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Export growth: the challenge of poor logistics

Pakistan’s export performance has remained weak over the past few years. According to the World Bank, Pakistan’s export share in the world exports has declined over time, even less than 1 percent. In the same period, share of Pakistan’s competitors in the world exports have increased substantially. Given the limited size of Pakistan’s domestic market, targets set by the government on export growth cannot be met without a significant improvement in export performance and with some solid planning and actions. Both export product categories and destinations need to be diversified. A concerted effort to plug into Asian supply chains will also be particularly important. At a time, when the global economic center of gravity is shifting from West to East, Pakistan needs to address a situation where 60 percent of its exports are directed to the sluggish markets of Europe and North America and less than 10 percent to the dynamic markets in China and India. Data shows that Pakistan’s export performance was at highest in 2010-11 when exports crossed USD 25 billion mark. It also reveals that its base is quite narrow, highly concentrated in a few commodities namely, textile and clothing, leather, rice, chemicals, pharmaceuticals, and sports goods. These six categories of exports accounted for about 70 percent of total exports, which is not a healthy sign.

These two countries now contribute more than half to the global growth. Improving the investment climate, particularly in the tradable goods sector, would be essential to achieve the desired export growth. The key elements of a conducive investment climate are well known; they include stable, consistent and predictable policies; macroeconomic stability, robust legal and regulatory frameworks; and an improving environment for doing business. The Pakistani authorities are seeking to make progress on these fronts. Focused action is required to be taken to improve the country’s ranking in the World Bank’s ‘Ease of Doing Business Index’. The rankings are particularly low for paying taxes, dealing with permits and enforcing contracts. The Ministry of Finance should take the lead in bringing about a significant improvement in Pakistan’s ranking on this index. The target should be to take Pakistan into the top 50 countries.

While considerable attention has been focused on the country’s performance in the World Bank’s ‘Ease of Doing Business Index’, much less has been discussed or done to address a worse ranking on the World Bank’s ‘Logistics Performance Index’ (LPI). Pakistan is ranked 122th out of 160 countries in 2018. The LPI is composed of indicators relating to customs, infrastructure, logistics competence, shipments, tracking and tracing and timeliness. Within the South Asia region, Pakistan’s ranking is even below Bangladesh, which is a least developed country. It is noteworthy that improvements in logistics can be a major determinant of the success of the textile sector. In fact, this is one of the reasons why orders are gone to Bangladesh, Vietnam and other textile producers. The biggest challenge is to move away from the current system and to improve the logistics for the other export sectors as well.

Pakistan’s LPI ranking also reflects logistics related problems with both road and rail infrastructure. These include congested road access to the sea ports and the poor quality of trucking and rail services. Trucking and rail costs is increasing. The railway sector accounts for only about one percent of freight movements and is characterized by a large cost structure. In addition the logistics sector has been slow to provide value added services for transshipment through Karachi ports. The government can encourage this by providing free zones and customs procedures that can enable services to be provided efficiently. Pakistan’s major exporters have been successful in circumventing the challenges posed by the country’s poor logistics performance. They have done so by restricting themselves to niche higher value markets with relatively long order cycles. In future, they will be under pressure to expand their product lines and shorten order cycles. Garment manufacturers are already increasing use of air freight to reduce delivery time to some extent.

 

According to Pakistan Infrastructure Implementation Capacity Assessment, the transport sector inefficiencies are costing economy between 4 to 5 percent of GDP (Rs. 600 b) each year indicating the need for massive investment in road, rail, air and sea ports. Going forward, national export and growth targets can only be met through a change in the mix of local and imported goods to diversify the export base. Improving logistical performance would be an important part of meeting the competitive challenges that arise from this. Failure to raise our game on logistics will undermine the country’s prospects for achieving the export targets which are crucial for meeting growth and employment objectives. Poor logistics is undermining the competitiveness of the economy. Manufacturers have demonstrated the ability to reduce the time and cost of export production, while increasing reliability. However, the logistics sector of Pakistan has not been similarly proactive in developing supply chain solutions that can increase competitiveness by reducing delivery time and driving down total supply chain costs to exporters. Improving the domestic component of supply chains is important towards achieving this objective. Even greater benefits can be derived by restructuring the international components of supply chains so that value can be captured locally.

In a recent development, Pakistan is apparently eyeing on getting some benefits from the trade war between US-China. It is not sure, how this will be achieved but how long Pakistan will trying to get benefits from conflicts, tensions and other countries problems. Time has come where Pakistan should stand on its feet on the basis of its own merits.

Pakistan has great potential, which needs to be utilized effectively. Adviser to Prime Minister on Commerce, Textile, Industry and Investment Abdul Razak Dawood has recently emphasized that Pakistan will be able to cross its export target of USD 25 billion for the current fiscal year. According to the Adviser, government is pursuing a strategy of discouraging imports and encouraging exports and to fetch dollars through higher exports. It is being said that government is abandoning the policy of import, import and import and is opting for import substitution to push the economy forward.

Therefore, improving Pakistan’s logistics performance requires concerted action by both the government and the private sector. The government’s program of road, rail network, ports and airports development should be designed to support more balanced growth across the regions. In rolling out these programs, a holistic approach should be adopted to infrastructure provision and improved logistics for exports. Equally, the private sector needs to be more proactive in providing logistics solutions that enhance export competitiveness. Significant improvements in domestic and international connectivity would need to be planned for and implemented if exports are to drive accelerated growth in Pakistan.

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