Textile industry warns against proposed import duty on cotton

ISLAMABAD: A day before the announcement of the federal budget for FY25, the country’s textile industry, which accounts for over 50% of Pakistan’s total exports, has raised a red flag over the imminent move by the government to impose customs duties on the import of cotton.

This measure, they argue, would pose a severe threat to the industry’s existence, particularly for small and medium enterprises (SMEs) that are part of the value chain, leading to serious economic repercussions.

The All Pakistan Textile Mills Association (APTMA) wrote written a letter to Federal Commerce Minister Jam Kamal Khan on Tuesday, seeking his intervention regarding the highly expected budgetary measure to impose customs duties on cotton imports. They argue this step will lead to the closure of businesses, a reduction in exports, and a further hike in unemployment, as input costs are already the highest in the region.

The textile industry is a critical component of Pakistan’s economy, contributing substantially to export revenues and employment. Unfortunately, the current economic environment, characterised by uncompetitive energy costs, prohibitive borrowing costs, and a dysfunctional tax regime, has already forced over 60% of the basic industry to shut down. Imports of cotton yarn, for instance, have skyrocketed from around two million kg in July 2023 to 14 million kg in May 2024, indicating the inability of yarn manufacturers to compete with international prices. The proposed duty on cotton imports will further exacerbate this situation, decimating the competitiveness of the spinning sector, which comprises SMEs.

The imposition of duties on cotton will have a serious negative impact on the SME sector, including domestic yarn and cloth manufacturing. Textile and apparel manufacturing in Pakistan is highly disaggregated. Very few firms possess full vertical integration, and the benefits of duty-free import schemes such as the Export Facilitation Scheme (EFS) do not extend across the entire value chain. For instance, a spinner cannot be imported under EFS because the yarn they manufacture goes through several stages of value addition—such as weaving, processing, and dyeing—before reaching the final exporter. Despite persistent requests for a multi-stage EFS with a robust traceability system, the multi-stage EFS has been effectively sabotaged by the FBR.

The destructive impact of these duties will also spill over to the domestic cotton sector. Rather than focusing on measures to enhance cotton productivity and yield to improve farmers’ returns, the government is again resorting to the outdated, tried, tested, and failed approach of import protection, which will prove counterproductive as it has in the past.

This measure will also lead to significant job losses, exacerbating unemployment and poverty. With diminished competitiveness, Pakistan’s textile exports will plummet further, adversely affecting the country’s trade balance and foreign exchange reserves. Net exports (the value of gross exports minus the value of imported inputs) will continue to decrease rapidly, severely impacting the country’s balance of payments.

The industry consumes around 14-16 million bales of cotton annually. However, the current season has witnessed a significant reduction in cotton cultivation. For the current season, the area under cotton cultivation has reduced by 30-35%, amounting to only 4.415 million acres compared to 6.62 million acres last year. In Punjab, the sowing target was reduced from five million acres to four million acres, but less than three million acres have been sown. This reduced sowing area will yield no more than 4.5 million bales.

Similarly, Sindh and Balochistan have also slightly reduced their cotton sowing areas. Nationally, with the current sowing area of approximately 4.4 million acres, production is not expected to exceed 7-8 million bales. This represents only 50-60% of the industry’s consumption needs. Consequently, Pakistan will need to import significantly more cotton compared to last year to meet export requirements.

The situation is further exacerbated by climatic challenges. So far, about 50,000 acres of cotton plantations, constituting nine percent of the total, have been damaged by abnormal heat in Sindh, one of the country’s most fertile provinces. The Pakistan Meteorological Department has predicted the rapid onset of a flash drought in June due to low rainfall and high temperatures. This phenomenon is leading to crop failure, wildfires, and water shortages in the country’s south, further threatening the domestic cotton supply.

The association has strongly urged the government to properly evaluate and reconsider any such proposal while taking all stakeholders into confidence.

The government should focus on enhancing the poor quality, productivity, and yield of domestic cotton, which is the primary factor behind low returns for farmers, so it can compete better with imported cotton and improve farmers’ incomes. Implementing a multi-stage EFS with robust traceability will support the entire textile value chain and foster sustainable growth.

Issues such as uncompetitive energy costs, prohibitive borrowing rates, and the dysfunctional tax regime must also be addressed to stimulate growth in the industry, which will increase demand for domestic cotton and, therefore, automatically increase its price and returns to farmers.