NEW TRADE POLICY
A strategy to meet challenges of WTO rules
By AMANULLAH BASHAR
Aug 04 - 10, 2003
Obviously, the current trade policy for the year 2003-04 has been evolved on the basis of the performance of the economy during 2002-03 and of course keeping in view all the merits and the de-merits of our trade regime. Being an emerging economy on the world trade map, Pakistan however has come on the track for tremendous growth in its trade volume in the years to come. Although the trade policy 2003-04 sets an export target of $12.1 billion whereas it fixes an import target at $12.8 billon there are some optimistic feelings that instead of culminating into a trade deficit of $700 million, the current financial year may produce a surprising trade surplus when it matures in June this year.
The trade deficit in the previous financial year was estimated at $1.6 billion mainly on account of higher imports of oil estimated at $3.1 billion, which include import of POL products $1.7 billion and crude oil $1.4 billion, chemicals $2.2 billion, plastic material 423 million, iron and steel $400 million, fertilizer $240 million, edible oil $580 million, textile machinery $525 million, power generating machinery $263 million etc. The higher imports of certain items like oil and textile, chemicals etc are likely to be restricted effectively during the current year due to shift in government policy from oil based system to natural gas and production of certain chemicals within the country. If these assumptions for restriction imports within limits and retaining the export performance especially by the textile sector, it is hoped that the current financial year may end at a happy note of trade surplus, said some industrialists.
The targets projected in the policy are based on assumptions that the exchange rate will remain stable during the fiscal year. The appreciating rupee against US dollar has disproved the assumptions that a subdued rupee is important for enhancing the exports. In fact it is the quality of the products capable to respond to the market needs, which matters for export promotion and not the low exchange rate.
The trade regime especially the export sector performed strongly last year where GDP ratio increased by 2 per cent to 17 per cent. The robust growth in the textile exports resulted in fetching $7.17 billion or 67 per cent of our total exports. It was the textile sector which posted the largest increase of 24 per cent over previous year. Within the textile sector, three categories i.e. bed wear, woven garments and knitwear crossed $1 billion each for the first time. Rice export also increased by 22 per cent including 39 per cent increase in basmati exports. The increase of 63 per cent in the export of POL products from Pakistan was another noticeable development.
It is also hoped that there would be greater access to export finance and the domestic and external environment will not face any new challenges. In conformity to this policy, the State Bank of Pakistan has further reduced the financial charges on the export financing. Now exporters will get export finance from banks at three per cent as the SBP has cut refinance rate by half percentage point to 1.5 per cent.
The State Bank of Pakistan (SBP) was also lending a strong hand to provide a meaningful support to the export sector. In this connection, the SBP has announced that it would give banks export refinance at 1.5 per cent in August, adding that the banks would be free to add a 1.5 per cent spread over it while pricing export finances. Thus the eligible exporters would get export loans from banks at three per cent in August. Till July they got export loans at 3.5 per cent as the SBP refinance rate stood at two per cent.
According to SBP announcement, the financing facility under part B of the export finance scheme for financing locally manufactured machinery shall also attract similar mark-up structure meaning that three per cent interest would be charged on it during August.
Export finance rate has fallen from eight per cent in 2002 to three per cent during 2003 primarily because of the SBP expansionary monetary policy which brought down the interest rates considerably.
The trade policy 2003-04 been evolved in the back drop of the global perspective and the economic conditions within the country. Last year has been a frustrating year for global economic recovery. After the significant downturn in late 2001, precipitated by the 9/11 events and subsequent developments, the world economy was showing signs of recovery during the first half of 2002. The optimism for global economic recovery largely dissipated during the second half of the year, owing to a series of adverse developments, unfolded on the international economic scene. These developments included several major corporate scandals and bankruptcies in the United States, resulting in bursting of the equity market bubble, rising uncertainties in the run-up to war in Iraq causing oil prices to the rise sharply, and a recent outbreak of SARS virus, badly affecting business environment in Asia. As a result, the world economic outlook remained subdued, and global trade remained sluggish during fiscal year 2002-03. Economic growth remained somewhat weaker in the major growth poles of the world economy. Weaker outlook in the advanced countries and higher oil prices have adversely affected the pace of economic recovery in the developing countries.
The global situation is now showing signs of improvement. Uncertainties surrounding the conflict in Iraq are broadly resolved. There are expectations that global economic recovery would gradually reassert itself, during the second half of the 2003. Major growth poles of world economy are likely to perform better than last year, and the growth outlook for developing countries appears encouraging.
Pakistan is likely to benefit from a modest recovery in the global economy, during the current fiscal year.
The new trade policy is based on the optimism derived from our high export performance last year, in spite of the adverse external factors. With the hard work and dedication of exporting community and the consistent policies of the government, Pakistan not only crossed the export target of $10.4 billion that had eluded in the preceding years, but even surpassed the target reaching a level of $11.3 billion for the first time in our history. In the rapidly changing world trade scenario, Pakistan cannot be complacent with our achievements. For sustaining the export growth rate, we have to work still harder, using all our resources and exploiting our full potential, to avail new opportunities and meet new challenges. The trade policy initiatives have been taken considering both the national compulsions and challenges of international trade environment.
Pakistan being the signatory to new multinational trading system, envisaged in the WTO regime that was started in 1995, and still mature fully from 2005. In particular, after the end of the transitional period of ten years, all quantitative restrictions on export and import of textiles and clothing will be eliminated from January 1, 2005. This would have a profound impact on our predominant textile sector, which contributes 67 per cent of our textile exports.
The high increase of 23 per cent in textile exports last year, in all textile categories, gives us a degree of confidence in facing the upcoming world competition in this sector.
Pakistan's domestic textile industries have adequate protection against imports, which we have already liberalized gradually in the past ten years. This liberalization of textile imports has helped in improving our production efficiencies. To neutralize the unfair competition from dumped and subsidized imports, necessary legislations have already been put in place, in the form of Anti-dumping, Countervailing and Safeguard Ordinances. Pakistan's trade and industry now have to be ready for compliance with the WTO agreement on Trade Related Intellectual Property Rights (TRIPS) in this field, Pakistan has made substantial progress. The establishment of Pakistan Intellectual Property Rights Organization is already approved and necessary legislation will come soon so that it could start functioning immediately. Legislation is already in place for protection of Trade Marks, Patents and Industrial Designs. The manufacturers will be henceforth needed to be very careful about infringement of Intellectual Property Rights to avoid possible trade sanctions against Pakistan.
For smooth operations in production and exports, Pakistan has to ensure compliance with environment and social standards, and adoption of security measures required by the choosey customers. There are other health-related restrictions on export of agricultural products under the WTO agreement on sanitary measures which are already creating problems in sea food, fruits, vegetables, rice and wheat. There is a need to be trade-effective and credible measures, and adopt better standards and quarantine regulations, which they can apply under the WTO agreement.
World trade is now dominated by regional trading blocs like the EU, NAFTA, ASEAN, which give preferential treatment to their members. Unfortunately, although such discriminatory treatment cuts across the recognized MFN principles, these are allowed by the WTO rules. Until a truly free multilateral trading system comes about, we are also compelled to seek trade alliances, wherever we can, by dint of our historical close relationships with a number of countries.
Like other WTO members, our services sector is also being liberalized and opened up to foreign competition. This will require Pakistani service providers to improve their efficiency and provide quality service to the customers.
The trade policy 2003-04 outlines the exports strategy of which the main elements are; reducing cost of doing business, increasing market access, technology and skills up-gradation, Social, Environmental and security compliance, encouraging export-oriented foreign investment, region-specific strategy, country and business image building, capacity-building of exporters, incentives to the exporters and value addition.
Pakistan being a developing country is pursuing policies directed towards rapid economic uplift of the country.
Accordingly, emphasis of imports trade regime has been on stimulation and acceleration of industrial development with special emphasis on export oriented, and high tech industrialization as well as modernization of agriculture sector for creating employment opportunities with the ultimate objective of achieving higher standard of living for the people of Pakistan. The import trade regime therefore aims at un-interrupted supply of adequate raw materials to the industries; facilitating liberal import of machinery for industrial development; availability of essential commodities for the general consumers; providing a measure of competition to the informal channel; facilitating inflow of latest technology into Pakistan; and increasing efficiency of the domestic industry by gradually exposing it to the international competition.
With the above objectives in view and in line with the export strategy being pursued and also to meet the post 2004 WTO era, and conclusion drawn from the trade performance during 2002-03, the following decisions have been taken in consultation with the trade and industry.
An Up-gradation Fund will be managed under public-private partnership. This Fund will finance the initiatives for technological up-gradation, social, environmental and security compliance, setting up combined effluent and waste water treatment plants, hiring consultants, professional marketing companies abroad, up-gradating industrial clusters, warehousing pakistani products abroad, agriculture export processing zones, special export zones, garments cities and brand acquisition, mechanism for operations of the Fund will be developed by Ministry of Commerce. The estimated financial requirement for the Up-gradation Fund from the government is Rs3.74 billion. For technical management and export marketing, consultancy services will be provided at the enterprise level on 50-50 cost sharing basis from the Up-gradation Fund. In the case of declining sectors, like leather and carpets, contribution from Fund may go up to 75 per cent.
Export Promotion Bureau will engage consultants to identify advice and assist export enterprises for entering into joint ventures with compatible joint venture partners in foreign countries on 50-50 cost sharing of consultancy services out of the Up-gradation Fund.
For a number of export products, in which Pakistan has or can create a competitive edge, the scheme of industrial clusters has been eminently successful in cities where the production of these goods is traditionally concentrated. In collaboration with UNIDO, such clusters are already in operation, or being developed, in Gujarat for electric Fans, in Wazirabad for cutlery, in Lahore for woven garments, in Karachi for leather and leather garments, gems and jewellery.
Five more clusters will be organized for sports goods in Sialkot, for auto parts in Karachi, for electrical appliances in Karachi and Lahore and for Knitwear also in Karachi and Lahore. Infrastructure facilities will be provided for these cluster cities and cluster products. These will include training facilities, testing facilities, including laboratories, common bonded warehouses for raw materials, accessories and components and combined marketing support where feasible.
A Cluster Development Directorate will be established in EPB, headed by DG (Supply) in Head Office and two Directors (South and North) with sectoral clusters development agent for purposes of coordination with local and international stake holders. These agents from EPB will work in offices located centrally in each cluster area with representatives of SMEDA, SSIC, internationally a credited testing agencies, SME Bank and, where available donor agency sponsored technical resource persons, to provide one window service to enterprises for all infrastructure facilities, including Banking, Communication, Water, Power and Gas.
In order to face the challenges of WTO rules based on trade regime, particularly the elimination of quantitative restrictions on international trade in textile and clothing following the abolition of textile quotas from January 1, 2005, there is an urgent need to enter into joint ventures with reputed foreign companies, especially in the garment sector. Three garment cities in Karachi, Lahore and Faisalabad will be established. These garment cities will be owned and operated by corporate entities in which government, multilateral institutions and the stakeholders would be equity partners.
The Commercial Banks will be engaged to arrange financing under the SBP prudential regulations at 6 months treasury bills rate plus two per cent. These cities will be provided infrastructure including sheds and will provide one window facility for the SMEs. The SMEs would only be for value-added finished textile products. These cities will serve as the trend setters.
Commercial representatives abroad are vital to effective export development and trade diplomacy. Regional Trade Commissioners will be appointed for the six regions, namely, The Americas, European Union, Africa, Far East, Middle East and Central Asia. They will be guiding the country representatives in the promotion of exports.
To promote export products, EPB will arrange to hire through professional companies retail space in high-traffic shopping malls in major commercial capitals of the world. Such space will be made available to exporters, selected on a pre-determined criteria agreed between the EPB and stakeholders of different products on a 50-50 charge basis. Management of such space and retail sales will be outsourced to reputed well established Retail Chain Store companies.
Brand name is an important component in export marketing and carries the respective image of product, quality and business-related services. Branded products usually attract higher price advantage. Established brand names in foreign markets are often available for purchase or franchising. A new scheme will be launched to enable exporters to acquire or franchise brand names. Support will be provided to exporting companies for obtaining bank loans at 6 months Treasury Bills auction rate plus 2 per cent under the prudential regulations of SBP.
The trade policy 2003-04 allows 25 per cent freight subsidy on products whose total exports in any of the preceding three years i.e. 1999-00 to 2001-02 were not more than $5 million, and for all products exported to countries where our average annual exports in the proceeding three years were not more than $10 million. The scheme what the Minister for Commerce described has been instrumental in product diversification and geographic expansion of exports. It is worth mentioning here that that there is a number of export items which have a great potential to increase volume of trade but they are restricted mainly because of high rate of freight charges. For example, Pakistan produces plenty of mangoes of different varieties; however, the export of mangoes is one per cent of the total produce because of freight charges. According to a market assessment, the cost of mango at customs stage comes to around Rs15 per kg but the freight charges on one kg are estimated at Rs75 which impairs the export potential of this commodity. Same is the case of kinno which has also great demand abroad but restricted exports due to high rate of freight charges. Such exportable items need consideration if really want to diversify our export regime.
An annual Mega Event will be held in Karachi Expo Centre, and Lahore Expo Centre (which is under development). In this exposition all products of Pakistan with an export potential will be put on display and export-related seminar would be held. This event will be widely publicized. Selected foreign buyers, buying houses and trade specialist media will be invited to the Expo as guests.
Priority needs to be accorded to educating the manufacturers and exporters about WTO Trade Rules particularly about full liberalization of international trade in textiles and clothing. It has been decided that a WTO Directorate will be established at EPB with a mandate to create awareness among the stakeholders and get feed back from them on WTO related issues.
Under this awareness program, the Directorate will enhance capability in the National Tariff Commission in the spheres of Anti-dumping and Countervailing Duties and Safeguard Measures as well as assisting stakeholders in filing their applications with NTC for creating awareness about Intellectual Property Rights (IPRs).
The environment for enforcement of IPRs in Pakistan is a source of concern to a number of trading partners and is a serious disincentive for potential foreign investors. It is important that the issue of IPRs is addressed urgently. Establishment of Intellectual Property Rights Organization (PIPRO) is already approved. There is a need to proceed with the required legislation so that PIPRO could start functioning immediately.