Widening Trade Gap

Pakistan needs to expand its export base, which mainly revolves around ten conventional products of ten markets

By: Mirza Ikhtiar Baig
Published: February 13, 2018
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Our export data for the last three to four years depicts a declining trend of sizeable proportions – from an FY13 US$ 25 billion to US$ 20 billion in FY17.

The situation can be attributed mainly to a higher cost of production, over-valuation of the Pak rupee, as well as non-payment of exporter’s sales tax and income tax refunds that have accumulated to Rs. 200 billion during the last three years, causing a serious liquidity crunch to those involved in the trade.

In addition, the higher cost of power and gas, as compared to regional competitors, is making Pakistani manufactured goods uncompetitive in the international market.

A recent survey paints a dismal picture, revealing that more than a hundred textile mills have closed down, with the State Bank reporting 25 percent of its loans to the sector as having become non-performing (NPLs).

During the same period, Bangladesh exports, mainly textile products, have reached the US$ 36 billion mark due to cheaper labour and power rates, and gas prices at one-third compared to us.

The business community has been pressing upon the prime minister and the finance minister, with no viable response so far, the serious implications of higher production cost and imposition of several indirect taxes on exports. This has resulted in Pakistani entrepreneurs becoming uncompetitive in the international market and fast losing their export orders.

    Our imports have jumped to US$ 52 billion and are expected to touch US$ 60 billion by the end of June 2018, whereas our exports are expected to remain at about US$ 22 to US$ 23 billion with a huge trade deficit of US$ 38 billion at the start of the next fiscal year.

To contain the alarming increase in imports, the government has imposed regulatory duty of five to 80 percent on luxury goods. However, the inclusion of raw material and chemicals used for manufacturing exportable items will enhance their cost making them uncompetitive.

There is mounting pressure on our foreign reserves and Pak rupee. The national currency depreciated by five per cent on 8th to 12th Dec 2017 and the US dollar crossed the highest level of Rs. 112. The International Monetary Fund (IMF) has also declared our currency overvalued and recommended devaluation by 10 to 15 percent.

   I am against devaluation as it never helps boost exports; instead the exporters – in desperate need of orders – pass this benefit on to the buyers. The adjustment of currency as per market forces is always a preferred choice.

Pakistan has about US$ 83 billion foreign debt and by affecting five percent devaluation of our currency; our obligations will increase overnight by Rs. 425 billion. It will also make the cost of petroleum products and raw materials expensive, jacking up inflation and resulting in a price hike across the country.

Dr. Miftah Ismail, a Karachi-based businessman and recently appointed Advisor to the Prime Minister on Finance & Economic Affairs, in his first policy statement, ruled out any government intervention in exchange rates.

He emphasised the need to increase exports and curtail imports to reduce the trade deficit to a maximum four percent and the current account deficit to five percent of the GDP.

He also supported the proposal to give legal cover to regularise the income and assets of overseas Pakistanis which will fetch about US$ 4-5 billion to support our foreign reserves.

Dr. Miftah Ismail also assured the payment of exporter’s Rs. 200 billion dues to alleviate their liquidity crunch.

In a recent meeting of the FPCCI, Prime Minister Shahid Khaqan Abbasi had also promised the businessmen a reduction in the industrial power tariff for exporters to maintain their competitiveness.

After Ishaq Dar left the country, there was no finance minister for four months. This delayed the implementation of a Rs. 180 billion Special Trade Enhancement package, announced for exporters by the former Prime Minister, Nawaz Sharif, gravely hindering desired results.

Another factor building pressure on the currency reserves is the repayment of foreign loans. The government has to part with US$ 5 billion annually under this head till 2022. However, according to a statement of the Ministry of Finance this year (2017-18) our repayments are US$ 6 billion, out of which US$ 2.4 billion have already been paid while the remaining US$ 3.6 billion are due by June 2018.

    To stabilise our foreign reserves, the government has recently issued Sukuk and Euro bonds for five and 10-year periods amounting to US$ 2.5 billion and is intent to issue additional ones worth US$ 1 billion by March 2018.

Looking at the present trend of imports, including plants and machinery for the China Pakistan Economic Corridor (CPEC) projects, we can expect higher imports in the near future.

Under the circumstances, the government has to concentrate on increasing the remittances from overseas Pakistanis, to attract foreign direct investment for CPEC and other projects, and to fetch US$ 4 to US$ 5 billion through declaration of foreign assets by overseas Pakistanis.

However, as a long-term strategy, a more viable route would be to boost our exports by reducing our cost of production and working on import substitution.

Pakistan had set an ambitious target of 10.7 percent growth in exports for the year 2016-17 and to achieve the export target of US$ 35 billion by the end of 2017-18, under a three-year strategic policy framework.

However, the ground reality is that these targets have remained elusive; rather, our exports declined.

The Prime Minister of Pakistan has expressed willingness to reduce the industrial power tariff by 20 percent, subject to exporters increasing their trade by 15 percent annually.

    Pakistani exports revolve around ten conventional products and ten conventional markets, mainly (North) America and Europe. This is a very small export base. We should also concentrate on promoting export of non-conventional products to the non-conventional markets.

One such move was seen during the Shaukat Aziz government period when a ‘Look Africa’ intention was announced to focus, explore and exploit this continent’s immense market potential. But no policy was made and the pronouncements proved to be just hot air. Africa is the second biggest continent with 54 countries, with a total GDP of US$ 2.2 trillion and a population of 1.2 billion. Their cumulative trade is more than US$ 3 trillion, out of which Pakistan’s share of trade is only 0.3 percent (US$ 3 billion).

It is somewhat reassuring that during the recent Expo 2017, the Ministry of Commerce announced a special policy and package to promote trade links with ten African countries by allowing exporters two percent additional rebate. This may prove to be a limited but welcome boon, howsoever belated.  So far, nonetheless, the government corridors seem thickly insulated, shutting out all the warning bells.

Paying heed to the voices of all stakeholders is imperative to ward off any economic disaster. The sooner the better!

About the Author
Mirza Ikhtiar Baig
The writer is the Chairman of the Baig Group of Companies, a former adviser to the PM on the Textile Industry and a recipient of the Tamgha-e-Imtiaz