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Leather exports lagging behind regional economies: SBP

By Erum Zaidi
April 08, 2018

KARACHI: Pakistan is falling behind other parts of the South Asian region in leather exports for not being able to diversify its product portfolio and non-compliance with environmental standards, the central bank said.

“Pakistan’s share in South Asia’s total leather exports of processed and finished products is 27 percent and 18 percent [respectively], much lower than that of India,” the State Bank of Pakistan (SBP) said quoting Asian Development Bank (ADB) in its latest second quarterly report for the fiscal year 2017/18.

The SBP said leather manufacturing continued on its declining trend and suffered a contraction of 5.9 percent during the first half of the current fiscal year-on-year. “Alongside subdued external demand, the industry is facing pressure from regional competitors, who are focusing on high value-added products,” the bank said.

Citing the ADB report, the state bank said the country has the potential to enhance

its intra-regional trade by around $90 million annually if it diversifies its product

portfolio and streamlines the industry’s tariff structure.

“With an appropriate mix of policy support, adequate funding for laboratory testing, and presence of more domestic players in the Leather Working Group (LWG), the local industry will be able to increase its share in the global high-end leather sector,” the central bank said.

It said the LWG is a multi-stakeholder international platform, comprising retailers, manufacturers, chemical companies, and other related parties involved in the global leather industry.

“The group works to ensure and promote environmental-compliance in the production of leather commodities to be traded around the world,” the SBP report said adding increasingly, top retailers and brands are relying on LWG to import leather intermediates and finished goods.

The bank highlighted the LWG members are required to follow certain quality and treatment standards so as to limit environmental degradation and currently, only three manufacturers from Pakistan are the LWG members.

“This figure is substantially lower than the registered members in regional competitors such as China (76 members) and India (88),” the SBP noted.

It said, indeed, this is not a satisfactory state of affairs and requires immediate attention of both the manufacturers and the policymakers to jointly put concerted efforts to solidify the country’s place in the high value segment of the global supply chain.

The central bank maintained that non-compliance with the LWG’s environmental standards is hindering the potential induction of domestic manufacturers into the global platform.

“For example, upgrade of non-conforming treatment facilities of some manufacturers in the Korangi industrial area of Karachi will enable them to become part of the group,” the bank said.

It continued that alongside LWG compliance, top retail brands also require products to undergo extensive laboratory testing to ensure the quality of the leather used.

“These tests are quite expensive. The local manufacturers used to get 75 percent rebate on these tests during 2009-2012. However, in the policy adopted by the government for the period 2012-2015, the rebate clause was removed, which impacted the industry’s cost margins,” the SBP stated.

Besides these factors, the apex bank said, the already high cost of doing business and inefficient raw material procurement systems are leading domestic players to being priced out by other regional players in various international expos and trade fairs.

For instance, during the LineApelle fair held in Italy during October 2017 in which 22 Pakistani firms participated, and the All China Leather Exhibition held in September 2017 that saw only 6 Pakistani participants, Pakistani leather manufacturers concluded business deals worth $11 million and $5.3 million, respectively.

However, it said, the trade predominantly involved selling intermediate items to other countries for further value addition (most notably to China for the production of shoes, garments, and handbags).

“Adding to this trend, local players are increasingly vying to tap the growth of Bangladesh’s leather exports by selling raw material and intermediate items to Bangladeshi exporters,” the SBP said.