Spearhead Analysis – 20.10.2017
By Anam Saeed
Research Analyst, Spearhead Research
For the last couple of years, the economic headlines in Pakistan have oscillated between differing viewpoints of the Government, opposition parties and some eminent Economists. A lot has been written on the different aspects of the economy such as the Gross Domestic Product (GDP) growth, fiscal deficits, rising debt levels, internal political instability and CPEC as a game changer for Pakistan. Amongst these multitude of issues, for some time now, the case of the plummeting exports in Pakistan have started to gain prominence as exports are a major source of inflows for the country along with Workers’ Remittances and Foreign Direct Investment (FDI). It is a fact that Exports have declined by approximately 17% over the course of last four years, with various reasons cited for the deterioration. It was this decline that forced the Government to announce a Rs.180 Billion Package in FY2016-17 for the revival of this crucial sector.
In July 2017, State Bank of Pakistan (SBP) issued the Third Quarterly Report on Pakistan’s economy with a historically high trade deficit of around 38.5% on a YoY (Year-on-Year) basis from Mar-Jul’17 compared to Mar-Jul’2016. The deficit level has shown an increasing trend for several years now, while exports after touching a high of $25 Billion in 2011 have come down to $20.448 Billion in the third quarter of 2017. While this red flag should have been the top priority of the government over the past four years, it was only last year that the government actually took the issue seriously and provided the export relief package.
The latest quarterly report of 2017 by State Bank of Pakistan has further highlighted that the trade deficit situation in the 3rd quarter has further worsened. In the third quarter of 2017, there was a further 3.1% decline in exports, after a decline of 13% in the same period of 2016. This decline in exports coupled with a record increase in imports during the third quarter of 2017, which peaked at around $38 billion and ended up creating a trade deficit of around $8.9 billion in Mar-Jul’17. So what is it that contributes to the debilitating exports? What sectors have the potential prospects to uplift the whole country?
The Weakening Textile Exports:
The core of Pakistan’s exports revolves around the textile and cotton sectors. There has been a downward trend in the country’s finished textile products and cotton exports. After a decline of 8.2% in Mar-Jul’16, it further declined by 1% in Mar-Jul’17 and Pakistan’s share in the global textile exports decreased by 23% ended up falling from a 2.2% to 1.7%. The story of cotton yarn and cloth was also grim as it fell by 3.64% and 5.8% respectively from Mar-Jul’16 to Mar-Jul’17. However, during the same period Pakistan’s value-added textiles like bed linen and readymade garments increased by 5.96 and 5.66 percent respectively, mainly due to the revival in the European Union market.
Pakistan is the only country in the Southern Asian region, which is experiencing such a disastrous situation in the textile and cotton industry. 2016-17 has been a golden year for textile exports for countries like Vietnam, India, Bangladesh, and Sri Lanka, which have achieved a massive growth rate of 106%, 31%, 64% and 20%, respectively.
Taxing Local Conditions & Infrastructure:
If there are potentially brighter prospects for Pakistan in terms of exports, what is hindering the local manufacturers? It is a combination of inefficient policies, infrastructural flaws, lack of investment and inability to fully capitalize the benefits of Free Trade Agreements. According to APTMA, the local industry faces industrial gas and electricity tariffs which are 50%-100% higher than regional competitors. Energy costs amount to 30% of the total spinning cost and this inevitably makes the local products inefficient as compared to the competitors. The country’s exports are also not competitive because of higher costs and an overvalued Rupee. During the course of last 4 years, Pakistan has maintained a fairly stable exchange rate while other Asian currencies have depreciated by more than 8% since 2014. Despite the repeated warnings by IMF, the artificially supported Rupee has made exports from Pakistan less competitive.
On 15th July 2017, The Economic Coordination Committee & the government has reversed on its mandate to facilitate export led growth and reinforced the 4% duty and 5% sales tax on cotton cloth. On the investment side in textile industry, All Pakistan Textile Mills Association (APTMA) claimed that investment for the sector has declined by 44% from 2016 to 2017. to a mere $560 million in 2016-2017. On the other hand, during the course of last year 150 textile industrial units have been shut down and others are operating below their maximum capacity. Plummeting investment makes it difficult to stand against competitors like India and Bangladesh who have heavily invested in the sector, by adding 25 million and 4.29 million spindles since 2005, respectively. Overall, without immediate focus on reducing energy costs and providing infrastructural benefits to the textile mills, Pakistan can’t expect any comeback in the textile industry especially with the tightening foreign competition.
The Need to Support Pakistan’s Forte in Food and Agriculture:
According to the Third Quarterly Report by SBP, despite heavy reliance of Pakistan on the food and agricultural sector, on the whole the sector has declined by 7% versus last year. Comparing Mar-Jul’17 vs. Mar-Jul’16, the steepest decline was around 17.82% in meat, with a 13.6% and 12% dip in rice and vegetables, respectively. The agro-based export sector definitely showed some positives as it witnessed an increase in export earnings of 21% in fish and seafood, 35% in tobacco, 512% in wheat and 21% in sugar.
Despite around 7% decline in food and food based exports, this sector can have a promising future in the exports from Pakistan. Many factors and layers can play a vital role for growth of this sector, and the first of many is the much talked about CPEC. The latter initiative will reduce the transportation costs and provide the northern regions’ ample fruits and nuts a trading opportunity through a safe road network. Besides, with the development of the road networks, CPEC promises to provide easier access to agro-based technology and training to the local farmers.
Competitive Edge in Food Market:
Pakistan has positive prospects in the exports of Basmati rice. Pakistan exports around 100,000 tons rice to the EU, while its biggest competitor India ends up selling around 350,000 tons. EU has now decided to put some stringent measures in place on the amount of pesticides used to grow Basmati rice, which can hinder the Indian rice exports. Similarly, there are gaps existing in the world seafood and mango exports which can turn conditions in favor of Pakistan. Pakistan has acquired quality measures like ISO certification and recognition as a Halal meat provider and can leverage on these quality measures to fill in the food based export markets’ gaps. These quality assurances have granted Pakistan a competitive edge over its regional competitors and the country can potentially expect a surge in agro-based exports, if managed properly.
Potential & Prospects:
The Tech Industry
A huge potential business opportunity for exports lies in the Information Technology industry, which consists of IT services, training, outsourcing, call center and out maintenance activities etc. This sector has grown by leaps and bounds by a whopping 1600% in last one and a half decade. A lot more growth is expected as the tech industry is expected to hit the $700 million mark in exports in 2017. Pakistan Software Export Board is providing a lot of technical support to this budding sector by engaging various international trainers to certify local companies. The Government has exempted them from taxes if they promise to keep the major chunk of their earnings within Pakistan. All these efforts are targeted to enhance this sector and bring Pakistan up to the level of India and Philippines in terms of the quality in the IT sector.
CPEC – Oiling the Spinning Wheel of Growth
Apart from specific export sectors there are a multitude of reasons and efforts underway, which can brighten up the future prospects of our exports. Earlier in November 2016, Gwadar port opened its doors for trade and opened up a variety of opportunities for trade with countries like China, Middle East, Tajikistan etc. Gwadar port serves as a base for CPEC, which is a one of a kind project, that could potentially be a doorway to massive growth. Projects like Gwadar port and CPEC will take the burden off from sea by linking Pakistan to Kashgar and enhancing the intra- and inter-country trade. Similarly, the GSP plus status by EU and an opportunity to lead the ECO bloc in the coming years, can give Pakistan an edge over other South Asian countries. Pakistan can leverage this status in its exports in food, agriculture, cross-country negotiations, IT sector, finished textile goods and more.
The long-term productivity of our nation’s industrial and trade policy is dependent crucially on how effectively the nation leverages on FTAs, CPEC and exploits the potential trade with newer geographical regions. Currently, Pakistan is ranked as the 169th country according to the recent World Bank ratings on ease of doing business, as per trade across borders is concerned. Also, Pakistan ranks at 122nd position in the Global Competitiveness Index, which is far behind its competitors like India, Bangladesh and Sri Lanka which rank at 40th, 85th and 99thpositions, respectively. Pakistan has granted or is in the process of issuing more than 18 free trade agreements so far, however, not a single free trade agreement has been exploited and implemented fully. The country needs to open up its boundaries to free trade, support new industries like the IT sector and work on its cross country trade policies. There are opportunities within the textile and agricultural sector as well, which can be tapped into only with long term policies coupled with incentives for investment in the sector. Overall, the trade deficit can still be managed with unorthodox shifts towards free trade with a diversified mix of countries and focus on rejuvenating policies in the favor of export led growth.