By SHABBIR H. KAZMI
July 16 - 22, 2001
The Trade Policy for the year 2001-2002 has
certainly disappointed those who were expecting an 'incentive studded'
policy. The new Trade Policy is consolidation of the working of
previous years and continuation of the same strategy with changing
tactics and area of emphasis. Traditionally, Trade Policy has almost
always been perceived as an occasion to announce more and more
incentives for the foreign exchange earners for Pakistan. However,
both the last and current year's trade policies indicate departure
from this tradition. Razak Dawood, Minister for Commerce, has rightly
said, "Trade Policy should confine itself to the strategic
aspects and give clear signal to the producers and exporters of the
policy direction of the government."
The Minister also talked about some 'structural
weaknesses' which do not allow the country to make significant gains
on exports front. Therefore, in the new policy efforts have been made
to remove such irritants in consultation with all the stakeholders.
While efforts are being made to eliminate or minimize subsidies, the
new measures to boost exports include: deregulation, capacity
building, greater availability of funds, pre-shipment export finance
guarantee, foreign currency export finance facility and political risk
guarantee scheme, etc.
According to some analysts, "It is less
significant whether the Policy offers or does not offer incentives.
The actual performance of local exporters will largely dependent on
how overseas buyers place orders at a time when Pakistan's key
markets, the USA and the European Union, continue to suffer from
economic slow down. These two markets also have a fallout effect on
Pakistan's other markets. According to some analysts, given the time
lag between external developments and their effect on Pakistan, the
full impact of the slow down will be faced during 2001-2002.
Another important factor which will drive the
quantum of exports to Pakistan's key markets is the movement of
exchange rate. During the previous year while the rupee depreciated by
about 22 per cent vis-a-vis dollar, the gain in respect of Euro was
only 9 per cent. It needs to be borne in mind that about 30 per cent
of Pakistan's total exports go to Europe.
Some of the business segments have termed the
Policy a 'non-event' and have also expressed apprehensions regarding
Pakistan's ability to achieve the export target of over US$ 10 billion
and contain trade deficit around one billion dollar. These
apprehensions are based on lowering of export target and achieving
even lower than that during the previous financial year. However,
Razak's critics must also take into account that in the last two years
exports have increased from US$ 7.7 billion to US$ 9.14 billion —
for the first time exceeding US$ 9 billion mark. Therefore, if all the
stakeholders make joint efforts, achieving US$ 10 billion target does
not appear a remote possibility.
Razak's critics do not take into account a fact
that area and industry specific incentives offered in the past have
only proliferated inefficiency. Protection of local industries may be
necessary at times, but players should also be exposed to the global
competition. This has become all the more necessary because Textile
Quota Regime will be completely phased out by December 31, 2004.
Nearly 60 per cent of Pakistan's total export proceeds come from
export of textiles and clothing category which mostly fall under
Textile Quota Regime.
Before dilating further on the Trade Policy for
2001-2002, it is necessary to find out what the economic managers were
able to achieve during the last two years. The achievements are : 1)
growth in quantities exported and 2) deeper penetration in markets
like China, Saudi Arabia, UAE, Bangladesh, Indonesia, Korea and
Australia. Other than UAE and Saudi Arabia, these are all what we
refer to as 'non-traditional markets'. During last financial year
exports grew by 6.7 per cent in dollar terms but there was an
impressive gain of 21 per cent in rupee terms.
To the utmost surprise of textile industry, the
Policy does not offer any incentive for the largest foreign exchange
earning group. However, it may not be wrong to say that
representatives of textile industry failed in taking into account the
various incentives announced, which will also be applicable to textile
industry. According to an analyst, "Textile industry wanted
export refinance at concessional rate which the GoP did not accept.
They also wanted exemption from some of the prudential regulations —
enabling them to borrow even more — to which the GoP did not agree.
In other words they are unhappy because their lust for more and more
funds remains unfulfilled."
According to another analyst, "Most of the
forward looking sponsors of textile mills have either received the
plant and machinery in Pakistan for expansion projects or have already
placed orders. These are the people who will be able to reap the real
profit. Others, who always wait for the crutches of GoP
support/incentives may not succeed in revamping their facilities in
time and to compete in the quota free regime."
Another analyst said, "The persistent increase
in cost of production is eroding competitiveness of most of textile
producers. While supply and prices of cotton and man-made fibre may
not pose any significant threat, higher financial charges and colossal
electricity tariff are the two serious issues eroding the
competitiveness of local manufacturers." However, these two
issues can be addressed by the millers themselves and without relying
too much on the GoP, if they wish."
It is evident that while there has been increase in
quantities of various textile products exported, there has been a
significant reduction in unit price realization also. The trend
indicates that the emphasis of textile manufacturers is on exporting
higher quantities rather than on improving value-addition. This is a
trend which has to be curbed. It seems that since most of the
exporters of textiles and clothing were not willing to change their
mind set voluntarily, the economic managers have thought it more
appropriate to initiate a change by withdrawing concessional export
refinance facility for low value-added products.
However, according to a textile sector expert,
"The GoP must realize that manufacturers and exporters of
textiles and clothing have been so used to the crutches that they are
not able to adjust to a shift in government policy. Therefore, the GoP
must do something for the 'spoiled kids' to keep them happy. As such
the changing rules of games, emphasis on greater disclosure, recovery
drive for non-performing loans, demand by the stock exchanges to
release timely annual reports, restriction and rigorous implementation
of the rules governing lending to associate companies have caused
jittering among the textile tycoons."
However, most of the textile sector experts
strongly believe that the GoP must allow duty free import of all kinds
of machinery. Their point of view seems logical for a number of
reasons. However, two of the reasons are enough to justify the policy:
1) most of the textile machines are not manufactured in Pakistan and
2) imposition of duties cause 'front loading' of the projects.
TRADE WITH INDIA
Razak has clearly hinted towards the GoP stand
regarding trade with India. At this juncture, Pakistan is entering a
new phase of relationship with India. It is being propagated, by some
quarters, that establishing trade links with India can help in
developing better diplomatic relationship. However, the other point of
view is that perhaps it is also one of the rare opportunities for
Pakistan to resolve an issue which has been a cause of hostility
between the two countries. Let the two countries trade with each other
as friends and not as a distress measure to overcome temporary
THE WAY FORWARD
The success stories of newly industrialized
countries had started with specific attention to enhancing exports.
This was made possible by creating more and more productive facilities
and producing superior quality products needed by the overseas buyers.
Both Japan and Korea were able to market their products in a better
way through establishing specialized marketing companies — separate
from manufacturing companies. This allowed the manufacturers to
concentrate on production of quality products only. Consistent
increase in exports enabled the manufacturers in achieving economies
of scale and optimizing cost of production.
The main emphasis of present economic managers is
on creating quality assets, enhancing productive facilities and
removing irritants. Therefore, there is an urgent need to undertake a
study to find out which of the sectors suffer from poor capacity
utilization and what are the reasons for the poor performance. On the
basis of findings of such a study, the GoP should conceive and
implement policies to improve capacity utilization and achieve
economies of scale. This will automatically help in optimizing cost of
Without going into too many details, it may be said
that the sectors suffering from low capacity utilization are: textiles
and clothing, sugar, cement, leather and ship building and repair.
Other sectors which offer immediate import substitution/export earning
potential are polyester staple fibre and chemical fertilizer.
Therefore, the GoP must come up with sector specific policies to
address their pertinent problems.
It is known to every one that Pakistan's GDP and
exports are heavily dependent on agriculture and two agro-based
industries — textile and sugar. The key issue faced by both the
industries is limited availability of basic raw materials — cotton
and sugarcane. The limited availability also results in volatility of
prices of these commodities. It is also known that limited supply of
raw cotton and sugarcane is due to low yield. Cotton and sugarcane
yield in Pakistan is almost half of what is normal in India.
Therefore, the right move is to try to improve yield, mainly by
introducing high yielding varieties.
It is also known that cultivable land in Pakistan
suffer from low nutrient content. This deficiency can be overcome by
ensuring balanced used of chemical fertilizers. Pakistan is, more or
less, self-sufficient in production of urea but needs further addition
in capacity to maintain self-sufficiency over the next decade.
However, expansion in capacity is largely dependent on price of gas
(feedstock) for the next ten years. The only hurdle in announcing the
Fertilizer Policy is the insistence of Ministry of Petroleum to remove
subsidy on feedstock. Since the industry is willing to pay price which
is comparable with the gas price in the Middle East, the GoP must
accept this demand without further delay.
It has been almost a norm that the GoP also
announces Cotton Policy every year. Now, there is a need to announce
Sugar Export Policy also. This may look a little outrageous to some
observers. However, is it not a fact also that capacity utilization in
sugar industry is less than 50 per cent? This industry has the
potential to meet local demand and also earn foreign exchange by
exporting surplus sugar. Therefore, the GoP must announce the Sugar
Export Policy in consultation with the sugar industry and all the
other stakeholders before commencement of next sugarcane crushing
season, due in November.
Cement sector faces two major problems: 1)
higher cost of production and 2) lower offtake. These two
problems have kept capacity utilization low. According to sector
experts, higher cost of production is due to higher fuel cost and
taxes. If cement manufacturers are able to optimize cost and achieve
higher capacity utilization, it will provide fresh impetus to
construction industry and offtake will increase substantially. The
issue of higher fuel cost can be addressed by making use of coal
obligatory. This move has to be supported by reinforcing policies to
achieve higher production of quality coal, its storage and
Polyester staple fibre is no longer considered a
substitute for raw cotton, at present it complements cotton. The local
demand and export of blended yarn and fabrics and made-ups from
poly-cotton yarn are on a constant increase. Therefore, further
expansion and capacity utilization of local textile industry is also
linked with the expansion and growth of man-made fibre industry.
Though, the sector may not need further incentives, it is important to
protect the local manufacturers from potential threat of dumping.
Improved supply of locally produced polyester staple fibre has helped
in curbing its price volatility and enhancing its use. The efforts
must continue by local manufacturers and should be fully supported by
appropriate policy measures.
It is encouraging to note that the GoP has
announced a long-term policy to solicit fresh and large-scale
investment in shipping industry. It is also imperative for the GoP to
look into the problems faced by Karachi Shipyard and Engineering Works
(KSEW). The KSEW has enormous potential for ship building and repair
which is not being exploited fully. Therefore, there is a need to
restore its competitiveness through adequate financing and developing
better marketing strategies.
The focus of year 2001-2002 Trade Policy is on
creating conducive working environment for exporters. The Policy may
be short on incentives but certainly aims at resolving the key issues
faced by local exporters and achieving sustainable export growth. The
strategy has been developed in consultation with the various
stakeholders. Every one must keep the words of Razak in mind,
"Things toady are more challenging than yesterday and will be
even more challenging in future." If Pakistan can achieve over
US$ 9 billion exports, it can also achieve the target fixed for the
current financial year by working hard and maintaining the tempo.
There is also a clear message for trade and
industry that days of subsidies, incentives and concessional financing
are over. In the coming days exporters will only be able to sell their
products on the basis of superior quality and competitive prices.
Pakistani exporters must also learn from the experience of other
countries, which despite suffering from the disadvantage of lack of
locally produced raw materials, have been able to compete successfully
in the global markets.
The permission to retain 50 per cent of enhanced
export proceeds over the previous year will encourage the exporters to
improve their performance. However the slow down in the global economy
would make their job a little harder, at least in the near term.
The decision to set up Foreign Currency Export
Finance Facility would allow the central bank to have some leverage in
the foreign exchange market as the pressure on dollar demand due to
imports would ease to some extent. Even though the amount of US$ 150
million for the scheme appears to be small, the GoP has pledged to
raise the amount.
The performance of Export Promotion Bureau, during
the last couple of years, indicates some improvements. However, there
is still room for further improvement. At the same time, it is better
for the exporters to make efforts, at their own, to improve country's
image as well as their own image by their acts. With the permission to
set up their own warehouses abroad and retaining part of their
earnings in dollar, exporters should take the maximum advantage of
TRADE POLICY HIGHLIGHTS
* Export Target of US$ 10 billion
* Import target of US$ 11 billion
* Trade deficit estimated around one billion dollar
* Permission to retain 50% of enhanced export proceeds
* Lowering of maximum tariff to 25 per cent
* Withdrawal of subsidy on export finance
* Emphasis on value-addition
* Increased emphasis on export of services
* Political Risk Guarantee Programme
* Export Finance Guarantee Scheme
* Foreign Currency Export Finance Facility
* Establishment of Deregulation Committee
PAKISTAN'S MAJOR EXPORTS
(In million US dollars)
Petroleum & Petroleum