WHAT NEEDS TO BE DONE?

AROOJ ASGHAR
(feedback@pgeconomist.com)

June 25 - July 1, 20
12

Pakistan's economy gained strength during 2003-06 but since then it is not moving in the right direction. The excess of imports over export, or trade deficit, has received considerable attention from policy makers. Increasing trade deficit is a natural consequence of fiscal imbalances. Business community has expressed their apprehension on trade deficit. It is expected that trade deficit may increase during the current fiscal year and it would be difficult for the government to achieve the export target. The growing trade deficit, experts say, would not have only put pressure on foreign exchange reserves but would aggravate inflation because the country imports a number of food items to meet its domestic needs. Many fear that Pakistan is becoming increasingly an imports- dependant country with the growing list even of food items, despite being an agricultural country.

It is now important for the private sector to take the lead in for economic growth of the country. Export is critical for any country for a variety of reasons. First, export sector usually has a high rate of profits. Their profits are high because they produce for world market and therefore achieve greater economies of scale and production efficiency. Second, export sector generates foreign exchange earnings and overcomes the foreign resource constraints for greater imports. Third, exports and particularly manufactured exports are highly employment intensive. An increase in exports creates jobs for workers directly engaged in the production of the export commodities. If raw materials and machinery used in such production are supplied by domestic industries, increased demand for their products creates more employment. Finally, higher exports growth help achieve higher economic growth. Given the apparent importance of exports in the economic transformation of nations, the ability to achieve strong export growth has become vital for Pakistan's overall economic progress and prosperity of the nation.

"The government pursued vigorously to secure concessional duties package on 75 items from the European Union. The World Trade Organization approved the package this year. It is expected that this will boost Pakistan's exports to EU, one of the major trading partner of Pakistan," said Economic Survey of Pakistan 2011-12.

"Exports witnessed a strong performance last year attaining the highest level ever of $25 billion showing a growth of 30 per cent. It reflected both the price and quantity effect. Despite euro zone crisis, impacting the demand for Pakistan goods, Pakistan has successfully maintained its exports at last year's until April this year. Exports during July-April 2012 were $20.5 billion compared to $20.46 billion last year. The Afghan Transit Trade Agreement (APTTA) has encouraged formal trade between Pakistan and Afghanistan and the volume has risen to around $2.5 billion annually. Efforts are underway to formalize free trade and preferential trade agreements with many countries. It will help boosting Pakistan's exports. Efforts are also in hand to normalize trade relations with India."

Pakistan has witnessed some geographical diversification in exports. During 2005-06, 47.2 per cent of the country's exports were concentrated in five markets (USA, UK, Germany, Hong Kong, and U.A.E.) of the world and remaining share of all other countries was 52.8 per cent. This concentration is on continuous decline since 2005- 06 and recently the share of these five markets stood at 35.7 per cent whereas the share of all other countries increased to 64.3 per cent during July- December 2011-12. This improvement in geographical diversification was mainly the result of strategic trade policy framework (STPF-2009- 12) introduced by the government and the resulting increase in exports to China, Afghanistan and Bangladesh.

ROLE OF THE PRIVATE SECTOR

The first thing that the private sector must do is to improve their competitiveness by employing state of the art machinery through better management, cost effectiveness, and improving their working environment. Due to energy shortage, it is increasingly difficult for the private sector to generate profits. Efforts are underway to introduce other cheap energy resources but that will take time to materialize. The second most important task that private sector must undertake is to look for new markets and new products. Today, our exports are highly concentrated in few items and going into few markets. More than 75 per cent of our exports originate from four items, namely cotton, rice, leather and sports goods. Similarly, more than one-half of our exports go to seven countries in the world. This state of affairs will not take us at higher export path. Diversification of exports, both in terms of commodity and regions, will be needed. For new markets, we need to look at China, Japan, Latin America and in ASEAN Region.

A more diversified export mix may enable Pakistan to accomplish stability and growth oriented policy goals. Further, by providing a broader export base, replacing commodities with positive price trends, adding value to commodities through additional processing and marketing a diversified export portfolio would be expected to minimize the volatility in export earnings and foster economic growth. It is also suggested that export diversification initiatives need to be undertaken within a broad policy approach where the government should design and support a coherent macroeconomic policy framework consistent with export promotion strategies. While export diversification programs should be implemented primarily by the private sector, the role of the government, in this context, should be to prevent distortion and create an environment, which promotes diversification.

ROLE OF THE GOVERNMENT

The government should play its supporting role in achieving the objectives of raising exports. The first and foremost duty of the government is to provide a strong macroeconomic environment, an environment where exchange rate is stable, a comfortable foreign exchange reserves, low cost of capital, low inflation, low budget deficit and no debt crisis and consistent and transparent macroeconomic policies. In reality, rupee is not stable, inflation is out of control, electricity is not available, cost of capital/debt is high. The second most important duty of the government is to provide strong infrastructure, transport and communication, roads and highways, power, well-functioning ports etc. In highly competitive international markets, poor and overstretched infrastructure facilities can greatly limit the potential gains from an export-oriented trade regime.

Buyers in the international market have a range of alternative suppliers, and they value dependability of on-time delivery, ease of communications with their suppliers, and other attributes that exporters can only achieve if infrastructure is adequate. The third most important duty of the government is to enter into active trade diplomacy.

Our commercial attachés abroad will have to change their attitude. The government will have to work hard in getting market access and provide level playing field in major countries and regions. This is something, which is not achievable easily. It is difficult to explain how Pakistani embassies treat their people and requesting them to help in getting contracts is something funny. Anyhow, there is no harm in expecting this.

Institutions can also play an important role in increasing exports for any country. East Asia is full of examples as to how their institutions have succeeded in enhancing exports. The case of Malaysia is before us. The main features of their success have been the level of professionalism of their agencies responsible for export promotion. There is also a need to establish more export processing zones (EPZs) like Textile City in Karachi.

It is also vital for the economy to attract foreign investments in export sector. This is what we need to pursue. It is generally observed that exporters sometime demand that government should pursue discriminatory policies in favor of exports and provide adhoc incentives for export promotion. Historic analysis suggests that discriminatory policies and adhoc incentives to promote exports have not worked on sustained basis. Therefore, it is not appropriate to pursue discriminatory policies. In order to increase export proceeds, it is important that increase in exports should be done through increasing quantity and not solely relying on price increase. Some increases in price is understandable if we move to higher value addition but our efforts should be to increase exports through increasing quantity for which we have to find new markets.

Falling export and staggering trade deficit of the country has reached alarming levels. But, it is a matter of great concern that despite the enormous potential and attractive business opportunities in Pakistan, the potential investors did not come out with money at the desired level due to various reasons, especially the unpredictable policies and law and order situation in the country. Therefore, government should play its role in stabilizing the political environment and play the role of a facilitator. Private sector must take the lead in materializing polices. Together, they can transform Pakistan into an export-oriented country. Export is the country's future.