For the past 50 years, Pakistan’s export sector is confronted with some structural issues, like lack of value-addition and dependence on few sectors and products (we’re virtually a three-product exporting country), which will take some time to address, at least medium to long-term. No matter how much we devalue our currency, our exports cannot be increased in their present form. We have devalued our currency by almost 35 percent in just one year and yet our exports have fallen. This will give an idea of our export competitiveness and also about how little devaluation helps our exports. So, it is a completely different restructuring of the economy that we need to direct it towards growth.
The export structure needs a complete overhaul and we need to explore new areas, products and services, where we can gain something in the medium to long-term. The challenge lies in investing in the knowledge economy, information technology (IT) and software. That is where we should be heading now. Our industries are outdated. In the current circumstances, we should forget that we can capture any market through exports. Any efforts to improve the old export model will be counter-productive.
In trying something new, we should focus on developing the IT sector in the country and improve health infrastructure so that people can come to Pakistan to get healthcare, just like India. India is an exporter of health services now, which Pakistan can achieve as well if we prioritize our health sector. Pakistan can also venture into the pharmaceutical industry and encourage exports in that sector.
The import substitution strategy that the current government is trying to embark upon cannot work in the present circumstances. Import substitution is a good slogan but cannot be given importance in the current circumstances. If import substitution is to work, Pakistan should venture towards the knowledge economy and build the capacity to substitute.Unlike East Asia, Pakistan has historically followed a policy of import substitution rather than export promotion. Consequently, there has been little emphasis on broadening the export base that has remained over-reliant on textiles as the principal export. Even now, exports of cotton yarn, cloth and value-added textiles constitute almost 60 percent of our total exports. Unfortunately, exports from agriculture and SME sectors have been neglected through over taxation of inputs, lack of access to infrastructure, especially electricity and gas, and restricted availability of credit from commercial banks. Extraordinary skills of Pakistani craftsmen, therefore, have remained largely unrealized. Export of precious gem stones and jewelry alone could enable Pakistan to earn more than half of the present total export earnings of Pakistan.
The government should provide incentives to certain industries where it sees a high potential for investment, exports, and foreign exchange. Such industries should be protected but not for an indefinite period of time. There should be a timeline and scale defining how the government is going to intervene in a particular sector or industry, and how it is going to be incentivized for a certain period before it becomes uniform for everyone. Incentives should not be for life, but they should be there in a rational way if the government wants to increase income and reduce unemployment.
Import tariffs are a revenue measure but Pakistan cannot rationalize import tariffs as long as it is a part of the World Trade Organization (WTO) and tariffs are a global phenomenon. There is an ongoing tariff war between America and China. If one country increases the tariff for the other, it is responded in a similar manner. The suffering and loss are eventually mutual. Pakistan cannot increase import duties as such.
But if we are able to restructure the system of taxation, which has a component of value-added tax and consumption tax, and income tax is structured in a way that taxes are paid by those who have money, then there is no real need to impose import duty tariffs. Governments levy import duties as a measure to increase revenue so if there is a proper taxing system in place, there is no such need.
Pakistan must also more actively exploit the openings created by the GSP plus status granted by the European Union as well as the opportunities offered by China-Pakistan Free Trade Agreement and the South Asia Free Trade Area (SAFTA) agreement. New markets need to be developed especially in Central Asia, Iran and Turkey. There is a risk of growing protectionism and a rising wave of anti-globalization. Exports could become even more difficult to increase within this looming scenario. It is essential that the trade gap be brought down over the next three years by almost USD 10 billion through establishment of Special Economic Zones.