Time for a fresh look at trade policy
By M. Ziauddin
IT is time the government took a fresh look at the content and direction of its foreign trade policy. Of course, the exports have almost doubled in the last seven years, going up from nearly $8 billion in 1999 to $16.4 billion in 2005-6.
But they are no more than 13 per cent of the GDP. Indiaââ¬â¢s exports have crossed 16 per cent of its GDP while those of Chinaââ¬â¢s have gone up to 40 per cent of its GDP.
So, in order to attain a growth rate in export which would be in line with the rates in other South Asian countries, Pakistan would need a new foreign trade strategy aimed at diversifying the export items and their destinations and augmented by an industrial policy that would produce enough exportable surpluses of high quality and value addition.
And a will to implement this strategy will have to be found to avert being influenced by the politically powerful lobbies which have kept our foreign trade in the low end all these years in order to ensure their own rents and unearned profits.
At the time when President General Pervez Musharraf took over the reins of the country on October 12, 1999 our exports were nearly 14 per cent of the GDP. In fact, in the so-called ââ¬Ëlost decadeââ¬â¢ of 1990s when Pakistan had become the most sanctioned country after Libya, it had successfully doubled its exports from a little over $4 billion in 1989 to nearly $8 billion in 1999.
Now with only three years left in this current decade of plenty when the countryââ¬â¢s exports have been allowed generous additional access into the rich markets as a reward for our contribution to the war on terror and also blessed us for the same reason with enough fiscal room to carry out the much delayed structural reforms, the military-led government has been able to just about double the export earnings.
Exports during the 1990s had doubled despite the fact that the increase in imports during the decade had been restricted to only $3 billion. But the doubling of exports in the last seven years has been achieved by pushing up the imports by as much as $18 billion from $10 billion in 1999 to about $28 billion in the outgoing year. No doubt, a lot of textile related machinery was imported in 2002-04, but most of it was for producing more yarn rather than for making value addition to exports.
And during the decade of 1990s, the trade gap had expanded by over $3 billion only in three years but dropped to $1.7 billion in the final year of the decade. In the last seven years, the $3 billion mark gap was crossed for the first time in 2003, and subsequently it doubled to more than $6 billion in 2004 and it was over $11 billion in 2005.
The growth rate in imports in the last three years has been phenomenal. It went up by over 27 per cent in 2004, then it went over 32 per cent the next year and in the out going year it had gone up by nearly 45 per cent. And most of this import (minus the soaring oil import bill) was made up of consumer goods like mobile phones, consumer durables and two and four wheelers.
In the last seven years, there has not been any addition to the list of major exports which has remained confined to a few items only: cotton, leather, rice, synthetic textiles and sports goods.
These five categories of exports account for 74.5 per cent of total exports during the first nine months of last year with cotton manufacturers alone contributing 58.4 per cent, followed by leather (6.1 per cent), rice (6.9 per cent) and synthetic textiles (1.2 per cent). Further break up of figures reveals that almost all the export earnings of cotton group have originated from textile and clothing.
And the direction of the exports has also remained confined to a few countries as well. The seven countries, namely USA, Germany, Japan, UK, Hong Kong, Dubai and Saudi Arabia account for 50 per cent of our exports. The US is the single largest export market for Pakistan accounting for 27 per cent of its exports followed by the UK, Dubai, Germany and Hong Kong Japan as Pakistanââ¬â¢s major export destination is fast vanishing as less than one per cent of its exports are entering this land of rising sun.
This has happened despite the fact that in the last seven years the government has announced umpteen numbers of policies to promote new categories of exports and has also entered into agreements with a number of countries for preferential and free trade besides early harvest accords.
In fact what had happened is, every year the policy makers have announced a number of measures and steps to boost exports, but most of these announcements have continued to remain announcements only and implementation has been restricted to only about 50 per cent and most of that too only on paper.
Remember the fanfare that had accompanied the announcement of governmentââ¬â¢s intentions to set up textile cities, promises to restructure the National Tariff Commission and establishment of ROZs? Nothing has so far happened on all these scores. These are only three examples. There are many more such announcements which were made perhaps to play to the gallery for political mileage but without any intention of translating them into action.
Even the so-called phenomenal increase in exports in the last seven years has been achieved mainly by offering the exporters decidedly rent seeking kind of concessions. Pakistanââ¬â¢s export sector has over the years progressed not on innovation, quality or value addition but on concessional schemes like refinance scheme, cash compensatory rebates, freight subsidy and research and development support.
Additionally, exporters have been obliged with duty exemptions and tax concessions. According to one analysis, it is the government which makes up the profit component of the exporters while they compete in the world market on the basis of throwaway prices alone.
In fact it has been observed that people take up the business of exports only to avail the governmental concessions and tax breaks and not to do any real export business. The freight subsidy was originally announced for the export promotion of new products and to new markets but now it is being availed by even those who sell traditional items in the traditional markets.
These analysts said that dollars earned through subsidised exports cost much more than the prevalent exchange rate. Subsidies put an extra burden on the budgets expanding the budgetary deficits which are normally financed through printing of currency or new indirect taxation or borrowing, all of which add to the rate of inflation.
The government has so far refused to accede to the demand by the textile industry for a package of Rs50 billion worth of concessions. But this lobby is politically too powerful for a government just about to enter the election phase. Moreover, it is a government overly beholden to the big business. So, one should be too surprised if the government is finally persuaded by this lobby.
This sector had made huge profits over so many years. It can always draw on these profits to meet the challenges of the so-called ââ¬Ëunfavourableââ¬â¢ markets of today and also use these resources to start the much delayed value addition in the textile products.
The government should also take a fresh look at its industrial policy which today is focused only on automobile, textile, cement and white goods which so far have failed to produce exportable surpluses except the textile sub-sector which too is only producing exportable surpluses in low-end products only. And despite the concessions and incentives offered to the manufacturing sector in the last seven years, it is showing a declining trend with the last year recording a growth rate of nine against the target of 15 per cent and an achievement of over 27 per cent in the previous year. And agriculture in the last year grew at only 2.5 against a target of 4.2 per cent. On the other hand, the availability of water, gas and electricity is relatively much more uncertain in Pakistan than in other regional countries.
So, we need an industrial and agricultural policy that would ensure adequate supplies of required inputs at economical costs so that enough exportable surpluses of good quality and with higher value addition are made available to achieve exports to the tune of at least 15 per cent of the GDP in the short term. Otherwise, the rising trend in the growth rate of exports is likely to reverse in the coming years.
