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 shortfalls.
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 production.
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 transportation.
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 these facilities.
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 Products
Chemical & Pharmaceuticals