Exporting for prosperity
On the foreign trade front Pakistan should follow a many-faceted strategy comprising both the export front and the import regime
By Saif R. Khan
Feb 05 - 11, 2001
At its 5th January meeting in Islamabad, the Federal Export Promotion Board took stock of the slow-moving export targets, and announced yet more facilities for exporters. The Board took four decisions: there will be no duty on export of finished leather, rice can be exported on consignment basis, tax collection system will be improved, and refund of general sales tax (GST) will be expedited. How effective the new steps would prove to be, remains a wide open question.
The current Trade Policy was formulated in the framework of a three-year perspective, in line with the Budget for fiscal 2001 (1 July 2000 to 30 June 2001). It was touted as a comprehensive policy document: flexible, dynamic, and responsive to market trends as well as to the provisions of the World Trade Organisation.
But, policy-making is one sphere of activity in which we can boast of being self-sufficient to a degree of some excellence. It is, however, at the implementation stage where we really get stuck. Six months down the year proves this bitter reality, the target. Exports have grown by 12 per cent in the first five months to November, but still are below the target. Thus, in the remaining period of the fiscal year, exports must increase a minimum 20 per cent to attain the target of $10 billion.
There are three major targets of the current Export Policy (i) to enhance the country's world market share of 10 top textile and non-textile categories; (ii) to boost export of non-traditional items of exports; and (iii) diversification of export products and markets.
At the time of framing the current Export Policy in June 2000, it was decided to de-emphasise the SRO-dominated culture. It was realised that frequent issue and cancellation and revisions of SROs (Statutory Rules and Orders) by the Central Board of Revenue (CBR) was largely responsible for creating a climate of uncertainty, thus thwarting export efforts. The system has also been responsible for discriminatory practices as well as for real or imagined maladies of adhocism.
But, this has not happened. A multiplicity of SROs still rule much of the export-import trade. The whole idea seems to be that if an ordinary mortal can understand an SRO, then there would be no use keeping thousands of CBR officials in their cosy offices. It is the SRO culture, which is their bread and butter.
The present Export Policy had come up with two administratively important institutional measures: (a) the establishment of Product Upgrading and Marketing Development Fund, and (b) a Skills Development Council. These quality-conscious and quality-improvement steps were supposed to be a sine qua non of modern trade practices. However, not much is known about the fate of these important measures. The fact of the matter is that it is in the field of quality of products that our export effort tends to fail miserably.
If history is any guide, grant of frequent incentives to exports tend to be largely counter-productive since they have hardly helped in boosting the sagging export sector. We have had one bad experience after the other with granting a variety of incentives in the past. Yet, exports have not picked up. Even the Rupee-dollar parity of 61:1 in the kerb market has not yet brought about any significant expansion in exports. Why the exporters keep asking for more incentives is indeed hard to understand.
It could be a good research topic to collect and collate the number of export incentives granted in the past 10 years. Their volume can easily fill up the Committee Room of the Chief Executive's Office.
Therefore one would be rather sceptical about any positive impact of the four major incentives decided at the recent meeting of the Federal Export Promotion Board.
Exports are unlikely to grow on the crutches of export-import incentives alone. The more important factors to consider are higher productivity and growth in agricultural and industrial sectors. Agriculture and industry act and react on each other. The new emphasis on Information Technology is a welcome move. To help this important, dynamic segment of the industry, it is imperative to set up an IT-friendly institutional and administrative environment. Export earnings from software hold great promise. A look at the Indian experience is an eye-opener. Just 10 years ago their software industry was worth only Rs 2 billion. In the year to March 2000 it had jumped to Rs 190 billion. Current year's projection is a phenomenal $ 13 billion. Of this, annual exports will touch a figure of $ 9 billion. That would be more than our total exports last year.
Quoting examples from other countries, even India, is certainly not inappropriate as long as we are willing to learn a lesson in developing our own economy on sound lines. In this context, yet another point from the Indian economy will be in order. Indian foreign exchange reserves have shot up 14 per cent to a record 40 billion dollars as of 31 December 2000. Compared to this, Pakistan's reserves are only $1.5 billion. That shows how far we have to go in boosting the total export volume.
The role of large-scale industry is important. According to one estimate there are a total of 96 large-scale manufacturing units in Pakistan. Of these, 37 units are in the federal jurisdiction and 58 under the Provincial governments. During 1999-2000 their combined production growth was only 1 per cent, largely due to a 25 per cent decline in the production of sugar. That had brought down the growth in the entire industrial sector (including small and medium scale) to a negative figure.
Had the agriculture sector not done really well (with a record 22 million-ton wheat output, and 11.5 billion bales of cotton) the national economy would have faced a deeper economic crisis.
The most important cash crop in the agriculture sector is raw cotton. It plays a significant role in all our macro-economic policy-making. The highest share (60 %) in total exports is claimed by the Cotton Group. This leads one to the painful conclusion that the economy and cotton rise and fall together.
It will be a grievous mistake to feel complacent about cotton crop just because there was a very good crop last year. We have to take care of it right now with sound, grower-friendly policies, and not mill-friendly strategies. The farmers of either sugarcane or of cotton or even of wheat cannot be left to the mercy of the millers.
This year we may not be very lucky in wheat production, as the wheat-growing areas in Sindh and southern Punjab have been hard-hit due to near-drought conditions. Some rain in December has proven to be a good saviour. However, till the yield starts coming in April, firm estimates of wheat crop are not possible. The same argument applies to raw cotton. Unless we can reap a minimum of 10.5 million bales, the textile industry is going to suffer a great deal.
After incurring heavy cost on some of our major imports of crude oil, edible oil, tea, etc. not much will be left for importing cotton or wheat, if domestic production is not adequate. Talking of wheat, one would wish that the government had not gone too quick on export contract last year. Instead, the surplus wheat should have been stored for possible bad times ahead.
The bottom line of the whole argument is that increase in agricultural productivity must be given top priority. Otherwise, industrial growth that essentially feeds on agriculture will not be able to show reasonable performance. For how can Pakistan economy prosper from export-led growth, when agricultural and industrial sectors are unable to produce adequate exportable surpluses. So, a sustained expansion in the production base is of vital importance.
In the last five years, exports have hovered helplessly around the abysmal $ 8 billion benchmark (even when there was no East Asian crisis). The trade deficit in the year to June 2000 increased by 4.4 per cent to $ 1725 million. Imports rose by 8 per cent to $ 10,184 million and exports by 8.7 per cent to $ 8,459 million. Given the current stifling economic environment and the constipated export belly, achieving a 17 per cent export growth for the whole year would be a near miracle. In fact, considering the poor export performance up to November 2000, achieving the $10-billion target would require export growth of 20 per cent in the remaining period of the current fiscal year. A hard job indeed.
External factors are not encouraging either. Commodity prices keep falling internationally, except that of crude oil. In fact, the spiralling oil prices (which have again gone up to around $ 26 a barrel, after a brief 20-23 dollar period) would be an additional damper on export effort. With the recent oil-price hike of 7 to 22 per cent, both agricultural and industrial production will face another bout of cost-push inflation. In the last one year, the increase in oil price has come to a cumulative figure of 60 per cent.
As a result of these domestic and external factors, our exports are becoming costlier and are fast loosing the competitive edge in the world market.
To put it mildly, Pakistan's economic climate stays uncertain and at the mercy of IMF. The five-year-long recessionary trends continue to worry. Month after month the economy keeps oscillating between IMF and disaster. In the last fiscal year, the loudly trumpeted Trade Policy (1999-2000) target of bringing trade deficit to zero has failed to catch up with the noble motives. The current year will be no different.
Attaining the target of $ 10 billion of exports in the current year would largely depend on the efforts of the private sector. It is doubtful if a slumbering sector that is not prone to making dynamic efforts, but thriving on incentive-prone crutches and on the generosity of successive governments, will now wake up. In this sector the yarn kings are a highly self-complacent lot.
Living off, for the last five decades, on cheap cotton produced by hard-working farmers, they made easy billions by selling just yarn. Worse still, they sold off cotton yarn of low count (10 or 20) at raw cotton prices in the international market. The billions that they made by selling largely low-value added cotton yarn were gobbled up in fattening their personal fortunes instead of investing or re-investing toward capital formation.
The result has been that the textile sector has not been able to go in to higher value-added items like high-quality fabric or garments. Even at present, cotton yarn takes a large share (12 %) and cotton cloth (14 %) of total exports. The current Trade Policy has rightly taken care of this cotton-yarn malady and has withdrawn export-financing to yarn manufacturers.
It is indeed imperative that the government and the private sector really woke up to face the hard facts and strenuously work for jacking up the economy. That would necessitate a three-pronged attack on (a) diversifying our narrow export base and markets, concentrating on higher value-added products, and (c) producing high-quality goods both for the domestic and export sectors.
Our exports are highly dependent on imported raw materials and various types of industrial components. With lower rates of customs duties and other import-based incentives granted to the export-oriented industries, import volume is sure to go far beyond the present $ 10-billion mark. This will inflate the overall import bill and the trade deficit would continue to hover around the present $ 1.7 billion mark or could go even higher.
In this background the State Bank of Pakistan needs to take measure to prop up the Rupee that has already fallen to over Rs 61 to a dollar in the kerb market.
On the foreign trade front Pakistan should follow a many-faceted strategy comprising both the export front and the import regime. And there is hardly anything new that we are to adopt. Just the old traditional approach with a little bit of common sense. A greater emphasis needs to be placed on implementing the multitude of ideas and recommendations.
The unusually narrow export base, comprising a mere five major product groups, must be broadened to include a variety of different products with high-value added contents. Because higher the value added, higher will be the prices that such exports will command in the international market. The discovery of the new field of exporting defence-related products is a good beginning.
The five groups and their share in the total exports, as an average in the last nine years to June 2000, showed an unbalanced picture, with the lead taken by the Cotton Group (60%). Other export groups ranked far too low in the scale. Way below were the Leather Group (8.1%), Synthetic Textiles (6.6%), Rice Group (5.6%), Fish Group (1.9 %), Carpet and raw wool (2.8 %), sports goods (2.9%), and miscellaneous exports (12 %).
That much for Pakistan's narrow export base. In order to broaden the export base and productive capacity in various spheres has to be expanded. This would require huge investment, both domestic and foreign, which is extremely shy because of political and economic reasons.
Pakistan's export destinations are characterised by a narrow band. USA is our biggest buyer taking 22 % of total exports. Other single major export destinations are Hong Kong, UK, Germany, Japan and Dubai, their share ranging between 5 % to 7.6%. As for regional export pattern, Asian region accounts for nearly one-third of total exports. Europe accounts for nearly 40 %. This is our normal, traditional trading pattern. It appears that the G-7 Group of influential countries take a lion's share of our total trade. That is a risky business and would call for larger, spatial diversification of export trade.
Poor quality of our export products has invariably inhibited export growth both in the existing and new markets. In this context the setting up of market development fund, the skill development council, and Commercial Courts should be made more effective in improving the standards of excellence in the export field.
The Pakistan economy is characterised by a deep-seated recessionary environment and slow-moving external sector. To overcome this disturbing situation, a host of policy prescriptions can be made. One would not hazard any degree of novelty in these recommendations. Such ideas have been mooted again and again, ad nauseum. Because, when it comes to making 'suitable suggestions,' there is no dearth of pundits who would come thronging with prognoses of all hues and shades.
We are a people eternally brimming with thought-provoking, revolutionary ideas. However, what is really lacking is a sense of commitment to achieving the targeted goals. There is all the stored-up wisdom available to our economic managers, all the nice-looking strategies, all the planning models and a lot more. However, it is at the stage of implementation where we seldom succeed.
It is a common scenario that at the end of the year when targets become tarnished, only the well-drafted policy document remains intact. The blame for failing to translate well-worded policy into solid goal-achievements is promptly shifted to weather conditions at home and events of varying degrees abroad. In the Pakistani official circles there is no paucity of excuses. As a nation we are so adept at inventing excuses. Wait and see. There will be custom-made excuses when we would be approaching the end of the fiscal year in June 2001. Till then, keep your fingers crossed.