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August 9, 2023
If we can start from an economic policy perspective, policymakers are asking the wrong question: how to increase exports? Instead, the more pressing and immediate question that they must address is: how to expand economic productive capacity? The World Bank, in its recent report, assessed Pakistan’s annual export potential at $88.1 billion.
With the current exports hovering over $32.5 billion in FY22, the potential works out to be about four times the current level. The size of the missing exports is therefore quite a startling disclosure. As stated above, our exports in FY22 were $32.5 billion compared to India’s $680 billion. For a fair comparison, our per capita exports were $140, compared to India’s $483.
Pakistan’s level of per capita exports in FY22 was achieved by India in 2006. This means that we are 17 years behind India in terms of export performance. Undoubtedly, we have a lot of economic potential. Our country is located at the crossroads of South Asia, Central Asia, China, and the Middle East and is, thus, at the center of a very large regional market with a vast population, diverse resources, and untapped potential for trade.
But our concern here is with long-term performance and not the drastic fall in exports in the current fiscal, which is due to a default-like situation triggered by balance-of-payments, fiscal, untapped export potential sectors, and political crises.
The ADB (Asian Development Bank) says Pakistan is a relatively large country; however, its trade openness remains remarkably low. Citing an example, it says countries that have GDPs comparable to those of Pakistan but with much higher trade-to-GDP ratios include the Philippines, the Netherlands, and Viet Nam. India’s GDP is almost 10 times larger than Pakistan’s, yet trade plays a greater role in its economy.
The dominance of textile products in Pakistan’s exports raises the issue of diversification—or potentially the lack of it. Concentrating too much on only a few traditional sectors or products poses risks to an economy since shocks to the dominant sector can more easily cause an economy-wide recession. It is about time the government adopted a policy paradigm that incentivizes the generation and production of new products with a competitive and comparative advantage.
Moreover, activities, but not sectors, should be supported, and every penny subsidized must be accounted for in terms of overall VFM (Value for Money) in dollars. For instance, while being dependent on gas subsidies, our fertilizer industry has a significant price advantage if exported. However, this billion-dollar sector is being hampered by export prohibitions and capacity development (to ensure surplus generation).
No export strategy can succeed without dovetailing import policy into it. An export policy looking in one direction and an import policy looking in another will keep working at cross purposes and pulling each other down. Tariffs and other duties on imports ultimately serve as a tax on exports, up to four times higher as they are applied to intermediate inputs.
Furthermore, “average tariffs on final goods in Pakistan are 50 percent higher than the average for South Asia and almost three times as high as the average for East Asia. If these inputs are costly due to higher tariffs and other duties, then ultimately manufacturing and exporting costs will be higher and may out-compete our exporters in the international market”.
Other structural problems that restrict our export sector include an untenable tax structure, excessive corporate restrictions, and insufficient access to domestic financing. The government has been obtaining loans from commercial banks for years, leaving minimal financial room for medium-sized or even large exporters.
The SBP should prioritize addressing this rent-seeking behavior on the side of banks and ensure that the ratio of loans taken by the government relative to those of the private sector is restricted. New financial products must be created, focusing in particular on small and medium-sized businesses (SMEs), and credit rating systems must be made transparent to allow for access to loans and insurance services.
To cut a long story short, our innovation in technology and product diversification is limited. Our key export has remained textile for decades.
Our market channels and customer reach are inward-oriented and passive. According to a fair analysis, an additional $60 billion in exports could generate around 893,000 jobs and $1.74 billion in taxes in the agriculture and manufacturing export sectors.
These are the numbers that every government should seriously look at and work on, particularly the current functioning government that is looking for some out-of-the box solutions to turn around the economy.
How to galvanise our exports
Muhammad Sheroz Khan LodhiAugust 9, 2023
If we can start from an economic policy perspective, policymakers are asking the wrong question: how to increase exports? Instead, the more pressing and immediate question that they must address is: how to expand economic productive capacity? The World Bank, in its recent report, assessed Pakistan’s annual export potential at $88.1 billion.
With the current exports hovering over $32.5 billion in FY22, the potential works out to be about four times the current level. The size of the missing exports is therefore quite a startling disclosure. As stated above, our exports in FY22 were $32.5 billion compared to India’s $680 billion. For a fair comparison, our per capita exports were $140, compared to India’s $483.
Pakistan’s level of per capita exports in FY22 was achieved by India in 2006. This means that we are 17 years behind India in terms of export performance. Undoubtedly, we have a lot of economic potential. Our country is located at the crossroads of South Asia, Central Asia, China, and the Middle East and is, thus, at the center of a very large regional market with a vast population, diverse resources, and untapped potential for trade.
But our concern here is with long-term performance and not the drastic fall in exports in the current fiscal, which is due to a default-like situation triggered by balance-of-payments, fiscal, untapped export potential sectors, and political crises.
The ADB (Asian Development Bank) says Pakistan is a relatively large country; however, its trade openness remains remarkably low. Citing an example, it says countries that have GDPs comparable to those of Pakistan but with much higher trade-to-GDP ratios include the Philippines, the Netherlands, and Viet Nam. India’s GDP is almost 10 times larger than Pakistan’s, yet trade plays a greater role in its economy.
The dominance of textile products in Pakistan’s exports raises the issue of diversification—or potentially the lack of it. Concentrating too much on only a few traditional sectors or products poses risks to an economy since shocks to the dominant sector can more easily cause an economy-wide recession. It is about time the government adopted a policy paradigm that incentivizes the generation and production of new products with a competitive and comparative advantage.
Moreover, activities, but not sectors, should be supported, and every penny subsidized must be accounted for in terms of overall VFM (Value for Money) in dollars. For instance, while being dependent on gas subsidies, our fertilizer industry has a significant price advantage if exported. However, this billion-dollar sector is being hampered by export prohibitions and capacity development (to ensure surplus generation).
No export strategy can succeed without dovetailing import policy into it. An export policy looking in one direction and an import policy looking in another will keep working at cross purposes and pulling each other down. Tariffs and other duties on imports ultimately serve as a tax on exports, up to four times higher as they are applied to intermediate inputs.
Furthermore, “average tariffs on final goods in Pakistan are 50 percent higher than the average for South Asia and almost three times as high as the average for East Asia. If these inputs are costly due to higher tariffs and other duties, then ultimately manufacturing and exporting costs will be higher and may out-compete our exporters in the international market”.
It may seem that high import duties are good for promoting import substitution, but our 75-year history shows that protection accorded to domestic manufacturers for a long time makes them dependent on high duties. In this environment, the process of export promotion becomes very difficult, and the overall productivity of manufacturing declines.
Other structural problems that restrict our export sector include an untenable tax structure, excessive corporate restrictions, and insufficient access to domestic financing. The government has been obtaining loans from commercial banks for years, leaving minimal financial room for medium-sized or even large exporters.
The SBP should prioritize addressing this rent-seeking behavior on the side of banks and ensure that the ratio of loans taken by the government relative to those of the private sector is restricted. New financial products must be created, focusing in particular on small and medium-sized businesses (SMEs), and credit rating systems must be made transparent to allow for access to loans and insurance services.
To cut a long story short, our innovation in technology and product diversification is limited. Our key export has remained textile for decades.
Our market channels and customer reach are inward-oriented and passive. According to a fair analysis, an additional $60 billion in exports could generate around 893,000 jobs and $1.74 billion in taxes in the agriculture and manufacturing export sectors.
These are the numbers that every government should seriously look at and work on, particularly the current functioning government that is looking for some out-of-the box solutions to turn around the economy.
How to galvanise our exports
If we can start from an economic policy perspective, policymakers are asking the wrong question: how to increase...
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