WILL THE NEW TRADE POLICY WORK?

SYED FAZL-E-HAIDER
Aug 10 - 16, 2009

Pakistan's new trade policy for 2010-12 envisages an increase of six per cent in export growth target for the current fiscal year 2009-10 that will end on June 30, 2010, and increase of 10 percent and 13 percent in the following two fiscal years. The export target for the current fiscal year has been fixed at $18.86 billion, followed by $20.68 billion in 2010-11, and $23.5 billion in 2011-12. The business community fears that the targets fixed in the trade policy are difficult to achieve in the prevailing law and order situation and energy crisis. The new policy would hardly work, as growth targets have not been fixed with a realistic approach, according to critics.

The policy lacks a clear-cut road map to pull out the value-added textile-manufacturing sector from crises. The sector is likely to face more troubles ahead if gas supply to industrial units begins to deplete next month.

The exporters urge the government to buy warehouses in Central Europe for local exporters so that they could avoid losses of huge demurrages and storage charges and make products available on time to their buyers. The policy did not meet the long-time demand of the textile sector for incentives on international business travels.

The announcement for subsidies to fisheries, leather and other sectors was direly needed. For instance, the announcement of 25 percent air freight subsidy to the seafood industry would help the marine edible-food sector to compete in the markets. Unveiling the trade policy, Islamabad pledged to make its ailing export sector competitive within three years. Officials expect that the country's competitiveness ranking would improve by 2012 from the present 101 to 75, but the analysts forecast that the country's $146 billion economy would expand as little as 0.8 percent in the current fiscal year, the slowest pace since 1952, due to the worst contraction in global trade since World War II. Critics say that the government has not set any target for imports or the trade gap for the next three years. Shrinking domestic market and contracting domestic trade is rendering millions jobless, which has multiplied the economic sufferings of masses who are already reeling under high inflation, lawlessness, and uncertainty.

The South Asian country witnessed an unprecedented downturn in its major export markets including the European Union and United States in the last fiscal year 2008-09. The country's exports declined to $17.8 billion in 2008-09 compared with the previous year's exports of $19.1 billion. Imports also witnessed a relative decline, falling by 13 per cent from $40.4 billion in 2007-08 to $34.9 billion in 2008-09. The local exporters are still struggling to find buyers for the country's textiles and rice in the global market.

"Shipments abroad from Pakistan have been hit by 'structural impediments coupled with anemic global demand," Bloomberg quoted Rohini Malkani an economist at Citigroup Inc. in Mumbai as saying. "We seek comfort in the government's statements to enhance competitiveness."

Another important issue is the negative impact of unrestricted export of raw material on the local manufacturing sector. The new trade policy has not addressed it and put no bar on it.

"Pakistani economy is now in a recovery phase," AFP quoted Makhdoom Amin Fahim, Commerce Minister as saying. 'The problems which we inherited such as energy crises, business closures, declining long-term foreign investment have been worsened by the war on terror in which Pakistan is a frontline state. The direct and indirect costs of this war do not only include the loss of life, property, and business assets, but also the deterioration of the country's image, as a result of which business-to-business interaction becomes more difficult.'

The new trade policy focuses on four areas, according to a report published in daily Dawn. Firstly, the government has proposed a hedge fund to give loans to sick or slowing industries on low mark-up rates. Secondly, there is a proposal to give insurance cover to foreign importers, who do not feel comfortable to visit Pakistan for placing orders owing to prevailing law and order situation. Thirdly, Inland Freight subsidy has been proposed to reduce the cost of transportation of goods meant for export from upfront country. Fourthly, a special focus will be for promotion of engineering goods from the country under the policy.

The analysts believe that the economic growth revival largely hinges on the performance of the manufacturing sector and security environment in the country, which is currently at war with Taliban insurgents. The ongoing fight against Islamist extremists in the country's northwest as well as uncertainties created by the slump in global demand and domestic power shortages add to the challenge of pulling the economy out of an extended phase of sluggish activity.

Textile, cement and auto industries are among the main sectors forming the country's industrial base. Industrial output of the country dipped by 8.49 per cent in the first 11 months of the last fiscal year ended on June 30 due to global financial crisis, according to the Federal Bureau of Statistics (FBS). The production of cotton yarn declined by 0.14 percent, cotton cloth 0.05 percent and power-looms 28.71 percent during the 11 months of the fiscal year 2008-09 over last year. The rising cost of production, mainly because of utility bills and highest ever increase in the interest rates, also multiplied the problems of the industrial sector.

The country cannot sustain with dwindling domestic trade, which is largest employer outside agriculture. Industry contributes 20 percent of GDP and 60 per cent taxes. The soaring power and gas tariffs are likely to put additional burden on the industry and squeeze the gross margins of the industry, according to the analysts. The local manufacturers are unhappy with the government for failing to reduce the cost of doing business, seen as the key to industrial revival and for reinstating minimum income tax in the budget 2009-10. They forecast more industrial closures and job losses over the next one year.

The IMF is pushing the government to withdraw the subsidy being offered to the power consumers and increase the prices of electricity. Pakistani officials had told the IMF that the government could not raise the tariff as long as there was electricity load shedding. The IMF has however rejected long-hours of load shedding as a reason for not increasing power tariff and advised the government to improve management to avoid public criticism.