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Pakistan Facing Crisis of Cotton and Energy

Pakistan’s textile sector has no shortage of woes.

In an unusual step, a recent request for a $2 billion soft credit or loan from Islamabad this month for the import of U.S. cotton has been one considered route for the nation’s troubled textile mills. 

In a recent letter to the U.S. ambassador, the All Pakistan Textile Mills Association (APTMA) made an additional request for concessional loans.

The industry faces a shortfall of almost 9 to 10 million bales of cotton required for production, based on last year’s figures, where 14 million bales were used for domestic production. 

Extensive flooding left Pakistan with just 5 million bales of cotton production.

“The dicey international economic situation and the floods have pushed Pakistan’s economy to the brink,” Javed Hassan, cotton advisor at APTMA, told Sourcing Journal. “Pakistan’s economy largely depends on textile exports for foreign currency and employment. The textile sector last year exported goods worth $19.3 billion and has further expanded capacity through an investment of $5 Billion to increase exports to $25 billion depending on the availability of the raw cotton and other supplies,” he said. 

Last year, Pakistan imported 5 million bales worth $1.48 billion, as domestic cotton production fell to a historical low and estimated cotton production losses totaled more than $2 billion. Of the imports, 1.7 million bales were from the U.S. 

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But with the present situation where foreign reserves are barely expected to last out the month, imports hang in the balance. 

Foreign exchange reserves have come to a low of $4.3 billion, barely enough to cover three weeks of imports.

Pakistan also has to repay more than $8 billion in loans this quarter. 

“As of today, contracts for the import of 1.2 million bales of cotton from the U.S. would be the main source of import for the current year,” said Hassan. “However, because of the country’s economic situation, there are difficulties in getting shipments cleared from the State Bank of Pakistan which is also mentioned in the world market and trade report as maximum outstanding sales are from Pakistan.”

According to a report by the World Health Organisation (WHO) floods in Pakistan from June to October 2022 caused more than 1,739 deaths and losses of  3.2 trillion Pakistani rupees ($14.9 billion) of damage and 3.3 trillion Pakistani rupees ($15.2 billion) of economic losses. This included.    

The U.S. loan for cotton import will save millions of jobs and improve Pakistan’s balance of payment the letter from the Association reasoned. 

Inflation in December 2022 hit 24.5 percent, doubled over the previous year, with food prices soaring. Flour has been in extreme short supply and onion prices surged more than 500 percent over the previous year. 

The depreciation of the Pakistani rupee has been an additional deterrent for imports, having fallen more than 20 percent over the last year against the U.S. dollar. 

While the International Monetary Fund (IMF) has been stepping in with loans in other countries (including recently in Sri Lanka) the $7 billion loan in 2019 that was expected to help bail out the deteriorating economic situation has been put on hold. Measures taken to follow subsidies and other requirements were reportedly not met to facilitate loan repayment. Approximately half of the loan money has already been spent. 

That’s not Pakistan’s only problem.

This week, many textile mill owners told Sourcing Journal they were running at 50 percent capacity or less and a crippling energy crisis was compounding the situation. Earlier this month, energy-saving measures came into effect, including keeping a large number of street lights switched off, cutting back on office hours, malls and restaurants operating on a limited basis.

Having watched Sri Lanka endure a similar crisis last year, analysts said they hope to learn from the process, and salvage the situation. Apparel exports are seen as an essential tool for bringing in foreign exchange, and global retailers are looking to keep their investments in manufacturing, as well as bringing in more safety for apparel manufacturing processes. In December, Patrick Zahn, CEO of German retailer KiK asked factory owners, unions and brands and retailers involved to “put aside their own interests to bring about a rapid and comprehensive solution in the interests of thousands of garment workers.”

“Over the past five years, KiK has been working to provide fire protection to industrial units and secure electrical installations and infrastructure in Pakistan,” he said. As other brands and retailers are looking at making more commitments to factory safety, worker leaders in Pakistan believe it will help bring in some stability. Textile exports contributed approximately 61 percent to the total exports of $31.8 billion during the fiscal year 2021-2022; it also is 46 percent of the total manufacturing sector and employs 40 percent of the total labor force.

Monday’s power failure swept across much of Pakistan, as the morning power outage darkened cities and left textile mill and factory owners facing another day of heavy disruptions. 

Industry experts estimate the sector’s losses at $70 million minimum.

Cities from Karachi to Lahore and Quetta to Islamabad faced the blackout after a grid failure, with the systems being restored in phases later that night and by Tuesday. 

Already reeling under steep energy shortages in recent months, the industry has also faced a shortfall of cotton production after last year’s flooding ruined crops. Weak imports due to the economic situation with low foreign reserves and the fast-falling Pakistan rupee have already left many mills and factories cutting back on production hours, and making short-term closures. 

The energy crisis has been more acute in Pakistan since April 2022, with worsening power outages and load shedding in different areas. According to industry analysts, the dramatic drop in thermal plant’s power generation as well as gas and fuel shortages have been affecting business for months. 

According to the Asian Development Bank’s (ADB) December report, the lack of a detailed energy plan is an issue, as billions of dollars are needed for investment for nuclear power generation as well as for unleashing the renewable power potential.

The Monday failure of the national grid led to the ‘widespread breakdown’ in the electricity system, according to a statement from the Ministry of Energy. 

Prime Minister Shehbaz Sharif, who took over the position in April last year during a worsening economic situation, has faced tough responses and decisions. His statement on Twitter on Tuesday expressed “sincere regrets for the inconvenience” people suffered due to power outages.

“On my orders an inquiry is underway to determine reasons of the power failure. Responsibility will be fixed,” he tweeted. 

 However, industry heads are frustrated by an increasingly dire outlook.

Inflation doubled over the previous year in December 2022 to hit 24.5 percent, with food prices soaring. Flour has been in extreme short supply and onion prices surged more than 500 percent over the previous year.

The Pakistani rupee has depreciated more than 20 percent over the last year against the U.S dollar.

Textile exports are 46 percent of the total manufacturing sector and employs 40 percent of the total labor force.