The textile and apparel sector has long been a cornerstone of Pakistan’s economy, contributing significantly to export earnings and providing employment to millions. In recent years, a notable transformation has occurred within this sector, particularly in the realm of high-value-added (HVA) products such as readymade garments. Despite this positive shift, an intriguing paradox has emerged: while HVA exports have shown resilience and growth, the working capital financing dynamics tell a different story, especially when compared to low-value-added (LVA) segments. This article delves into these trends, their implications, and the factors driving them.
Performance of HVA vs. LVA Segments
In the last two years, Pakistan’s textile sector has witnessed a substantial increase in export volume, particularly in high-value-added segments. These segments have outperformed low-value-added categories, like yarn and greige fabric, even amid challenges such as soaring production costs and declining prices. High-value-added exports, encompassing finished textiles and apparel, have exhibited a remarkable ability to withstand economic headwinds, suggesting a robust demand for more sophisticated textile products.
Despite these encouraging developments, a striking trend has emerged: the working capital financing available to HVA industries has stagnated. Historically, HVA segments have commanded a relatively small share of total textile lending, averaging around 40%. This reliance on export-based trade financing—typically comprising 70% of their total working capital borrowing—has left them vulnerable as the avenues for concessional export refinancing have been curtailed.
Stagnation in Working Capital Financing
Over the past two years, the total working capital financing for HVA segments has remained stagnant at approximately Rs 550 billion. With the closure of concessional export refinancing programs, industries are shifting towards commercially priced pre-shipment foreign currency (FE-25) loans and post-shipment bill discounting lines. While this reprofiling of debt has occurred, the total trade-based export financing for HVA textiles has declined, highlighting a critical concern for the sustainability of these industries.
In contrast, low-value-added industries have experienced a notable uptick in working capital borrowing, rising by more than 18% over the same period. This trend raises significant questions about the underlying factors driving the resilience of LVA segments in the face of declining production volumes and historically lower access to trade financing.
The Dynamics of Low-Value-Added Financing
The low-value-added segments, primarily comprising spinning and weaving mills, have historically struggled to access concessional and export-based trade financing. Despite facing production challenges and a decline in domestic demand, LVA industries have managed to secure increased working capital. This raises intriguing questions about the nature of their borrowing practices.
While some argue that the working capital requirements for LVA industries have escalated, this perspective does not hold when considering the broader economic context. The price of raw cotton has stabilized, and production volumes for both yarn and greige fabric have plummeted, suggesting that working capital needs should have decreased rather than increased.
The observation that LVA segments are witnessing increased borrowing is particularly concerning, given the reported widespread shutdowns within the spinning and weaving sectors. If this is indeed the case, how are these industries managing to secure financing, and what implications does this have for the future of the textile sector?
Understanding the Shift in Borrowing Patterns
One potential explanation for the disparity in financing trends between HVA and LVA segments lies in the evolving structure of the industry itself. The substantial capital expenditure (capex) investments made during the fiscal year 2021-22 may have allowed previously low-value-adding units to vertically integrate and transition into higher-value production. This shift could explain why the share of export-based trade finance within LVA industries has increased from 35% to nearly 50% in recent months, as these entities begin to participate more actively in the export market.
However, this observation prompts further inquiry: if LVA segments are now generating more exports, does this indicate a concentration of borrowing among a handful of large, vertically integrated businesses? Such a trend could lead to the marginalization of smaller firms that lack the resources to compete, further complicating the already challenging landscape of the textile sector.
The Role of SBP and Industry Dynamics
As the State Bank of Pakistan (SBP) continues to monitor these shifts, it must address the implications of the rising concentration of borrowing among a limited number of large textile groups. With the vast majority of textile bank borrowing increasingly being concentrated within 30 to 40 large firms, smaller businesses may find themselves at a disadvantage, unable to access necessary financing to sustain their operations.
This growing disparity raises essential questions about the long-term viability of the textile sector as a whole. If small and medium enterprises (SMEs) within the spinning and weaving industries cannot secure adequate funding, their ability to recover from recent downturns and contribute to the economy will be severely hampered.
Conclusion: Navigating Uncertainty in the Textile Sector
The evolving landscape of Pakistan’s textile and apparel industry presents a complex interplay of growth, stagnation, and resilience. While high-value-added exports have flourished, the stagnation in working capital financing for these segments poses a critical challenge. Conversely, the relative strength of low-value-added segments raises questions about the distribution of resources and support within the industry.
To navigate these uncertainties, stakeholders—ranging from policymakers to industry leaders—must engage in meaningful dialogue to address the disparities in financing and ensure a more equitable distribution of resources across the textile sector. This collective effort is vital to fostering a sustainable and competitive environment that can adapt to the evolving demands of both domestic and international markets. Only by ensuring that all segments of the textile industry are adequately supported can Pakistan harness the full potential of its textile and apparel sector, ultimately contributing to economic growth and development.
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