The textile industry in Pakistan has been a key pillar of the country’s economy for decades. It accounts for a significant share of GDP, employment, and foreign exchange earnings. In 2024, however, the sector finds itself at a critical juncture. Rising production costs, political instability, and global economic challenges are testing the industry’s resilience.
Once a global leader in textile exports, Pakistan now faces stiff competition from regional players like Bangladesh, Vietnam, and India. Despite these challenges, the industry also has new opportunities for growth, especially with global buyers seeking alternatives to Bangladesh due to its ongoing economic crisis.
The Rise and Decline of Pakistan’s Textile Industry
In 2021, Pakistan’s textile sector achieved a major milestone, with exports reaching a record $19.9 billion. This represented more than 50% of the country’s total exports, signaling the industry’s importance to the national economy.
However, this success was short-lived. By 2024, the industry was grappling with high energy costs, political instability, and reduced demand from key global markets. The rise in power tariffs and the cost of gas further added to the woes of textile manufacturers.
Energy Crisis Hits Textile Production
Energy costs are one of the biggest hurdles for Pakistan’s textile industry. Electricity tariffs have exceeded 14 cents per kilowatt-hour (KWh), nearly double the rates in competing economies like Vietnam, India, and Bangladesh. This drastic increase in energy costs has eroded the competitiveness of Pakistani exports.
Similarly, the cost of gas for industries has surged to $13.5 per million British thermal units (mmbtu), making it unaffordable for many manufacturers. Adding to the crisis, the government has announced that from January 2025, gas supply to captive co-generation power plants will be discontinued. This move could lead to factory closures, job losses, and sunk investments as businesses will be forced to spend millions on grid connectivity.
Large manufacturing units that consume over 10 megawatts (MW) of power per hour are required to set up their own power grids. However, this is a time-consuming and costly process. Without a stable power supply, textile manufacturers face machine breakdowns and production disruptions, which further increase operational costs.
Tax Burden and Cash Flow Challenges
Exporters face a double burden from heavy taxation. Recent amendments in the tax policy have increased the advance income tax rate on exporters, making cash flow management even more difficult.
The advance tax has risen to 2% (1% under Section 154 and an additional 1% under Section 147) compared to only 1.25% for domestic manufacturers. This disparity places an unfair burden on exporters, who also pay a 29% corporate income tax on profits.
Additionally, exporters are struggling with delayed tax refunds. An estimated Rs 300 billion of exporters’ working capital is stuck in refund claims related to Sales Tax, Income Tax, and Duty Drawback. The delayed payments are affecting liquidity, forcing exporters to borrow at high interest rates.
Unfair Tax Burden on Exporters
Under the Sales Tax Act 1990, exporters are responsible for verifying the entire supply chain’s GST compliance. This rule is seen as unfair since exporters have no access to the Federal Board of Revenue (FBR) systems to track suppliers’ GST compliance.
While exporters file detailed monthly disclosures under the sales tax regime, they still face audits and fines. Experts have called for reforms to limit the responsibility of exporters to only their direct suppliers, rather than the entire supply chain. This will ensure greater accountability without burdening exporters with compliance issues beyond their control.
The Bangladesh Factor: A New Opportunity for Pakistan
Bangladesh, one of Pakistan’s key competitors in the global textile market, is currently facing severe economic and political turmoil. Energy shortages, high labor costs, and environmental challenges have forced many international buyers to seek alternative suppliers.
This situation presents a golden opportunity for Pakistan to position itself as a reliable alternative. However, Pakistan’s own energy crisis and policy bottlenecks are making it difficult for local exporters to seize this opportunity. If the government introduces energy subsidies and resolves the power supply issue, Pakistan could attract the orders that are being diverted from Bangladesh.
Industry experts stress the need for the government to support exporters by easing tax policies, accelerating refunds, and offering stable energy supplies. These changes could help Pakistan capture a larger share of the global textile market.
Impact of OPEC+ Decisions and Global Market Trends
Global trade patterns are shifting as Western buyers reduce reliance on Chinese and Myanmar suppliers due to geopolitical tensions. American and European brands are actively looking for alternative suppliers in South Asia, presenting another opportunity for Pakistan’s textile sector.
OPEC+ production decisions also play a role in determining the cost of raw materials and energy, which directly impacts textile production costs. The high price of oil and gas affects the cost of synthetic fibers, transportation, and energy required for production.
Key Reforms Required to Revive the Textile Sector
To revive and strengthen the textile industry, the following reforms are essential:
- Energy Price Stability: Reducing electricity tariffs to match regional competitors like India, Bangladesh, and Vietnam. Stable and affordable energy costs will help reduce production expenses and make exports more competitive.
- Tax Relief for Exporters: Lowering the tax burden on exporters, especially the advance tax under Section 147. Reducing the rate to the same level as local manufacturers will improve exporters’ cash flow.
- Speedy Refunds: The government should fast-track the release of outstanding refunds to exporters. With over Rs 300 billion locked up in pending refunds, releasing these funds will boost liquidity and support production.
- Gas Supply to Captive Power Plants: The decision to halt gas supplies to captive power plants must be reconsidered. Without an alternative energy plan, manufacturers face operational shutdowns and job losses.
- Streamlined Compliance for GST: Reforms are needed to shift the responsibility of supply chain compliance from exporters to direct suppliers. This move will reduce the administrative burden on exporters and promote a more efficient refund process.
- Diversification of Export Markets: Expanding export markets beyond traditional regions will reduce reliance on a few large buyers. New markets in Africa and Latin America can be explored to increase demand for Pakistani textiles.
- Technology Investment: Upgrading textile machinery and adopting digital tools for production and supply chain management will improve productivity and reduce wastage.
Looking Ahead: The Road to Recovery
Despite the current challenges, Pakistan’s textile industry remains a vital part of the national economy. With the right government policies, it can regain its global competitiveness. Resolving the energy crisis, reducing taxation, and supporting exporters through faster refunds are critical steps to put the industry back on track.
The crisis in Bangladesh presents a rare window of opportunity for Pakistan to capture a larger share of the global textile market. But this will only be possible if Pakistan addresses its domestic issues with energy, taxation, and cash flow.
The future of the textile industry depends on collaboration between policymakers, exporters, and industry stakeholders. If these challenges are tackled with urgency, Pakistan could reclaim its position as a global textile powerhouse.
