NEW TEXTILE POLICY WON'T CURE WHAT AILS PAKISTAN'S INDUSTRY

UNCLAS SECTION 01 OF 03 LAHORE 000209 SENSITIVE SIPDIS E.O. 12958: N/A TAGS: ECON BEXP BTIO EAGR EAID ECIN EIND ELAB ETRD PGOV, PREL, PK SUBJECT: NEW TEXTILE POLICY WON'T CURE WHAT AILS PAKISTAN'S INDUSTRY REF: A. LAHORE 207 ¶B. ISLAMABAD 1901 ¶1. (SBU) Summary: Pakistan's 2009-2014 federal textile policy correctly identifies and seeks to rectify many of the sector's weaknesses, but experts predict it will not deliver the desired transformation of the industry. Despite accounting for 40 percent of all industrial employment and 8.5 percent of Gross Domestic Product, much of the garment and textile business remains focused on low value-added market segments and is hampered by fragmentation and fragile infrastructure. Through the new textile policy, the first of its kind for this critical sector, the government hopes to increase value addition from $1,000 per bale of raw cotton to $2,000 per bale, expand production capacity, and double the industry's employment with three million new jobs. Policy mechanisms include subsidized loans for technology upgrades, industrial estates and cluster development, training, tax-exempt exports, tax rebates for employing women, and a host of subsector initiatives. While healthy businesses would certainly benefit from these types of measures, the government of Pakistan appears to have bowed to pressure from the textile lobby and the overriding need to create jobs, and will continue to subsidize the lower end of the industry rather than drive much-needed change. End Summary. - - - PAKISTAN'S MAJOR EXPORT INDUSTRY NEEDS MENDING - - - ¶2. (SBU) According to government data, the textile sector represents 8.5 percent of GDP and generates more than 50 percent of total export value (down from over 58 percent in 2007). The Ministry of Textiles claims that the industry still accounts for 40 percent of industrial employment in the country. As reported in Ref A, while the industry has several globally competitive firms, the bulk of the business is mired in low-value added market segments and hampered by fragmentation and fragile infrastructure. Decades of policy supported the industry as an engine of job growth, but demand for labor is intertwined with the sector's underlying weaknesses. The industry needs significant restructuring to remain competitive. Federal Textiles Minister Rana Khan understands the structural weaknesses of the sector and outlined many of them when introducing the new national textile policy. - - - TEXTILE POLICY GOALS AND OVERALL TRADE - - - ¶3. (SBU) The textile policy objective is to double value addition by 2014, from $1,000 per bale of cotton to $2,000. Federal Textiles Secretary Waqar Khan said that the government expects to achieve this goal while actually increasing total production capacity, raising export value from $9.7 billion to $25 billion in five years and doubling textile employment with three million new jobs. (Note: The export growth target for textiles represents between 77 and 100 percent of the annual export growth goals set out in the 2009-2012 general trade policy announced in July (Ref B).) End Note. - - - POLICY SPECIFICS: SUPPORTING THE INDUSTRY - - - ¶4. (U) The policy contains seven industry-wide "immediate measures," 13 longer-term broad interventions, and 15 subsector-specific initiatives toward achieving these goals. - Immediate measures include State Bank of Pakistan (SBP) subsidies for existing commercial loans, low cost SPB financing for filling export orders, and a one-year, no-payment grace period on all industry debt to private and public banks (one time cost of $91 million); a two-year exemption from local taxes on various textile and garment sector transactions, presumably either by replacing lost revenue to the taxing jurisdiction or by providing rebates to the tax payer ($532 million); and "priority" in gas and electricity deliveries (not priced). - Broad, longer-term interventions provide subsidized loans LAHORE 00000209 002 OF 003 for technology upgrades ($19 million in 2009, rising to $206 million by 2014); tax exemptions for exports, tax exemptions on imported products incorporated into exports (not priced); "removing regulatory bottlenecks" (not priced); developing industrial estates and clusters (not priced); and a skill training program ($12 million per year). - Significant subsector initiatives include creating an anti-child labor certification for carpet manufacturers, and subsidies to firms that hire women and handicapped workers to offset payroll taxes ($24 million the first year, and rising as additional subsidized employees are added). - - - BUT WILL THE PLAN WORK? - - - ¶5. (SBU) The price tag for the policy, well over $1 billion over five years, is a serious barrier to its successful implementation. A variety of analysts believe the policy is deeply flawed because it is dependent on large-scale financing that most likely will never be approved. While Textile Secretary Waqar Khan assured Econoffs that the Finance Ministry signed off on the policy, just two weeks later Finance Minister Tarin publicly endorsed a World Bank call to end all zero rating schemes and general tax exemptions. ¶6. (SBU) The failure to deliver regular power to the textile sector in the face of ongoing nation-wide blackouts is a serious industrial impediment. Though some public utilities have tried to maintain power supplies to industrial estates, they more often than not lack the physical grid infrastructure to do so. Moreover, Punjab Industrial Estates CEO Sabir Chohan reports that the utilities are no longer prioritizing industrial customers. (Note: 98 percent of all garment stitching and 87 percent of the country's looms depend on public energy infrastructure, with the remainder using captive power. End Note.) ¶7. (SBU) Experts also fear that lack of coordination between and among federal and provincial government agencies involved in the textile industry will hamstring the application of the policy. Secretary Waqar Khan said that the federal government would keep its industrial estates, clusters, and technical training activities separate from similar provincial efforts, and saw little need for close collaboration. (Note: Punjab province's investment in these approaches has been significant but yielded only limited success. End Note.) ¶8. (SBU) Detractors claim that the plan, even if fully implemented, would not have a meaningful impact on the structure of the industry. World Bank Senior Private Sector Development Specialist Anjum Ahmad observed that some policy instruments were practical and realistic, such as subsidized technology upgrade loans and tax breaks for hiring women and the disabled; however, these programs would probably benefit only the more sophisticated players in the industry. Echoing other analysts, Ahmad's overall assessment was that the Textile Policy alone would do little to change the (lack of) competitiveness of the small and medium size enterprises that dominate some parts of the industry. - - - COMMENT: SHRINK THE INDUSTRY TO MAKE IT COMPETITIVE - - - ¶9. (SBU) Comment: While the GOP commendably recognizes some of the flaws in its textile and garment industry, especially the need to focus on value-addition, the new Textile Policy represents more of a wish list of subsidies than a genuine strategy for "transforming the sector in five years." Most experts agree that raising value-addition is a wise and achievable goal, but realistically the industry will have to shed a lot of jobs to get there as the sector consolidates and modernizes. Moreover, Pakistan is already exceedingly reliant on textile and garment manufacturing, a point the Ministry of Commerce makes frequently and which the recently-adopted trade policy seeks to address (ref B). Yet the Textile Policy reflects a combination of pressure from the powerful textile LAHORE 00000209 003 OF 003 lobby, and concern about the overwhelming need to create jobs, any jobs. With this policy document, the Textile Ministry has argued for continuing to subsidize the lower end of the industry in spite of the opportunity cost, and the government of Pakistan appears prepared to prolong the crowding-out effect of favoring the textile and garment sector. Longer-term, this approach will have adverse consequences for the diversity and health of Pakistan's economy. ¶10. (U) Note: This cable is a joint production of Embassy Islamabad and Consulate General Lahore. End Note. CONROY