Can 180BN Package Help?
Since her independence, the beautiful country Pakistan has done a lot of miracles in many sectors including the economy. With a per capita income of more than US$ 3500 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 But unfortunately, political and policy instability, energy crisis, insecure environment, weak infrastructure, outdated technology, deliberate frauds by some of our traders, hostility of the world towards us as a country and many other significant factors have kept country’s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 0.15% 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, the Vietnam has faced a war imposed by the US and the Bangladesh’s economy is new-fangled 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 good 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 lagged 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 in this week has announced an Export Enhancement Initiative worth Rs. 180 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 5 leading export sectors. Despite a tight fiscal space the government has decided to provide a boost to the exports through incentives. The package includes the removal of 4% customs duty on import of cotton, withdrawal of 5% sales tax on import of machinery and drawback of local taxes, cascaded in terms of the value addition.
The textile garments will be provided drawback at the rate of 7%, textile made-ups at 6%, processed fabrics at 4% and yarn at 3%. Similarly, in the non-textile sector, the leather manufacturers including garments will be provided drawback of local taxes at the rate of 7%, footwear 7% and surgical goods 7%. 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 Rs. 5 per unit.
The bitter truth is that in N’s regime, the export has been falling continuously. Imports are on the rise and trade deficit targets never met. An earlier similar sales tax refund scheme which was announced for the exporters is still waiting for 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 5.5% 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 7% and yarn at 3%.
Previously in 2002-3 one such scheme was misused by the industrialists due to no governmental overlook 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 neighbors 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 6 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 22% and has reached a level of $14490 million. From July 2016 to December 2016, total exports were US $9912 million while total imports in the same time period were $24402 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 6 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 realized its promises on privatization, is continuously giving subsidies on electricity bills and rupee value is not being devalued to gain political mileage. America, United Arab Emirates 9, Afghanistan 8, China 7, UK 5, Germany 5, Turkey 3, Italy 3, Bangladesh 3, Belgium 2 and others 38 percent. 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 to be 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 labor 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 globalization and sustainability by protecting the environment.
Additionally, there is a need to increase our export surplus, product utilization 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 said; quality too.
That’s Rs180BN Catch-22
