A factoring company in Pakistan is suggesting that the final 1 January 2004 loosening of quotas restricting imports of textiles to North America and Europe will lead to demands from importers for payment terms that favour them better than letter of credit (L/C) terms.

Chief executive of DCD-JS Factors Limited, Aniqul Islam, also says government schemes meant to guarantee exports from Pakistan are not being widely used by exporters, although he does not specify why not.

Risks for exporters

Islam says importers of Pakistani goods in the US, Canada and Europe will force their Pakistani business partners to export to them a greater quantity of goods using payment on acceptance of documents (D/A) terms after 31 December 2004 when the elimination of all quota barriers will be dismantled.

But Islam cautions that D/A terms carry a higher risk for exporters than L/C terms.

Quoting local bankers as his source, he suggests that annual defaults on D/A terms amount to around US$700 million and that other analysts believe default levels may be even higher than that.

No guarantee

Export guarantees offered by the Pakistan Export Finance Guarantee Agency (PEFGA) are not protecting many Pakistani exporters either, according to Islam.

"Multiple factors prevented the PEFGA from going in a big way in this area," says the Pakistan Times in its report on Islam's views.

Joint venture

DCD-JS is a joint venture arrangement with DCD Capital of the US and a local company, Jehangir Siddiqui. DCD Capital is an affiliate of GMAC Commercial Finance, a service mark of General Motors Acceptance Corporation (GMAC).

GMAC has been a wholly owned subsidiary of General Motors since 1919.

Open competition

Competition on price and payment terms for textile and clothing trades is expected to become fiercer when textiles and clothing trade among World Trade Organisation members is no longer subject to protective quotas phased out under the Agreement on Textiles and Clothing and the progressive application of the General Agreement on Tariffs and Trade.

From 2005, all WTO members will have unrestricted access to the European, US and Canadian markets.

This article represents the views of the author and not necessarily those of the ICC or any of the other partners in DC-PRO.