ECONOMIC ANALYSIS | ASSIGNMENT NO.

THE IMPACT OF ENERGY CRISES ON INDUSTRIAL SECTOR OF PAKISTAN: THE CASE OF TEXTILE INDUSTRY
Submitted to

Ms. Saeeda Batool Lecturer NUST Business School National University of Sciences and Technology

Submitted by

Abdullah | Faiza Faiz Amir | Fawad Ansari | Sarah Hassan | Somaya Mukhtar l Syeda Wardah Khalid | Shaima Qayyum | Yasir Muhib | First Semester MBA 2K11

NUST Business School [NBS] National University of Sciences and Technology [NUST]

THE IMPACT OF ENERGY CRISES ON INDUSTRIAL SECTOR OF PAKISTAN: THE CASE OF TEXTILE INDUSTRY

1. INTRODUCTION
Pakistan has been facing severe energy crises from the last several years. The cumulative effect of the energy crises on the economy is estimated as the upward of 2 percent of Gross

Domestic Product during the year 2009-10 alone (Economic Survey of Pakistan, 2010). The widening gap between energy demand and supply has crippled the industrial sector of the country in general, and textile industry in specific. Pakistans textile sector has been facing one of the toughest periods in decades. The global recession which has hit the global textile really hard is not the only reason for concern. Severe domestic issues also affected the countrys textile sector very badly. The higher production costs associated with energy tariffs has been the main cause of the downturn in the industry. As a consequence of load shedding, the textile production capacity of various sub-sectors has been reduced by up to 30 percent (PACRA, 2010).

1.1 Overview of Textile Industry of Pakistan The textile sector enjoys a pivotal position in the exports of Pakistan. In Asia, Pakistan stands at the 8th largest exporter of textile products. The total contribution of textile industry to the total GDP has been 8.5%. It provides employment to about 15 million people30 percent of the countrys work force.

The annual volume of total world textile trade is US$18 trillion which is growing at the rate of 2.5 percent. Out of it, Pakistans share is even less than two percent (Ministry of Textile, 2010). The development of the Manufacturing Sector has been given the highest priority since Pakistans founding with major stress on Agro-Based Industries. For Pakistan, which was one of the leading producers of cotton in the world, the development of a Textile Industry and making full use of its abundant resources of cotton has been a priority area towards industrialization. Presently, there are 1,221 ginning units, 442 spinning units, 124 large spinning units and 425 small units which produce textile products (PACRA, 2010).

The industry consists of large-scale organized sector and a highly fragmented cottage / smallscale sector. The various sectors that are a part of the textile value chain are:

THE IMPACT OF ENERGY CRISES ON INDUSTRIAL SECTOR OF PAKISTAN: THE CASE OF TEXTILE INDUSTRY

Spinningmost of the spinning industry operates in an organized manner with in-house weaving, dyeing and finishing facilities. Weaving comprises of small and medium sized entities.

The processing sectorcomprising dyeing, printing and finishing sub-sectors, only a part of this sector is operating in an organized state, able to process large quantities while the rest of the units operate as small and medium sized units.

The printing segment dominates the overall processing industry followed by textile dyeing and fabric bleaching.

The garments manufacturing segment generates the highest employment within the textile value chain. Over 75 percent of the units comprise small sized units.

The knitwear industry mostly consists of factories operating as integrated units (knitting + processing+ making up facilities).

The clothing sectors both woven and knits are mainly clustered in Karachi, Lahore and Faisalabad, where sufficient women labor is available.

2. ANALYSIS
Pakistan is the worlds 4th largest producer and 3rd largest consumer of cotton. The Textile and Clothing Industry has been the main driver of the economy for the last 50 years in terms of foreign exchange earnings and employment creation. The Textile and Clothing Industry will continue to be an important engine for future growth of the economy; there is no alternative indu stry or service sector that has the potential to benefit the economy with foreign currency earnings and new job creation, especially if synergy is developed among different sub sectors and efforts are made to aggressively grow the Ready made Clothing Sector.

The lower availability of electricity has been a key constraint for the value-added textile sector. According to State Banks quarterly report, unfortunately, due to circular debt local refineries could not provide required Furnace Oil quantity to power generation companies. As a result, import burden was increased significantly for Furnace Oil provision. The growth seen in JulyDecember FY10 period was challenging to sustain in the remaining months of FY10 given the

THE IMPACT OF ENERGY CRISES ON INDUSTRIAL SECTOR OF PAKISTAN: THE CASE OF TEXTILE INDUSTRY

inadequate energy balances in the country. For instance, the increase of 0.5 percent in gas exploration during July-November FY10 period did not seem sufficient to fuel a quick recovery. It must be noticed here that gas constitutes more than 50 percent of total energy consumption by industries. Similarly, scanty power investments in recent years allowed only a small increase in electricity generation capacity; which too often remains under-utilized due to water shortages or insufficient provision of gas and furnace oil. For instance, as winter rains remained low in FY10, the Hydral generation capability declined sharply in January 2010. Similarly, gas sales to power sector also declined during FY10. The gas load shedding to textile industries for one day in a week decreases the production of textile finished products due to dyeing process. The gas load shedding caused a loss of Rs. 1 Billion per day to the textile sector of Pakistan (State Bank of Pakistan, 2010). The textiles group exports have witnessed negative growth of 9.27 percent during the first ten months of the last financial year. Exports from July-April were recorded at $7.898 billion as against the exports of $8.706 billion during the corresponding period of last financial year. Exports of cotton yarn were decreased by 15.98 percent, cotton carded or combed by 1.41 percent, yarn other than cotton yarn by 54.74 percent, knitwear by 6.7 percent, bed wear by 12.19 percent, tents, canvas and tarpaulin by 14.70 percent readymade garments by 14.65 percent, art, silk and synthetic textile by 33.64 percent where as the exports of other textile materials were declined by15.43 percent.

The only two textile groups including raw cotton, cotton cloth and towels witnessed positive growth as their exports were increased by 40.32, 0.75 and 3.26 percent, respectively, during the first ten months of current financial year as against the same period of last year.

2.1 Decline in Textile Exports The gas and power outages over the last several years have caused the export of textile to decline. Share of Pakistan in the world textile trade (see Table 1) has been declining as per the Ministry of textile statistics; Pakistans percentage of world trade declined from 2.23% in 2005 to 1.81% in 2008. According to latest estimates, the share of Pakistan in international trade has

THE IMPACT OF ENERGY CRISES ON INDUSTRIAL SECTOR OF PAKISTAN: THE CASE OF TEXTILE INDUSTRY

declined to less than 1 percent. Power outages and interrupted gas supply has caused a severe setback to all the related textile industries of Pakistan.

Moreover, the inflated electricity and gas tariffs and value added taxation have further contributed to worsening the situation and caused several textile mills to shut down.

TABLE 1: EXPORT OF TEXTILE AND CLOTHING (US $ MILLIONS) 2005 Pakistan Textile Pakistan Clothing Total % of world trade 7,087 3,604 10,691 2.23% 2006 7,469 3,907 11,376 2.15% 2007 7,371 3,806 11,177 1.91% 2008 7,186 3,906 11,092 1.81%

Source: Pakistan Ministry of Textile

3. CONCLUSION The textile industry of Pakistan is its major contributor to the GDP and employment. It had been performing very well in terms of production and exporting but due to the severe energy crises from the last several years; the industry has sought a major setback. The optimum production capacity declined and industry suffered huge losses. The shortage of gas has been causing a loss of Rs. 1 billion per day to the industry.

Most of the sub-sectors of textile industry have been showing negative growth trends over the past few years as a result of interrupted power and gas supplies. Several textile mills have been shut down as well.

4. RECOMMENDATIONS The government should device mechanisms for uninterrupted supply of electricity and gas to the textile industry from rental power plants on subsidized tariffs. However, for long-run sustainability of the industrial sector, government must accelerate the large-scale power generation projects. Help of transnational organizations such as Asian Development Bank

THE IMPACT OF ENERGY CRISES ON INDUSTRIAL SECTOR OF PAKISTAN: THE CASE OF TEXTILE INDUSTRY

(ADB), World Bank (WB), and Islamic Development Bank (ADB) may be availed in financing the large-scale power-generation projects. Government should subsidize the industry in tariffs and value-added taxes so as to avoid shutting down of textile mills and ensure consistent production. Moreover, for enhancing exports of textile, government should explore new markets such as south-east Asia, central Asia, and Middle East; and expedite the process of market access with European and American countries.

Government and textile mills should also cooperate for upgradation of existing production technology, human resource training and development, and outsourcing of expensive raw materials and processes.

They should also cooperate to pursue energy efficient procedures, procuring energy efficient machinery and utilizing renewable sources of energy.

5. REFERENCES Economic Survey of Pakistan (2009-10). Ministry of Finance, Pakistan. Khan, A. A. and Khan, M. (2010). Pakistan textile Industry facing New Challenges. Research Journal of International Studies - Issue 14, pp. 21-29 Ministry of Textile Handbook 2010. Ministry of Textile Official Webpage [ www.textile.gov.pk] All Pakistan Textile Mills Association (APTAMA) official webpage. [www.aptama.org.pk]

State Bank of Pakistan. (2010). Annual Performance Review