BRIDGING BALANCE OF TRADE GAP
The improved balance of trade will free Pakistan from need to borrow from foreign sources for financing
By Dr. Muhammad Mahmud
Nov 20 - 26, 2000
Why does Pak rupee devalues continually? Why do we resort to commercial loans at lenders conditions? Why do we lack foreign fund to finance the projects? Why, far from becoming an Asian Tiger, Pakistan is beset with the danger of defaulting the international financial commitments? And what is the solution of this dilemma? Many a Pakistanis ruminate questions like these today.
A single yet not simple remedy to this financial ailment is to bridge the balance of payment gap by following a result oriented trade policy. The grinding effect of debit balance of payments on the country is frankly admitted by the Finance Minister Mr. Shaukat Aziz in his budget speech." This [balance of payments] forces us to borrow from foreign sources so that the excess of imports over exports can be financed. It is here that one finds the burden of foreign debt putting the nation in a bind and compromising its economic sovereignty," says the Minister
Balance of payments is the relation between all payments in and out of a country over a given period. The largest component of a country's balance of payments is the balance of trade; the difference over a given time (generally one fiscal year) between a country's total payments to and receipts from other countries wherein the debit items include imports, foreign aid, domestic spending abroad and domestic investments abroad, credit items include exports, foreign spending in the domestic economy and foreign investments in the domestic economy.
What policy tools the government can tap? How can the government the better balance of trade? What measures has the government to adopt? These basic questions are looked into here.
Two most obvious strategies to close the gap in balance of payments are: first, increasing the exports; second, decreasing the imports. The government has been using or at least trying to use these two strategies for last many years but results always dwell below the target. During the last six years, in spite of the government's much trumpeted trade policies, the exports earnings have been hovering in the band of $8-9 billions while imports have increased.
Trade Policy being an important component of the economic agenda of the Government not only provides measures for promotion of trade but also contributes towards the economic growth and strength of the country. As such, trade policy sets Fiscal, Monetary, Exchange Rate and Economic Development objectives.
Present trade policy announced by the Federal Commerce Minister, Mr. Abdul Razzak Daud on 28th July 2000, lays down macro-economic goals, targets for increasing the exports and reducing the import in a "a three year framework." While aiming at sustainable and consistent growth, diversification export base, greater value-addition in the goods and services being exported the government has fixed the exports target at $10.0—same as last year's, yet an ambitious increase of 17 per cent over export earnings of $8.5 billion (in 1999-00).
The new trade policy incorporates establishment of product up gradation and market development fund, steps for reducing the paper work, simplified registration of exporters, removal of SRO culture, suspension of cumbersome procedures at export stage.
Pakistan's exports are only 0.16 per cent of world exports, mostly (over 50 per cent) restricted to just seven countries; USA, Germany, Japan, UK, Hong Kong, Dubai, Saudi Arabia. The Federal Finance Minister in his budget speech said, "We have a narrow base of exports, inflexible imports with both imports and exports having low elasticities." There is need to widen the export domain in terms of product and market.
Pakistan's exports consist of traditional items like textile—60 per cent of total export — rice, leather, fish products, and non-traditional items comprising of software, engineering goods, chemicals, fruits and vegetables. The government is to focus on exports of selected non-traditional items such as software, engineering goods, chemicals, fruits and vegetables etc.
Among the traditional and non-traditional export items textile is the leader. The export target for textile in current fiscal year set at $6.4 billion is in line with its past performance of earning 60 per cent foreign exchange for Pakistan—$5.5 billion in fiscal 1999-00.
Since Multi Fibre Agreement (MFA) is coming to end in 2004 the export policy sets the direction towards gearing the textile sector to international competition through modernization, through quality production, through improvement of quality, through marketing strategies and through higher value addition. To encourage maximum value addition, the government has withdrawn excise duty on import of raw cotton and export refinance for export of yarn. A tremendous amount of value can be added to textiles by embroidery, computer printing, other high end finishing to the cloth and manufacturing garments in stitched form. Here, Pakistan can get a bit of inspiration from the example of value addition by Bangladesh—according to Sate Bank Governor's revelation, a country without indigenous cotton crop, exporting garments worth $4.5 billion value addition in textile.
Government's decision of zero basing accessories of textiles can come in handy for modernising the spinning, weaving and finishing machinery in preparation for the tough international competitions ahead especially at the expiry of MFA. Provision of 10 per cent tax credit and first year tax allowance of 40-80 per cent for new equipment and BMR (Balancing Modernisation and Repair) is manifestation of importance that the government attached to the textile sector. This should inspire 300 mills — 75 per cent of 400 textile mills in organised sector—presently relying on exports of dyed yarn, lacra yarn and milan yarn to get ahead with higher value addition
By including measures for allowing export of raw cotton right from the beginning of the season; setting up of a ginning research institute, reduction of customs duty on import of saw gins, amendment to Karachi Cotton Association (KCA) bylaws allowing shift from varieties to grades and withdrawal of excise duty on import of raw cotton the trade policy aims to facilitate further the export of cotton and textiles.
Rice exports averaged 5.6 per cent ( over the past nine years) of Pakistan's export earnings. Even now a sizeable surplus of rice worth $307 million is available just a couple of months to harvest the new crop. Impediments to exports of rice presently are the high production and FOB cost. To reduce these impediments, the government is allowing "import of par boiling plants from India" to lower production costs and reviewing port charges to "lower port handling" costs.
However the major determining factor in raising the level of rice exports will be the results of brand development and "depth of penetration" in markets of Indonesia, Iran, Iraq, Philippines, Kenya, Zimbabwe, and South Africa.
Exports of leather and its products have consistently declined over the past three years from peak export of $403.6 million in 1996-97 to $326.9 million in 1999-00. To encourage manufacture of leather product, new trade policy allows import of raw material for shoe manufacture from India, however the leather manufacturers demand reduction in duties on raw material and duty free import of raw material up to 5 per cent of export value of finished item. Using the foreign experts for improvement know-how, skills and design techniques at Leather Products Development Centre under NILAT (National Institute of Leather Technology) is step in the right direction for improving the quality and demand of leather products in the international market.
Fish and fish product exports have a great potential for increase from the present level of $8 million if modern equipment is used for fish catch. If post harvest losses are reduced and quality of product is improved.
Fish and fish product exports have a great potential for increase from the present level of $8 million if modern equipment is used for fish catch. To realise the export potential better the trade policy allows duty-free imports of navigational equipment, fish finders, storage and handling equipment while reducing the withholding to the 0.75 per cent for export in packet up to 2 kg.
Furthermore, for the development of shrimp industry duty-free import of shrimp's meal and baby shrimps is allowed.
Export of non-traditional items such as chemical, pharmaceuticals, onyx handicrafts, vegetables and fruit products recorded substantial increase during 1999-00. Federal Commerce Minister disclosed that for increasing the exports of non-traditional items "a detailed plan was separately being developed."
Fruits and vegetable is another sector with a lot of potential for increase in exports is in focus of the government. The export of fruits increased by 41 per cent while exports of vegetables dropped by 19 per cent during 1999-00. In view of limited shelf life, the export is now allowed on single consignment basis. One window operation and abolition of minimum price will facilitate their export. The processors—to be treated as indirect exporter now—will benefit from duty free import of machinery. However, to enhance the exports the industry has to improve quality, minimise "post harvest" losses, develop downstream products (canned and processed fruit products, etc.) and concentrate on new market.
Government has targeted to increase present level of $30 million exports of software by threefold in next two years.
A technology park is already open at Awami Markaz in Islamabad where 15 IT companies employing 350 professionals have established their offices. Two more such parks, one at Karachi and other at Lahore are to come up. Reduction in internet charges is another measure to promote IT.
Apart from exempting the software exports from income tax in the new trade policy "software companies are allowed to retain 25 per cent of their export earnings in foreign exchange to meet the expenditure on purchase of hardware/software, foreign travel, marketing and hiring of consultants."
Pakistan produced the largest wheat crop of 21.5 million tons resulting in exportable surplus of one million tons. Federal Finance Minister said in his budget speech, "This [wheat production] has saved us a precious foreign exchange of $250 million." Smuggling of wheat across eastern border eliminated due lower price in India, the government has all the surplus available for export.
Appreciating the role of suitcase-trade in boosting the economic activity, Federal Commerce Minister has expressed the intention to "to remove all irritants" in the way of suitcase trade. It would increase economic activity in the country and introduce Pakistan's product in foreign markets.
Gems and jewellery are the non-traditional items with great potential for exports. "The government is aiming at $10 billion gold trade," says Export Promotion Bureau Chairman Mr.Tariq Ikram. Pakistan's current annual gold trade of 120 ton annually (presently without much value addition) can bring in sizeable chunk of foreign exchange through export of value added item of jewellery. To enhance exports of the jewellery items with finished precious stones the "duty on import of diamonds and rough gemstones is being reduced" to 2 per cent ad valorum. Additionally six per cent withholding tax on imports of equipment and raw material used by exporters of jewellery is withdrawn. The value addition requirement for export of bangles is being reduced to five per cent.
Pakistan produce naphtha and POL products surplus to country's requirements. An NOC was required for their exports. To allow free for export of naphtha and lubricants the requirement of NOC is done away.
Reduction of imports being an effective measure of reducing the balance of trade gap, the government has announced several measures to cut dependence on import.
First, to encourage the local cultivation of oil seeds like sunflower, soybean etc. government is to announce a number of incentives. This would reduce some much dependence on imported edible oil whose import for first nine months of 1999-00 stood at Rsl6.487 million.
Second, Pakistan government spends a lot of foreign exchange on import of oil, it has to be reduced on "war footing." With the exploitation of estimated one billion cubic feet gas of Kirthar range in Sindh along with laying the new transmission pipelines, most power projects in Punjab presently run on furnace oil can be converted to gas thus reducing oil imports.
To encourage use of indigenous, LPG price will be deregulated. When the PARCO refinery near Multan starts production, the production of LPG in the country will increase by 80 per cent—leaving some surplus after meeting the local demand. Thus in addition to saving foreign exchange on imports of LPG, the country may export the surplus.
The improved balance of trade will free Pakistan from need to borrow from foreign sources for financing the excess of imports over exports, from compulsion to compromise its economic sovereignty and lead to investment and economic growth. According to the Federal Finance Minister's conviction that "the export potential of Pakistan is several times its present level, whereas Pakistan's balance of payments problems could be fully resolved if we can achieve an exports level of $12 billion without a significant increase in the present level of imports."
The author is Assistant Professor, Institute of Business Administration, Karachi.