Can 180BN package help?
2016 too was a continuation of the decline in Pakistan’s share in global trade. The decline approached the better performing sectors of Pakistan’s exports including textile and food as well
Since her independence Pakistan has performed a lot of miracles in many sectors including the economy. With a per capita income of more than US$3,500 in Purchasing Power Parity, Pakistan is the 27th largest economy in the world. But unfortunately, political and policy instability, energy crisis, insecure environment, weak infrastructure, outdated technology, deliberate frauds by some of our traders, hostility of the world towards us as a country and many other significant factors have kept country’s exports performance lackluster and far below the potential, which now consists of a meager 0.15pc of total world exports.
In last two decades, China and India have increased their exports over six and five times respectively compared to Pakistan’s 2.7. Including Turkey, countries like Vietnam and Bangladesh have outperformed us in the exports sector regardless of the fact that the Turkey has seen a lot of political instability, Vietnam has faced a war imposed by the US and Bangladesh’s economy is newfangled compared to Pakistan. Such examples leave less to blame other factors except for our own faults the most. This article will not only discuss the reasons for the fast decline in exports but will also pinpoint the areas where the government shall focus to correct the affairs. A set of recommendations to boost our exports are also given in the end.
2016 too was a continuation of the decline in Pakistan’s share in global trade. The decline approached the better performing sectors of Pakistan’s exports including textile and food as well. In terms of weight, for example, we exported more rice in FY16 than FY15 but not in terms of total value. One reason to this is the decline in international prices of our export materials but the second and most important is that the rise in export quantity is so less that it does not translate to the export progress of our country. We have been lagging behind our export competitors in trade openness. Average tariffs have fallen down only slightly from 14.4 percent in FY2013 to 13.4 percent in FY2016.
In a bid to tackle the shortcomings, the federal government this week announced an Export Enhancement Initiative worth Rs180 billion to increase the competitiveness of the export sector. According to official press release, this package aims at stemming the decline in exports and putting it back on the growth trajectory. Through this, the government has fulfilled the long-standing demand of the business community by allowing zero-rating regime for the five leading export sectors. Despite tight fiscal space the government has decided to provide a boost to the exports through incentives. The package includes the removal of 4pc customs duty on import of cotton, withdrawal of 5pc sales tax on import of machinery and drawback of local taxes, cascaded in terms of the value addition.
Textile garments will be provided drawback at the rate of 7pc, textile made-ups at 6pc, processed fabrics at 4pc and yarn at 3pc. Similarly, in the non-textile sector, leather manufacturers including garments will be provided drawback of local taxes at the rate of 7pc, footwear 7pc and surgical goods 7pc. To meet the energy demands, the government not only completely eliminated the electricity and gas load shedding for the industry but also reduced the electricity price by nearly Rs5 per unit.
Having a strong comparative advantage in agricultural commodities because of its soil endowment, climate, irrigation system and human force, Pakistan can do wonders in agriculture export
The bitter truth is that in N’s regime, exports have been falling continuously. Imports are on the rise and trade deficit targets were never met. An earlier similar sales tax refund scheme which was announced for exporters is still awaiting implementation. The government has been making and deferring promises to refund Sales Tax of exporters in April and September. However, through this huge package, the finance ministry is expecting a 5.5pc growth in the economy, 2-3 billion dollars additional export revenue and a positive trend in our exports. In a good move, the government has offered more rebate on finished goods exports than on raw material i-e textile garments at 7pc and yarn at 3pc.
Previously in 2002-3 one such scheme was misused by the industrialists due to no governmental oversight as huge investments were made in non-value-added sectors most of which was spinning. That was the time when Bangladesh took the lead. Cotton is not produced in Bangladesh but it exports textile garments and textile made-ups worth $30bn. In 2002-3 our investors used the low-interest regime in importing yarn spinning machinery, which has added no value to our exports as almost all of the fine yarn we produce is being exported at very low profits and cheap rates to Bangladesh and countries which produce textile garments. Our neighbours are using our raw material, making value-added products through it and then earning profits and increasing exports to improve their economy.
However, the point to ponder is that this package is being offered for the next 18 months only and the rebate will be given on the products which will be exported within the next six months. Sales tax on new machinery import has been terminated so that new machinery and technology can enter in our industry. In the first half of the FY2016, the trade deficit has increased at a rate of 22pc and has reached a level of $14,490 million. From July 2016 to December 2016, total exports were US$9912 million while total imports in the same time period were $24,402 million showing a huge difference in the trade balance.
In the current financial year, the government had set a trade deficit target of $30bn. But in the first half of this year i-e July-16 to December-16, the deficit has reached a level of $22bn and six more months of this financial year are pending. Our currency is overvalued and imports are competing with the internal production of the country. IMF and exporters have raised concerns on this overvaluation many times but the government has not paid any attention to it. Due to opposition’s pressure and certain political considerations, the government has not realised its promises on privatisation, is continuously giving subsidies on electricity bills and rupee value is not being devalued to gain political mileage.
Having a strong comparative advantage in agricultural commodities because of its soil endowment, climate, irrigation system and human force, Pakistan can do wonders in agriculture export. Its human resource is growing in engineering, finance, information technology and is the ninth largest English-speaking nation in the world, well equipped to integrate itself with the global trading system.
But due to heavy dependence on traditional export channels and low-quality value-added products which are being produced tobe dumped in the local market, the majority of the producers are either unaware of the export markets/channels or unwilling to do improve quality to an extent that it can be accepted worldwide. We are a country having GSP+ status for preferential trade and foreign investment with the EU member countries but have not used the opportunity very well.
Our global image of a producer of low quality, cheap, selected goods and services is hurting our export potential to the maximum. Increasing concerns of the importers about social and environmental issues, gender balance, child and bonded labour are also pulling the string back. Our investors have been shifting their investments across our borders and our major export markets including the US, EU, China and Middle East are experiencing an economic recession. We need to increase our productivity by increasing our efficiency, profitability by providing export incentives (as in the recent Export Enhancement Initiative), competitiveness by rapid globalisation and sustainability by protecting the environment.
Additionally, there is a need to increase our export surplus, product utilisation capacity, productivity, enhanced quality control and private-public partnership. A decrease is also needed in transaction costs and rupee value. We need to strengthen the practices to attract foreign direct investment, economic diplomacy, social and environmental compliance. SMEs shall be facilitated and encouraged to export. Our industry is not producing to its full potential because of costly and imported raw materials, ineffectual BMR, poor financing and low expertise. A comprehensive analysis is needed across different industrial units to enlist and solve these problems on priority so that export surplus can be created.
Export Promotion Bureau shall perform a proactive role by selecting goods and services which give us a comparative advantage in the world markets. For this a scientific and statistical research of the global demand and our product base is necessary. Textile and food are not the only options for us. We need to explore in IT, telecommunication equipment, automotive parts, sports, pharmaceuticals, renewable energy, petrochemicals and more. Diversifying the export base is the first step to sustainable exports for Pakistan. Our human resource is not competitive; we need to invest in its skills, on the job training, skill up-gradation and dissemination of new knowledge and techniques.
Quality must be our industry’s religion now and we need consumers who can understand and appreciate quality as well. Pakistan cannot become an economic giant until its domestic and international products have a huge quality difference. Charity begins at home, they say; quality too.
That’s the Rs180BN Catch-22
