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Challenges related to logistics and CPEC: Worst export fall in Pakistan

While the much talked about China-Pakistan Economic Corridor (CPEC) project which is certainly crucial for economic growth and stability of Pakistan this game changer project is accompanies by some challenges as well. In this regard the future increase in oil prices and enhanced CPEC related machinery imports would make the largest import bill to hit $52 billion while exports would hardly make it to $20 billion making the country to post the huge trade gap of around $ 32 billion.

This was highlighted by the Research and Development section of Karachi Chamber of Commerce and Industry in a report about the economic opportunities and challenges faced by the country. The report has come up with the identification of potential new export markets and products with regard to enhance diversification in Pakistan’s exports sector. The report concludes with highlighting points which can be pondered on for jacking up exports.

WORST EXPORTS’ FALL IN PAKISTAN’S HISTORY

Pakistan is likely to face mounting pressures on its external side at the end of ongoing Fiscal Year 2017 where exports are totaling at mere $18 billion even after the passage of 10 months with imports at alarmingly high trajectory of $ 43 billion.

Pakistan’s long term economic stability is contingent with achieving sustainable economic development which is largely associated with stable exports growth and containing deficits.

Owing to the makeshift arrangements made by the government authorities and low international oil prices, the economy managed to perform relatively better in the last two years. However, the persistent waning of exports still remain a major challenge due to which trade deficit continues to creep up to become the largest in Pakistan’s history. The report also draws attention towards dwindling export performance of Pakistan in comparison to its regional competitors and its effect on the economy while analyzing the issues hindering its growth. The tall claims made under the name of CPEC and impact of post Brexit scenario on Pakistan’s exports have also been scrutinized.

HIGH COST OF DOING BUSINESS

Pakistani exporters are facing the brunt of high cost of doing business; particularly the elevated utilities’ prices and wages, due to which Pakistan has lost its export competitiveness to a large extent. Consequently, number of local industrial units has moved to Bangladesh where cost of doing business is comparatively much lower than all the other regional countries in South Asia.

The minimum monthly wage rates of $ 66 combined with low electricity and gas prices and low corporate tax rates have kept Bangladesh’s exports sector resilient even at the times when low commodity index was prevailing in the world last year.

On the other hand, Pakistan can prove to be an attractive investment destination for China as minimum wage rate of $ 134/month in Pakistan is still nominal in comparison to China and India. However, since the electricity prices in Pakistan are much higher than China, it has made power sector of Pakistan more lucrative for investment. It is for this reason that Chinese investment is more directed in the power sector rather than export oriented sectors despite availability of cheap labor in Pakistan. Therefore, it is important to understand that low electricity prices would not only strengthen Pakistan’s position as an attractive investment destination but would also ensure this investment in exports led sector.

LOW DIVERSIFIED PRODUCTS & MARKETS

Pakistan’s exports are suffering from low export diversification for the long period in terms of both markets and products. More than half of what Pakistan’s manufactures is sent to just few markets. Among export markets, major chunk is covered by two regions i.e. European Union (EU) and US which absorbs almost 31% and 17% of the goods exported by Pakistan, respectively. Similarly, Pakistan’s export products are narrow based which mainly covers textile and clothing items, cotton, surgical instruments, sports goods as well as leather products. Among these goods, textile items grab largest share (60%).

The reason being, Pakistan exports its raw material ‘Cotton’ to its textile competitors Bangladesh, China and Vietnam, which then after adding value to it, exports to the world markets.

DID TAX INCENTIVES BENEFITED EXPORT SECTOR?

(i) Zero rating of five export sectors failed in increasing exports:

In a bid to enhance exports of Pakistan, government reinstated the zero rating in the last federal budget 2016-17 for five export oriented sectors namely textiles, sports, pharmaceuticals, leather and surgical goods.

The rationale behind it was improving cost competitiveness of these sectors while eliminating backlog of refund claims to avoid liquidity crunch. It may be noted that the Finance Minister Ishaq Dar in his budget speech has, however, assured that the refund claims of the exporters would be settled by August this year.

Nonetheless, the situation has not been changed even a bit by the end of FY17 where exporters are still demanding for their refund claim as billions of rupees are withheld with the FBR.

(ii) PKR 180 billion export package:

Observing dismal performance of the country’s export sector, the government introduced export package of worth PKR 180 billion in January 2017 along with duty drawback of 6% on textile made ups, 5% on processed fabric, 4% on yarn and grey fabric with 7% duty drawback on textile garments, sport goods, leather and footwear items. However this measure has been adopted for the period of Jan 17-Jun18, which is very short and therefore would not help in uplifting exports.

Furthermore, Finance Ministry’s failure in releasing funds on time remained another obstacle, which comes in the way of boosting exports through such packages. In contrast, textile sector of our neighboring countries like Bangladesh, India and China are thriving and have remained far more competitive even in the times when low commodity index was prevailing in the international market. The resilience of their export structure is the outcome of simple tax incentives provided by their government through various policy measures. In China, the cost of production is much cheaper complimented by host of facilities to the Chinese manufacturers.

CPEC is going to extend further cost reduction in oil supplies to China. Recently, it has created a fund of 20 billion yuan ($2.8 billion) for establishment of a textile city in Xinjiang to promote exports of textiles. It will be quite difficult for Pakistani textiles to compete in the region in the current circumstances.

POOR LOGISTICS & PORTS’ INFRASTRUCTURE

Currently, Pakistan’s logistics are considered to be the poorest among whole region and stands below the global averages. Pakistan’s 90% international trade is routed through sea and Karachi seaports — Karachi Port Trust (KPT) & Port Qasim, handles 95% of this trade. However the dwell time of container in Karachi is 7 days which is about three times more than that in developed countries, East Asia and Europe.

Similarly, the vessel call charges at KPT are one of the highest in region; standing at around $27,000 compared with $2,890 at Dubai port and $2,975 being charged at Singapore’s port.

Furthermore, exporting from Karachi takes around 141 hours in fulfilling documentary and border compliance compared to 20 hours in OECD countries while 294 hours are consumed to import from Karachi relative to only 13 hours from OECD countries. Similarly, 80% of the land transport is over roads which incur higher logistic cost due to poor customs and border management and worn out infrastructure.

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