Identifier
Created
Classification
Origin
08ISLAMABAD2633
2008-08-05 14:01:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Islamabad
Cable title:  

PAKISTAN'S TEXTILE SECTOR IN CRISIS

Tags:  ETRD ECON EINV PK 
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ZNR UUUUU ZZH
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FM AMEMBASSY ISLAMABAD
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INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEHNE/AMEMBASSY NEW DELHI 3613
RUEHKA/AMEMBASSY DHAKA 2276
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RUEHML/AMEMBASSY MANILA 3008
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RUEHLH/AMCONSUL LAHORE 5878
RUEHPW/AMCONSUL PESHAWAR 4664
RUEAIIA/CIA WASHDC
RHMFISS/CDR USCENTCOM MACDILL AFB FL
RHMFISS/HQ USCENTCOM MACDILL AFB FL
RUEKJCS/SECDEF WASHINGTON DC
UNCLAS SECTION 01 OF 02 ISLAMABAD 002633 

SIPDIS
SENSITIVE

E.O. 12958: N/A
TAGS: ETRD ECON EINV PK
SUBJECT: PAKISTAN'S TEXTILE SECTOR IN CRISIS

UNCLAS SECTION 01 OF 02 ISLAMABAD 002633

SIPDIS
SENSITIVE

E.O. 12958: N/A
TAGS: ETRD ECON EINV PK
SUBJECT: PAKISTAN'S TEXTILE SECTOR IN CRISIS


1. (U) Summary: Pakistan's textile sector is facing a crisis. A
hefty rise in natural gas prices, rolling blackouts, and the
announcement of the 2008-2009 Trade Policy - which lacks subsidies
and support for the textiles and apparel sector - have fed industry
woes. Textiles are the largest single export industry in Pakistan
producing half of total exports, and difficulties in the sector have
contributed to Pakistan's growing trade deficit. End Summary.


2. (SBU) Textiles make up approximately 51 percent of Pakistan's
total exports and provide approximately one-third of manufacturing
jobs in the country. In FY2007-08 the sector experienced a 20
percent decline in exports by quantity and a 2.1 percent decline by
value. A representative of the All-Pakistan Textile Mills
Association (APTMA) attributed these declines to multiple reasons.
Primarily, production capacity has fallen due to a severe energy
shortage in the country and price increases in raw materials. The
industry faces strong price competition from neighboring China,
India and Bangladesh which heavily subsidize their own textile
industries. Overseas buyer confidence has been hurt by political
instability and the deteriorating security situation in Pakistan.
APTMA also complains about EU anti-dumping regulations against
Pakistani textiles. Finally, the increase in the domestic lending
rate from 4.5 percent to 13 percent has discouraged new investment
in the sector.


3. (U) Due to the chronic 4500 mega-watt energy shortfall throughout
Pakistan, most export oriented textile and apparel manufacturers
have shifted to natural gas self-generating power facilities to
ensure minimal production capabilities. On June 30, in an
unexpected move, the Oil and Gas Regulatory Authority (OGRA) raised
natural gas prices by 31 percent for general users and by 68 percent
for self-generating power plants. After outrage from the industry,
on July 15, the Economic Coordination Committee (ECC) ordered OGRA
to reduce the tariff increase for self-generating industrial plants
to 31 percent which will significantly impact the overall
competitiveness of the industry. Many manufacturers also use hot
water produced as a by-product of power generation for processing
fabrics. Such price hikes have an immediate impact in a sector that
is already struggling to compete in the global market and faces
looming increases in competition at the end of 2008 when the U.S.
safeguard program ends against China.


4. (U) According to APTMA, the textile industry in Pakistan consumes
16 million bales of cotton per year. Pakistani cotton growers
produced 11.8 million bales in FY 2007-08 and their target for
FY2008-09 has been lowered from 14.11 to 12.6 million bales. In
July, India announced that it would drop import duties on cotton,
thus increasing demand for Pakistani cotton exports and raising
local cotton prices. The raw cotton shortfall in Pakistan is
supplied through imports. Pakistan is one of the largest buyers of
U.S. Pima cotton. However, a 17 percent drop in the Pakistani
rupee's value against the dollar since January cuts into the
manufacturers' buying power, further feeding the decline in
production capacity.


5. (U) The new Trade Policy for FY2008-09 was announced July 19 and
had a conspicuous lack of textile concessions. Subsidies in the
previous fiscal year were set at PKR 48 billion (approximately USD
679 million) for textiles and fertilizers. After considerable
pressure from the industry, the ECC announced on July 30 that a
research and development subsidy program equaling six percent of
total sector exports would be extended for the apparel sector until
the end of June 2009. However, home textile manufacturers and cloth
exporters will not benefit and money for the subsidies has not yet
been identified given the severe budget crunch facing the Government
of Pakistan.


6. (SBU) Comment: Because it represents such a significant portion
of Pakistan's economy, the textile sector's troubles have a negative
impact on the economy as a whole. In view of rising input costs,
energy shortages and domestic troubles, textile industrialists say
they are reluctant to spend money investing in upgrades to boost
value-added production. Their habitual fallback is to pressure the
government for continued subsidies that only put further pressure on
the national budget in exchange for ever diminishing returns. End
comment.

ISLAMABAD 00002633 002 OF 002



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