Spearhead Analysis – 21.02.2017
By Farrukh Karamat
Senior Research Coordinator, Spearhead Research
Pakistan’s exports have continued on a downward trajectory, placing considerable fiscal pressure on the economy, where inflows from multiple sources continue to stagnate or decline. To meet the fiscal shortfalls the government has added US$12.2 Billion of external debt in the past three years (US$14.7 Billion added in the five-year tenure of the previous government). Some eminent economists in a recent article have forecast that the level of external debt would rise to well over US$100 Billion by end-June 2020, inclusive of debt taken for CPEC projects. To be able to service such a high level of debt exports would need to be doubled. The ground reality is that the country continues to remain under pressure with declining exports, stagnant-to-falling remittances, low level of foreign direct investment; and, rising imports and debt servicing requirements. This is starting to exert pressure on the foreign exchange reserves and the solution devised by the government has been to contract additional borrowings to meet the fiscal gaps.
Apart from the purely commercial aspect, there has been some concern cited in terms of the ‘potential’ impact from the change in the US administration. Given the executive orders in the initial days of the Trump administration there could potentially be hindrances, which might impact Pakistan. Though there is no indication of such policy changes at present, contingency planning should be put in place. In addition the recent rise in terror-related activities within Pakistan could have serious repercussions for trade and investment activity. There is a dire need to undertake serious efforts to curb such activities and bring about reforms as envisaged in the National Action Plan some two year back.
PAKISTAN EXPORT & IMPORTS
The fact is that exports and imports continue to move in opposite directions. As a result there has been a continued and marked decline in exports and visible increase in imports. Actual exports have fallen from US$24.5 Billion in 2012-13 to US$20.9 Billion in 2015-16 – a decline of almost 15 percent over the period. In the absence of alternative viable inflows this is creating trade imbalances, which are difficult to manage and creating increased reliance on acquiring additional debt.
The governments three-year Strategic Trade Policy Framework (STPF 2015-18) has yielded very little in terms of arresting the downward trend in exports. At the start of 2017 the government, amid much media-hype, launched five cash support schemes for the export sector, which were meant to achieve certain defined objectives:
Improve product design and encourage innovation,
Facilitate branding and certification,
Up-grade technology for new machinery or plant import,
Provide cash support for plant and machinery for agro processing
Provide duty drawback on local taxes and levies for non-textile products.
To date not a single exporter has availed itself of any of these schemes.
There is a need to revamp the export regime within the country and diversify the export base to cater to value-additive exports. Presently textiles comprise around 60 percent of the total exports, and in 2015-16 received an export subsidy of Rs.2.5 Billion. In the recently announced Rs.180 Billion export package around 87 percent of the funds are directed towards textile and clothing sectors and 13 percent to others. This points towards lop-sided export policies and a lack of vision for expanding and diversifying the export base.
In order to be able to meaningfully increase export contribution in terms of inflows the government needs to institute structural reforms at the institutional, policy and business unit level. Unfortunately, apart from doling out subsidies and providing a semblance of reforms there has not been much progress in this area. Perhaps one of the glaring gaps in the equation is the lack of professional human resources with the vision to devise and deliver in terms of genuine trade reforms.
STPF 2015-18 has fallen short in terms of meeting its identified objectives:
Setting-up of separate export promotion councils for pharmaceuticals, cosmetics and rice.
Establishment of a committee to restructure subordinate offices of the commerce ministry.
Restructuring of export related departments such as Trade Development Authority of Pakistan (TDAP), Pakistan Horticulture Development and Export Company, the Ministry Of Commerce secretariat, Trade Dispute Resolution Organisation (TDRO), Services Trade Development Council, Pakistan Institute of Trade and Development, National Tariff Commission (NTC) and the Domestic Commerce Wing.
Finalization of the laws for protecting the ownership rights of goods and for resolving trade disputes.
The apparent focus on providing high monetary value subsidies and restricting imports for certain vested interests, can never achieve the desired results of sustainable and diversified export growth. It requires a simplification of the export channels through departmental harmonization, implementation of fair and objective laws for export protection and dispute resolution, rationalization of the Ministry of Commerce to be able to play a focused and positive role in export development, and establishment of trade initiatives to promote value-addition and diversification. In the absence of genuine institutional, policy and business level reforms the exports will continue to flounder, placing additional pressure on the balance of payments.