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Hope and Challenges for Pakistan Post-GSP Plus

Pakistan has ample reason for celebration now that it has been granted duty-free access to European markets under the Generalized System of Preference Plus (GSP), effective January 1, 2014.  However, there remains considerable concern regarding how sufficiently prepared it is to capitalize upon the opportunities the coveted trade status brings, given stubbornly persistent economic and governmental dysfunction.

Chronic energy shortages continue to undermine manufacturing across the nation, especially in Punjab, where many of the captive power plants are expected to be deprived of natural gas for the duration of the winter season. And more than 50 percent of the factories in Faisalabad have been shut down due to electricity shortages.

Sheikh Mohammad Ilyas, chairman of the Pakistan Textile Exporters Association (PTEA), said, “The EU trade concessions can push our textile exports and generate significant economic activity. But much will depend on regular availability of regular supply of gas and electricity to operate factories.” An estimated 40 percent of Punjab’s textile manufacturing capacity is expected to be stymied by the gas shortages. This is especially worrisome since nearly 80 percent of the industry’s overall capacity is located in Punjab.

Despite the progressive growth of its textile industry, Pakistan has had its share of economic troubles. A steep rise in gas and electricity prices will likely consume much of the additional revenue textile exportation produces. The gas tariff for captive power plants has risen by 17.4% and electricity rates for industrial units has skyrocketed 57 percent in recent months. And Pakistan’s stalwart regional competitor, India, is anticipating a big year as well, forecasting $17 billion in textile exports.

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Compliance with European Union (EU) standards on human rights is also a source of anxiety for those in Pakistan looking to take quick advantage of greater access to the region’s markets, comprising twenty-seven members. The EU has been closely monitoring Pakistan’s human rights record, particularly its policy on capital punishment, a practice the EU strongly condemns. In advance of the European Parliament’s vote on its GSP Plus status, Pakistan instituted a moratorium on the death penalty. Last year, the country violated its own four-year prohibition on the punishment, executing former Pakistani serviceman Muhammad Hussain, convicted of murder. In response to the sentence, EU authorities publicly communicated their outrage.

Lars-Gunnar, the EU’s Ambassador to Pakistan, said, “We have listened to Pakistan’s plea for more trade and not just aid. While there is every reason to celebrate this milestone in EU-Pakistan relations, the GSP Plus regime calls for Pakistan to fully implement its commitments under twenty-seven international conventions on human rights, good governance, labor and environmental standards.”

Currently, the EU is Pakistan’s primary destination for its textile exports. Overall, Pakistan’s textile exports topped $13.06 billion last fiscal year, including $2.7 billion worth of yarn and $2.5 billion of fabric to Bangladesh, specifically. Pakistan’s exports have grown by approximately 12.5% per year, with a growth of 10.3% to the EU, in particular. The textile industry accounts for more than 50 percent of the nation’s total exports. While forecasts regarding the full reverberations of the new status for Pakistan vary widely, many predict growth by as much as 100 percent over the next four years.

While the new GSP status doesn’t exclusively impact Pakistan’s textile industry, it should be among the biggest beneficiaries. Bilal Qamar, an analyst at JS Research in Karachi, said, “The domestic textile industry is likely to take the benefit of adding value itself and increase direct exports to the EU after GSP Plus status.” More than 20 percent of Pakistan’s exports will enter the EU market’s tariff-free, and more than 70 percent will enjoy dramatically reduced tariffs.

Thirteen textile products are included on the list of those than can be exported duty-free to the twenty-seven members of the EU, accountable for $231 million worth of goods last year. Some are predicting this will increase Pakistan’s exports to the EU by $1 billion.

There are still reasons for some modest optimism. Pakistan might benefit from the shifting sands of global textile trade. China increasingly reroutes its focus from textiles to technology, creating new opportunities for additional players to join the market. Also, Western retailers pine for an alternative to Bangladesh, a low-cost, high capacity producer that is a politically risky bet given its seemingly intractable problems with compliance.

The decline of the rupee, which has fallen 8 percent since the beginning of the year, also been a boon to exporters. In the last three months alone, it has dropped 4 percent against the dollar.