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.

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PAKISTAN'S MAJOR EXPORT INDUSTRY NEEDS MENDING
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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.

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TEXTILE POLICY GOALS AND OVERALL TRADE
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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.

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POLICY SPECIFICS: SUPPORTING THE INDUSTRY
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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

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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).

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BUT WILL THE PLAN WORK?
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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.

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COMMENT: SHRINK THE INDUSTRY TO MAKE IT COMPETITIVE
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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

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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