AGAIN. ¶1. (SBU) Summary. Pakistan is losing its competitiveness in textile and apparel goods. Based on third quarter figures, Pakistan's textile export performance slumped in July-February 2007-08 putting the GOP's export target of USD 19.2 billion at risk. With the exception of readymade garments all major textile categories recorded negative growth rates and the share of textile exports in Pakistan's total exports also dropped. The declining performance of the textile sector can be attributed to many factors including frequent power outages, high borrowing costs due to high interest rates, global increased cost of oil, concerns about law and order and increased competition from regional competitors. End Summary. ¶2. (SBU) Textile and apparel exports kicked off fiscal year 2008 in a poor fashion and are continuing that trend throughout the year. Textile exports are down by 2.92 percent in the first eight months of the fiscal year 2008 (July-February 2007-08). Almost all major textile categories recorded drops in this period but losses are also mounting in Pakistan's historically strong categories such as cotton cloth exports which dropped by 10.09 percent, bed wear exports slumped by 4.72 percent, and knitwear exports dropped by 8.46 percent. The sole survivor appears to be readymade garments, which grew 7.35 percent during this period. ¶3. (SBU) The share of textile exports in the overall exports of the country decreased by 6.46 percent during July-February, 2007-08 to 58.37 percent from 64.83 percent in the same period of last year. Similarly, Pakistan reports an 11.55 percent drop in the share of textile exports in the overall exports with levels in February 2008 dropping to 50.93 percent from 62.48 percent in February 2007. ¶4. (SBU) The government's export target of USD 19.2 billion for 2007-08 is not likely to be met in view of the drop in textile exports. Increased competition from countries like China, India, Bangladesh and Turkey coupled with Pakistan's tendency to cling to the commodity end of the market are not new and sudden threats to the domestic industry; yet in combination with domestic challenges, a perfect storm is brewing. Other factors, which continue to erode Pakistan's competitiveness include frequent and sustained power outages, further tightening of monetary policy this year with resulting higher interest rates, high utility prices as a result of international oil prices and large government subsidies for the textiles sectors in India and Bangladesh. ¶5. (SBU) According to All Pakistan Textile Mills Association, export orders for textile products fell by 10-15 percent in the last three months which will further impact the future trade imbalance. Large textile buying houses have shifted their bases from Pakistan to other regional countries due to law and order problems and energy shortage, which also negatively affects the orders for Pakistani textile products. The high costs of production due to widespread power outages and the record high international oil and gas prices coupled with law and order problems have forced industrialists to entertain less foreign orders than ever before. According to a rough estimate, the cost of production is 12 percent more in Pakistan than in regional competitors. ¶6. (SBU) Comment: Given the recent security and law and order problems, further decreases in the competitiveness of Pakistan's textile and apparel sector are not unexpected. Given the sizeable subsidy programs in competitor countries and greater EU trade preferences for key regional competitors, Pakistan is faced with greater competition. However, the GOP and the textile sector need to focus on training, energy needs, infrastructure, supply and competitiveness issues in order to maintain current market shares. We continue to be struck by the lack of planning and consideration for what could happen once the U.S. China safeguards expire in December 2008. We are hopeful the passage of the Reconstruction Opportunity Zone (ROZ) legislation and possible establishment of textile plants in the ROZs will help increase exports. End comment. BODDE