KARACHI: Pakistan is facing the flight of capital, with local industrialists shifting their factories to investor-friendly Middle Eastern countries like the United Arab Emirates due to the lack of favorable industrialization policies at home, Kamran Arshad, chairman of the All Pakistan Textile Mills Association (APTMA), said on Tuesday.

APTMA represents more than 200 textile millers, which employ the country’s largest industrial workforce of more than 40 million people and account for half of the nation’s total exports. Its top official made the remark during an interview with Arab News just a week ahead of the country’s federal budget that is scheduled to be announced on June 10.

“Pakistani investors are now the second or third largest investors in places like Dubai,” he said during the conversation.

“Yes, there has been a flight of capital,” he continued, adding “had there been curbs and checks and balances on the flight of capital and favorable industrialization policies, the capital would have remained within Pakistan and it would have gone into agriculture and industry.”

Pakistan’s government is trying to turn around the country’s debt-ridden economy by curtailing imports and increasing exports with the help of the International Monetary Fund’s (IMF) loan program.

The government has emphasized its commitment to creating a more business-friendly environment in recent years, identifying textiles as a central driver in achieving a $60 billion export target by 2029 under its newly unveiled five-year economic framework.

Overall, the country’s exports rose six percent to $27 billion this year through April, but its textile exports declined more than 13 percent between FY22 and FY24 after hitting a record $19.3 billion in FY22.

Arshad maintained this was mainly due to the Export Facilitation Scheme (EFS) introduced last year that did not work well for the sector.

Originally envisaged to streamline and incentivize exports by allowing exporters duty- and tax-free access to inputs used in the production of export goods, the scheme benefited importers over local input producers by putting yarn and all varieties of fabric on the EFS.

By removing the sales tax exemption from domestically produced inputs like cottonseed and yarn while keeping imported equivalents tax-free, the scheme made local sourcing less competitive for Pakistani manufacturers.

“We fully expect that the government would be considerate and they would honor our request, our demand to remove yarn and fabric of all sorts from the EFS scheme and to create a level playing field,” the APTMA chief said.

Separately, at a news conference, he said that while hundreds of local industries had already closed, others were running at partial capacity.

“More than 120 spinning mills and over 800 ginning factories stand closed at the moment,” he said.

NO BUYER FOR US COTTON

Arshad said the government may not find buyers for the additional cotton it is expected to import from the US if the heavily taxed spinning and ginning factories continue to shut down at the current pace.

Pakistan and the US last week began negotiating their “reciprocal” trade tariffs, with Islamabad aiming to bridge its $3 billion trade surplus with Washington by buying more cotton and soybean to avoid the imposition of 29 percent tariffs on its exports to the US.

“Washington has indicated availability of up to 1.5 million bales for export to Pakistan,” the APTMA chairman told reporters at a press briefing.

In the ongoing trade talks, he said one of the offers the Americans were expected to make was the doubling or tripling of cotton exports to Pakistan, which uses cotton as a raw material for its textile industry that fetched $16.7 billion in exports last year.

The US is the biggest buyer of Pakistan’s exports, mostly textiles, which were valued at $5.44 billion last year through June, according to State Bank of Pakistan data.

US Charge d’Affaires Natalie A. Baker last month met Pakistan’s commerce minister, Jam Kamal Khan, and cited enhanced cooperation in the cotton sector as a key area for mutual growth, given Pakistan’s textile industry’s demand for high-quality cotton and the US ability to meet that demand.

“Who will buy this US cotton,” said Arshad, “while more than 120 spinning mills and 800 ginning factories have already shut down across the country.”

He noted the industry was already dealing with the carryover stocks of as much as 800,000 cotton bales from last year while the next crop was about to land.

Spinning mills consume most of Pakistan’s cotton output, which is falling and halved this year to 7.1 million bales after reaching a record 15 million bales in FY15, according to Pakistan Central Cotton Committee data.

Pakistan’s annual cotton consumption is about 15 million bales, but a poor crop made it the biggest importer of US raw cotton in FY23, when the dollar-strapped country had to spend billions on importing more than 4 million cotton bales, each weighing 170 kilograms.

Arshad said for Pakistan to absorb an increased amount of US cotton, a viable and operational spinning industry was essential.

“Without restoring competitiveness for domestic spinners, additional cotton imports will not materialize,” he added.

Pakistan’s finance adviser Khurram Schehzad declined to comment on issues related to the textile sector “before budget,” while finance ministry spokesperson Qamar Sarwar Abbasi did not respond to questions.