Pakistan’s textile exports have witnessed an 8.6 percent recovery in 2024, reaching US$17.45 billion in 2024 from US$16.07 billion in 2023, and approaching the pre-crisis US$18.67 billion in 2022.

At the same time, the composition of exports has shifted significantly towards higher value-added segments like apparel and home textiles.

Compared to 2021, export volumes of readymade garment have doubled, and knitwear has seen a 50% increase, while those of bedwear and towels have recovered to around 2021 levels after a 15-20 percent decline.

The change in export values, however, has been much lower at 16.74 percent for readymade garments, 6.83% for knitwear, 6.78 percent for towels, and -1.04 percent for bedwear due to a decline in unit values. If 2024 exports had been made at 2022 unit values, the headline figure would have been well over $21 billion.

While there is a recovery in the headline figure of exports, the economy is nonetheless losing out because of a surge in imports of raw material and intermediate inputs like cotton, yarn and cloth, and resultantly a decline in domestic value addition in exports.

Imports of yarn have surged as domestic manufacturing has been rendered uncompetitive due to high energy costs, which account for 35 percent of conversion costs in the spinning sector and were as high as 55 percent a few months back.

The situation is further exacerbated by the sales tax disparity between local and imported inputs for export manufacturing. The FY25 budget withdrew the sales tax exemption on local supplies for export manufacturing under the Export Facilitation Scheme, while imports remain sales tax free and duty-free.

When procuring domestically manufactured inputs, exporters must pay sales tax of 18%, which is refundable in principle but only partial refunds of 60% are issued (corroborated by the World Bank Country Economic Memorandum 2022) with regular delays of over 6 months as the FASTER system, which promised 72-hour refunds has been made dysfunctional. While progress was made on clearing sales tax refunds in FY24, over Rs. 180 billion of the industry’s liquidity remains stuck in the refund regime.

In addition to the broken refund regime, there is an administrative and time cost of an additional 6-10 months — from when inputs are procured and the final good is exported — associated with payment of sales tax and filing for refund that imports do not face.

These factors have prompted exporters to increasingly substitute domestically produced inputs like cotton, yarn and cloth with imported ones.

Monthly imports of yarn........

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