Pakistani textile industry can enhance its apparel exports on a sustainable basis by following the model adopted by Bangladesh which significantly boosted its exports of readymade textile products.
According to research published by the State Bank of Pakistan (SBP), Pakistan can learn from the experience of Bangladesh to boost its apparel exports as it can replicate the successful use of back-to-back letters of credit and bonded warehouses to procure quality imported raw materials and intermediary products at world prices.
Pakistan’s textile industry is mostly dependent on domestic sourcing of these products; however, due to the declining cotton quality and availability, the industry needs to source better quality, high-count cotton primary, and intermediary products from the international market, as does Bangladesh. Moreover, since the world demand is transitioning towards man-made fibers, its duty-free imports can help to diversify Pakistan’s concentrated apparel basket; doing so can also increase its share in the world apparel market.
Pakistan’s garment maker firms should also get into joint ventures with foreign firms, as did Bangladesh. Such ventures can help transfer necessary capital, technology, managerial, and marketing skills, which will bring about necessary process upgrading, product upgrading, and functional upgrading, experts suggested in the Staff Notes published by the SBP.
Bangladesh had a non-existent textile industry at the time of independence in 1971. That changed with the advent of the Multi-Fiber Agreement (MFA). MFA was an international trade agreement concerning the textiles and clothing trade that was in place from 1974 to 2004.
Through overseas subcontracting, big apparel firms from Korea saw an opportunity to set up factories abroad, so that they could produce and export products to developed countries from there, without violating their own country quotas—a step often dubbed as ‘quota hopping’.
A generation of Bangladeshis also received intensive hands-on training in apparel production in Korea. Those trainees later set up their own factories in the country that set on the course of producing and exporting garments on a scale. Between 1984 and 2004, the number of apparel factories rose from 134 to 3,957. With nominal export values in the 1980s, the country’s garment exports grew significantly in the 1990s, at an average annual rate of 24 percent. Between FY84 and FY04, these exports had risen 22 times from $32 million to $5.7 billion.
Bangladesh adopted an import-substituting growth strategy in the early 1970s. That meant large-scale public sector enterprises, extensive quantitative restrictions on imports, high import tariffs, foreign exchange rationing, and an overvalued exchange rate, creating an “anti-export bias”.
Various export-friendly policies proved to be major domestic drivers of Bangladesh’s garment success including duty drawback scheme, cash incentives, bonded warehouse facilities, and back-to-back letters of credit. Under the duty drawback scheme, the tariffs paid on imported inputs and the value-added tax paid on local inputs used for export products are refunded.
These policies proved instrumental in enabling the growth of the garment industry in the decades to come. Policies such as bonded warehouses and back-to-back letters of credit, helped Bangladesh assimilate into the global textile value chain effectively and sustainably. They enabled the entrepreneurs to set up factories with low investment, thus allowing mushroom growth of the industry.
This arrangement has two-fold benefits. It helps apparel manufacturers and exporters to cut back on their working capital requirements, providing them fiscal space to ensure higher utilization of existing capacity, as well as capacity expansion. These policies, along with cash incentives, facilitated local involvement in the sector. Secondly, the country earns net foreign exchange without drawing down on the existing reserves.
Bangladesh has preferential access to 38 countries in total, including 27 countries from the EU, Canada, the UK, Japan, Australia, Belarus, Liechtenstein, New Zealand, Norway, Russian Federation, Switzerland, and Turkey. Europe (the EU-27 and UK) and the US remain its top traditional markets, with a combined share of over 80 percent.
Bangladesh’s garment story is one of success, especially when it is judged by the numbers and the impacts it has on its social and economic lives. The apparel industry has been a major FX earner for Bangladesh, accounting for over 80 percent of national exports.
Its contribution to GDP has multiplied 4.5 times between the early 1990s and 2019; GDP per capita also rose 6.1 times in the same timeframe, which is higher compared to India’s 5.7 and Pakistan’s 3.5 in the comparable periods.
The apparel industry is the single largest wage-distributing industry in the country, generating 40 percent of total manufacturing employment. It employs around 4.5 million workers, providing livelihood to 10 million people directly or indirectly.