EXPORTS — A YEAR IN REVIEW

Defence production, exports may take a new turn

By AMANULLAH BASHAR
Dec 04 - 10, 2000

Export growth of course is the key element of the government strategy for revival of the economy. Although concerted efforts have been made to keep Pakistani exports competitive by pursuing a market based exchange rate policy, serious efforts are still needed to remove non-price impediments, improve efficiency in production of exportable items and enhance the outward orientation of Pakistani exporters.

The textile sector, which is the leading player in the national economy, contributes over 65 per cent of the total exports of Pakistan. Since the national economy revolves around cotton and textile right from the beginning no other sector has been able to reach the number two position in the list of exportable items. The textile is the only sector which earns around $5 billion a year while other players in the export sector have not been able to reach the mark of even $1 billion export a year. Other prominent export items after textile are including rice, leather and leather products, fisheries, fruits (Mango and Kino) etc.

Defence production

IDEAS 2000 Defence exhibition and seminar recently held at Karachi has demonstrated Pakistan's capability for producing quality defence equipment has caused a stir around the world. Gen. Pervez Musharraf while inaugurating the exhibition announced that Pakistan will soon start mass production of weapons and intended to export them in the international market. The Chief Executive Gen. Pervez Musharraf also clarified that the two-year sanctions imposed on Pakistan following nuclear tests in May 1998 would have no effect on the country's defence and export of weapons.

US sanctions will not stop Pakistan building its own defence products and exporting them to the international market, said the Chief Executive. He said, "we have demonstrated a poor nation's option for acquiring required weapons". We have reached a stage where we find that the defence production is worth showing. He said that he could not quantify the earnings from export of defence equipment. Pakistan however has developed not only the best battle tank Al- Khalid symbolizing Pakistan's capability in defence but has developed advanced electronic devices, guns and other weapon system through reverse engineering. Business community feels that export of defence equipment is likely to elevate Pakistan's image in the international market in terms of money as well as quality of products. The private sector is however willing to invest in defence production at a large scale if the policy makers comes out with a proper package in this regard.

About 60 foreign companies participated in the first of its kind exhibition held in Pakistan. The presence of delegates from more than 40 countries with a combined procurement budget of over $15 billion was being interpreted by the organizers as confidence booster. Pakistan had a large defence production sector, which not only had the surplus capacity to meet the needs of friendly countries but was also in a position to manufacture quality products for global defence industry.

Indication

Pakistani exports registered a negative growth rate (-2.6) during financial year 1997. The declining trend was stabilized to some extent and the export sector attained 4.2 per cent growth rate during 1998. This was not a sustainable stability as the growth rate sharply declined to (-10.7) per cent in 1999.

As a result of good economic decision the sector performed well next year showing an 8.4 per cent growth rate against the target of 10.9 per cent during the year 2000.

The projected 15 per cent export growth is certainly ambitious and in sharp contrast to actual outcomes in the last five years, but the attention given by the policy makers to boost traditional exports and encourage non-traditional exports should make a difference.

While the agriculture sector has performed strongly as a result of bumper crops of cotton and wheat and noticeable increase in production of rice led to agricultural growth of 7.2 per cent which consequently improved self sufficiency in food and the quantitative exports. Unfortunately, the manufacturing sector did not rise to the occasion to strengthen and support.

The cushion provided by the agriculture sector to the ailing economy. Although some resurgence is expected in the large scale manufacturing particularly in the textile sector, yet the overall improvement is insufficient to have a noticeable impact on our exports.

The higher inflationary expectations due to continuous surge in the international price of oil and increase in electricity prices at home and extremely poor services provided by the Power Company altogether have seriously hit the competitiveness of our exportable items.

The representatives of around 13000 industries in Karachi have threatened to halt operations in their units if KESC does not stop load shedding immediately.

The industrialists pleaded that intermittent power breakdowns hinder production process along with causing hardships and miseries to the citizens. The manufacturing units are unable to meet the export commitments due to lower production. Revenue to the exchequer is also plummeting. If the present power shutdown policy continues, export target of $10 billion may not be achieved, the industrialists expressed their concerns.

Contrary to this situation, the finance minister Shaukat Aziz has been saying repeatedly in his meetings with the business community that economic indicators in the last three to four months are on track due to rising exports, improvement in revenue collection and swift flow in productions.

Zubair Motiwala, President Karachi Chamber of Commerce and Industry have urged the government to come to rescue of Karachi industrialists and solve the chronic problem of frequent and consistent interruptions in power supply.

Zubair, originally an industrialist from textile sector and also the former chairman of SITE Association of Industries feels that cessation of operation in 4000 units of SITE industrial area for one hour will inflict government a loss of Rs50 million in terms of taxes, duties, export earnings and production. This is for the first time that all segments of the consumers including domestic, commercial and industrial consumers of electricity are facing load shedding in winter.

Pakistan's exports in the first four months of the current financial year 2000-2001 has recorded an increase of 13.44 per cent to 2.969 billion compared to $2.617 billion of the same period in the previous year.

The federal bureau of statistics has noted a sharp rise of 7.48 per cent in textile exports i.e. $1.889 billion on back of good cotton crop. The production in the receding year rose 35 per cent to 9.7 million bales. There are strong feelings that the cotton production would be around 10 million bales this year. If the output hits the target of 10 million bales against the local consumption of 9.2 million bales the country can easily export over 800,000 bales this year.

The textile sector, which is the mainstay of our exports, is also optimistic for improved textile exports, which might cross the $6 billion mark in the year 2000-2001 from $5.5 billion of the previous year.

Other export items recorded appreciation were including rice 11.76 per cent to $140 million, cotton yarn 8.86 per cent to $325 million and ready-made garments 17.79 per cent to $179 million during the said period.

Agriculture

It is heartening to note that the labour ministry in Pakistan has taken note of the situation and has envisaged extension of the Industrial Relations Ordinance to the Agriculture sector. Now it is being considered that the Industrial Relations Ordinance 1969 will be extended to the agriculture industry, says the labour ministry. The advisory board has recommended increase in the amount of compensation from Rs100,000 to Rs200,000 under the workmen's compensation Act in case of death or permanent disability of a worker while at work or due to that. New ailments and disease would also be incorporated in consultation with the medical experts. National Safety and Health Council would be set up to give guidelines on health and safety measures at work places. A generic law for all work places would be enacted in this respect.

The draft policy also envisages extension of the coverage 4 of labor laws by reasonably increasing the present upper wage ceiling of Rs3000 in labour laws relating to social welfare of the workers and their children. Besides, in all social welfare laws the term 'worker' will be replaced by 'employee' to extend the coverage of application of these laws to the agriculture sector.

Over 60 per cent of the total labour force works in the farm sector of Pakistan but there is no law till today to regulate this sector. The farm workers generally known as Haris in Sindh and Mazarays in Punjab have been brutally denied of all the facilities available to industrial workers in the country. A crop of happy farm workers is expected to make Pakistan not only self sufficient in food but also a leading player in the export market.

Wheat surplus

Pakistan has the surplus wheat this season and the country would be able to market 1.8 million tonnes of wheat to earned foreign exchange. The ministry of food and agriculture has estimated a total production of 20.9 million tonnes of wheat this year of which 1.9 million will be surplus after the estimate of domestic consumption of 19 million tonnes. The Trading Corporation of Pakistan (TCP) and the Export Promotion Bureau (RPB) have been assigned the task of exploring market for the surplus wheat. The TCP has set up a 'wheat cell' for exploring overseas market and also approached Pakistani commercial officers abroad to send the lists of wheat importing countries in the world. A large portion of the surplus is likely to be exported to Iran and Afghanistan and the deal in these regards has already been struck, it is learnt.

Wheat production target for the Rabi season 2000-2001was earlier set at 22 million tonnes has now been reduced to 20 million tonnes due to shortfall in water supply.

The 20 million tonnes target seems to be well within reach due to support price mechanism introduced by the present government to evoke interest of the growers in certain crops. Even the slashed target of 20 million of wheat would be enough to cater to the need of the country. However, all such exit points from where wheat is smuggled out into Afghanistan, Iran and Central Asian States would be required to guard to plug the leakage.

Credit for boosting exports

The government in cooperation with the Asian Development Bank (ADB) has initiated two new credit facility and guarantee schemes worth around $250 million for the promotion of exports and small and medium enterprises (SMEs) in the country.

The two new schemes namely export credit facility scheme worth $150 million and export credit guarantee scheme worth $80 to $100 million will be operational by January 2001. The export credit guarantee scheme wroth $100 million will help resolve the problems of SMEs in securing credits from banks by providing collateral to the concerned banks on nominal charges.

The SMEs, which are often unable to secure, credits from banks due to collateral or security problems will now be able to get credit from banks through the Credit Guarantee Scheme.

The other scheme i.e. credit facility scheme worth $150 million will provide credit to the SMEs, facing lack of funds for the purchase of raw materials to be used for producing export oriented goods on soft terms.

The SMEs which will take the credit under this scheme will have the facility to pay back the credit after they receive payments in dollars for their exports.

Meanwhile the Small and Medium Enterprises Development Authority (SMEDA) has completed its studies in different areas like textile, fisheries, fruits, and vegetable, leather, marble, tanneries etc. will soon be opening its front offices to guide the SMEs especially in export sector. Besides offering guidance and assistance to SMEs for their business initiatives will also help resolve their problems in securing credit from banks mainly the Small Business Finance Corporation.

The government has approved the export of cement, rice, pharmaceutical, glass sheets G.I pipes and hardware items via land route to Afghanistan and Central Asian Republics against irrevocable L/C's in foreign currency. These items shall be zero-rated for sales tax and eligible for normal duty drawbacks.

In order to expand the list of non-traditional export items, the government is actively considering allowing export of wood products made out of sustainable forest woods. The items which are being allowed to export include timber doors, window frames, flush doors, panel doors, moldings, heading pallets, crates and cable drums in knock down conditions, broom sticks and floorings all made from sustainable foreign wood. The government has decided that it would be mandatory for exporters to ensure that the value of export product should be at least 100 per cent more than the value at which the timber was purchased from factory. The export promotion bureau is receiving frequent inquiries from various exporters for the export of lumbers, planks, doors etc. in knock down conditions and brook sticks and floorings made out of sustainable foreign species like Poplar, Eucalyptus, Mango and Sumbal. It may be noted that natural forests and timber were preserved throughout the world but man made forest or sustainable forests were encouraged for use in products for domestic as well as export markets. Even countries with scarce resources in the natural forests such as India too have adopted a policy of encouraging export of products of sustainable man made plantation, keeping strict controls on natural forests.

Software

The SBP has taken measures to encourage the software industry as part of the government policy, which wants to earn $1 billion through exports of software products by 2003.

The State Bank of Pakistan (SBP) has increased the limit from 25 per cent to 35 per cent for retaining foreign exchange earnings by software houses and companies. Earlier, the software houses and companies were allowed to retain 25 per cent of their export earnings in special foreign currency accounts with the authorized dealers for payment of commission to overseas buyers and to meet other expenses such as promotional publicity, import of hardware and software, foreign consultants' fee etc.

About 450 software houses are currently working in the country but the exports last year amounted to about $20 million and this year it is expected to earn $30 million. The automation in the banking sector especially for development of e-commerce is highly discouraging. Even the foreign banks did not print even the forms for opening of the e-commerce account. This was astonishing that the banks have even not prepared for the opening of merchant accounts and the forms are not available. People want to open these accounts are told that the forms are under preparation or being printed. More than two months have gone since the announcement of the IT policy but the progress is highly discouraging and this is basically the fault of the banks.

Outlook

Pakistan's exports are likely to take a new turn with the implementation of the new export policy which includes value addition in the textile sector, enlarging the list of exportable items with non-traditional export items and the new concept of marketing of Pakistan made defence products. An aggressive marketing campaign is the need of the hour to win a preferential treatment towards Pakistan defence equipment and other products. Muslim countries whose total defence imports range $15-20 billion a year can make a visible change in our export scenario.