by Guest Editor, Majyd Aziz, President Karachi Chamber of Commerce and Industry

The scenario at present is that the economic picture seems robust with a projected GDP growth in excess of 6% for the fourth year in a row and much improved macro-economic indicators. The per capita income is expected to surpass US$ 900, foreign exchange reserves hover around US$ 13 billion figure, there is a sharp increase in foreign direct investment, the country’s Eurobonds received a much favourable international response, there is significant socio-economic development of the nation’s infrastructure, there is a much better implementation of economic reforms, and inspite of hiccups, the privatization process is in motion.

On the other hand, it is imperative to note that the 9/11 syndrome has also contributed significantly to the achievement of economic objectives. The re-profiling and write-off of the debt portfolio, the assistance of multilateral lending agencies, the upsurge in remittances by expatriate Pakistanis, the role of Pakistan as a frontline state in the war against terrorism, and the trade incentives  given by EU countries, may not be possible in the years ahead. Pakistan is facing a tough international environment and recent events have highlighted the domestic economic challenges too. The country is in the throes of an over-heated economy, negative fiscal developments and a widening external account gap. In this scenario, the textile sector has become vulnerable again.

On December 31, 2004, the Agreement on Textiles and Clothing ended resulting in the abolishment of the quantitative restrictions on textiles and clothing in international trade. Pakistan was projected as being one of the major players in the global textile market, taking advantage of its inherent plus points, such as being the fourth largest cotton growing country, abundant textile workforce, intensive investment in capital equipment and capacity building, low interest rates, a vibrant stock market, and entrepreneurial expertise. Pakistan was poised to make inroads into the global share of countries such as Bangladesh, Cambodia, and Nepal, who were perceived as vulnerable to liberalization of international trade. Pakistan was designated as the producer of excellent quality towels, bedwear, and cotton yarn.

Much to the chagrin of the policymakers as well as the stakeholders, the oft-repeated motivational mantra, that after the elimination of the quota regime Pakistani textile sector would have more opportunities than challenges just did not hold juice. The textile sector instead faced pressures from internal as well as external influences. These impacted heavily on the cost of doing business in Pakistan.

The Achilles’ heel for the textile sector has been the unpredictable and frequent increases in the rates of power and gas, the low availability of water, and the disruptions, power shortage, and breakdowns in the systems. Moreover, the discretionary authority given to utilities to sanction connections has further aggravated the concerns of the industrialists. Gas is an important natural resource yet its tariff is excessively high because of subsidies given to some sectors and because of the method of calculating the guaranteed return on average net fixed assets provided to the two gas companies, i.e. 17% for SSGC and  17.5% for SNGPL. However, from October 2006 a new formula has been devised that links the guaranteed return to gas companies to the KIBOR rate plus 8%. This, in effect, would increase the guaranteed return for the gas companies.

KESC and WAPDA are unable to ensure uninterrupted power, and because of other crucial reasons like rates, attitudes, and regulations, many industries have opted for their own captive power generation. These are based on furnace oil, diesel, or gas. Textile industries consume 8.7% and 10.96% of total sales of SSGC and SNGPL respectively while captive power plants consume 10.16% and 4.68% of their total sales. The gas rates in Pakistan are US$ 4.02/MMBTU for general industries as well as captive power plants, while in Bangladesh the rates are US$ 1.90 and US$ 2.65 respectively.

These power rates are substantially excessive and if the invisible losses due to load-shedding and power outrages are taken into consideration, then the impact on the total cost of the product is formidable. Water for Karachi-based textile processing industries is expensive too. Due to non-availability of the required water supply, the industries have no option but to depend on the water tanker mafia to supply water, and that too at a steep cost. The water supply situation is pathetic as well as inequitable since SITE Karachi, the largest and oldest industrial estate of the country having 3002 industries including 40% of the total textile processing mills of the country has a meager laid down water quota. The estimated cost to Karachi units is about Rs 0.50 per square meter.

The solution lies in rationalizing the utilities rates and putting on hold the frequent increases. Gas prices must be reduced by at least 45% on an immediate basis. Gas prices have gone up by 48% since January 2005. Instead of coming up with a consumer-friendly formula for the gas companies, the new formula devised by the Petroleum Ministry would critically affect the viability of the manufactured textile products. The new management of KESC has still not found its bearings and their methods of operation have made lives miserable for the business and industrial establishments as well as for the citizens of Karachi. The nonchalant pronouncements of the concerned Ministry further add fuel to the fire. The general impression is that the KESC hierarchy is not presenting the pragmatic and correct picture to the decision makers.

The water problem in Karachi can be addressed to some extent by the installation of effluent treatment plants in all five industrial estates of the city so that environmental standards are complied with and also treated water is available for industrial utilization. The government must take the initiative and set up water desalination plants on a priority basis as the future supply of water to Karachi would continue to have negative ramifications.