EXPORTS: ECONOMY OF SCALE IS THE KEY
The improvement in the exports appears quite broad-based with the addition of new markets
By AMANULLAH BASHAR
Jan 06 - 12, 2003
There are strong signals that the current financial year is going to be a milestone in the export history of Pakistan. For the first time, the export sector will be hitting the target by crossing the $10 billion mark.
The inference has been made out of the best ever performance displayed by the export sector during the first half of the current financial year. Month-wise exports break-up of the first 6 months shows that in July 2002 the exports earning were estimated $816 million, August $897 million, September $868 million, October $891 million, November $850 million and the exports figures for the month of December which are being compiled are going to perform even better and likely to fetch $900 million plus. Creditably, this outstanding performance has been achieved despite the continuing strength of the Rupee, which appreciated by 8.3 per cent during October 2001 to September 2002. Historically speaking, exports always remain heavily loaded in the second half as compared to the first part of the year. However, the bulk of the current financial growth in exports has been contributed by the textile sector, which improved upon the previous year's export growth. In the aggregate, export growth of 14.3 per cent, 0.7 percentage points were contributed by rising textile exports, which saw an increase in almost all major categories.
The improvement in the exports appears quite broad-based with the addition of new markets which is yet another positive sign for the export profile of the country. Diversification in exports has helped growing of exports in 24 countries. The Export Promotion Bureau (EPB) working on a single point agenda to promote exports and has taken steps to diversify exports to non-traditional markets. Initially, the EPB selected 24 countries having high prospects for exporting goods from Pakistan. In order to encourage exports to these new markets, the EPB allowed subsidy on participation in trade fairs in these countries and also arranged visits of larger number of trade delegations. It also provided assistance to exporters to overcome non-tariff barriers in these markets. The government on its part has already allowed freight subsidy for encouraging exports of non-traditional items. The objective of these efforts was to promote geographical diversification in exports. Resultantly, the efforts produced positive results and created demand for country's products in non-traditional markets.
The textile manufacturers posted a remarkable performance by recording a 16.5 per cent growth during the first quarter of the current financial year. The increase is due to both, rise in unit values, as well as higher quantum of exports. Also, the growth in the high value added textile exports surpassed that for low value added textiles. During the current financial year, increase in unit value of most textile categories, of continued, will underpin the export gains through the remaining part of the financial year 2003.
A few policy changes also helped in maintaining this growth in the textile sector, following considerable complains by exporters, the government increased the duty drawback rates on all kinds of fabrics, garments, apparels and made ups. Moreover, payments of duty drawbacks were also accelerated. These measures reinforced the positive impact of higher unit value increases.
ECONOMY OF SCALE
Despite impressive growth in exports, especially in the back drop of the stagnant growth over the years, it does not translate the actual economic potentials of the country. Looking at the export performance of other Asian economies, one finds that we stand no where. Even one Korean, Japanese or a firm from a country like Thailand exports far more than our total exports. Pakistan is not getting its due share out of the global market because our manufacturing sector is far away from the concept of the economy of scale. Our large scale manufacturing has not risen to the occasion and suffering from small scale production thus suffering from high cost of production rendering it uncompetitive in the world market. Though the investment in textile industry has seen a significant rise during last three years, yet even large textile houses are not capable to meet the ever changing trend in demands of the developed economies
Despite satisfactory growth in export of textile goods, it is not reflected in the performance of the large scale sector which recorded a growth of 3.2 per cent slightly higher than the same period last year. One obvious explanation is that the export growth may lead primarily by small-scale manufacturing or by the undocumented economy. Growth in the undocumented economy also speaks of the lower demand for credit from the banking sector. In the face of the improved economic environment, the weak growth recorded by large scale manufacturing and the lower net credit from banks indicates growth of the undocumented sector in the economy. Another view is that the large scale manufacturing growth depicted by the official's statistics understates the true picture about the improvement in that large scale manufacturing sector of the country.
The performance of large-scale manufacturing sector has appeared with a slowdown of overall growth to 2.2 percent during first quarter of the current financial year. The sub-sectors which play a supportive role for the large scale manufacturing sector also show negative growth. These sub-sectors include food beverages & tobacco, fertilizers, pharmaceuticals and non-metallic minerals.
However, on the positive side, the higher production of automobiles, and the increasing activity in the construction and engineering industries provide some support to large scale manufacturing.
However, in the first quarter of the current financial year, the textile industry continued importing machinery for Balancing, Modernization and Replacement (BMR) under textile vision 2005. This perception is further strengthened by the strong growth in textile exports during the first quarter of the current financial year. This sector growth is led by a sharp jump in the quantum of major textile exports, which should have been reflected in higher production as well.
Infrastructure cost which is the highest in the region is yet another gray area hampering growth of the manufacturing sector in Pakistan. Exorbitant utility charges are adversely affecting competitiveness of the manufacturing sector in the global market. After the expiry of Multi fiber Agreement in December 2004, exporters and industrialists will have to face a situation where they would find themselves in a position to counter the onslaught of the foreign goods if they failed bring down their cost of production on account expensive power charges.
Export earnings from bed wear sector recorded an impressive increase of 34.8 per cent. Accordingly, the share of this category in total textile exports rose from 14.8 per cent to 17.2 per cent as compared to the corresponding period of the last year.
This category also performed outstandingly both in terms of value and quantity, rising 31.0 and 23 per cent respectively. This increase was mostly contributed by a surge in orders from the US, Asia and European markets. As a result of good policy decisions as well as improvement in supplies, Pakistan managed to obtain a prominent position among the large suppliers like Canada, China and Mexico of cotton fabrics to the United States.
There were the times when export of cotton yarn was the major export item of the textile sector in Pakistan. It is reassuring to note that there is a marked change for value addition in this sector. Besides producing yarn of finer counts, number of spindles is also on the increase helping the industry to meet the local requirement besides the export demand. During current year exports of cotton yarn registered a 0.3 per cent decline in terms of value as compared to the corresponding period last year. Though in volume terms its exports did increase by 10.1 per cent, yet the low international yarn prices nullified the foreign exchange earnings from this category.
Rice a major export item from Pakistan contributes export earnings around $600 million dollar per year. During the current year rice exports registered a marginal growth of 1.9 per cent so far. Despite higher demand for rice in the world market, exporters were unable to meet the requirements due to low level of stocks. This excess demand is reflected in 21 per cent increase in unit values for rice exports. The government also undertook some important decisions in the trade policy for the financial year 2003. These measures include abolishing the Quality Related Market Price system on export of all types of rice and withdrawal of Quality Review Check on export of non-Basmati rice.
Leather and leather products which substantiate to country's overall export performance significantly comes over half a billion dollar per annum are currently passing through a depressed condition on various accounts. It is said that this sector is facing liquidity shortage as their funds were blocked in stocks of leather and leather garment production. In addition, in the first quarter of the current financial year, the duty drawback rates on both finished leather and leather made-ups were slashed, thus, further aggravating problems for exporters. This resulted in a 7. Per cent fall in exports for this group as compared to the corresponding period last year.
Pakistan has earned a respectable name especially among the European countries for export of traditional hand knotted carpets. Currently, this sector is faced with the impact of world economic slowdown and the resultantly exports demand is on the decline. Though carpet sector has gained in term of unit price which increased by 12.3 per cent in the world market however the current part of the financial year witnessed 0.4 per cent decline in exports earnings as compared to the same period last year. Another factor which affecting the production scale of the carpet industry is said to be the return of the Afghan carpet weavers to their homeland. Besides, owing to appreciation of the Rupee and the resulting fall in export earnings, exporters were facing liquidity problems, thus slowing down the production process. In order to promote healthy business activity in this sector, the duty drawback rate was enhanced for carpet exports in September 2002 which is expected to have a positive impact on future exports.
An upward trend of 19 per cent in the country's exports shipped through Karachi Customs has been registered during the first half of the current financial year. Goods worth $3725 million were exported during July-December, 2002 as against 3146 million exported during the corresponding period of the last fiscal year showing an increase of $579 million or 19 per cent.
The cumbersome procedures at the customs stage have been greatly reduced with the use of Information Technology which also helped a lot in settling duty drawback claims.
Consequently, the pace of work at the customs stage has been accelerated at a great speed resulting in easing the liquidity position of the exporters. The Collectorate of Customs (Exports), Karachi as a result of these efforts has disbursed an amount of Rs6547 million as duty drawback to the exporters during the first half of the current financial year. The 121,305 number of claims were disposed off during the said period as against 107,825 claims disposed off during the corresponding period the last fiscal, thereby registering a growth of 13 per cent. The collectorate has announced that it has liquidated substantial number of duty drawback claims by putting extra ordinary efforts and working daily beyond the normal working hours and even on Sundays and gazette holidays. The collectorate's examination staff also worked round the clock during the above period to boost exports of the country shipped through Karachi Customs House. Not a single consignment was delayed or missed the vessel/aircraft due to customs. Besides disbursing the substantial amount of duty drawback to the exporters, the collectorate has also taken various measures to facilitate the exporters and all the officers have been made accessible to the exporters to get their problems resolved immediately. In order to further promote the exporters and ensure its smooth flow, various public notices and standing orders were issued by the collectorate to provide maximum facility to the exporters in all respects. Maximum use of Information technology has been made as a routine in order to expedite work, curb leakages and minimize documentation in exports.
Another encouraging factor in the exports sector was an increase in exports of non-traditional items during the first part of the financial year 2002-03. This diversification in export profile is seen in the machinery and transport equipment, chemicals and pharmaceutical exports which showed an impressive performance. This export of machinery registered a 39.6 per cent increase over the last year during the same period. The exports of chemical and pharmaceuticals displayed impressive performance with 80.2 per cent increase. Wheat exports also recorded an impressive improvement. Its total exports amounted to $47 million as compared to $12 million in the same period last year.
There is no doubt that the share of these commodity groups in the total export earnings is very small, and when seen in terms of their weight, the impact of this rise in total exports is small. However, even this small contribution leading to the diversification of exports is welcome, given the country's vulnerability to any adverse development in the textile sector that currently contributes more than 65 per cent of Pakistan's total export earnings.
In recognition to this concern, the government has announced various incentives for the growth of the non-traditional exports. These measures include reduction in customs duty for the import of necessary raw materials for such exports and a freight subsidy for the exports of new products. SUBSIDY
The government has decided to provide 25 per cent freight subsidy to exporters from January 1, 2003. The decision to allow 25 per cent subsidy in freight charges has been taken in conformity to the trade policy for 2002-03 and to enhance competitiveness of the exporters in the world market. The business community has however expressed its concern that the incentive of providing 25 per cent freight subsidy to the exporters having total export of over $5 million or on making exports to those countries where Pakistan's exports are less than $10 million could not be implemented so far despite announcement in the trade policy.
The State Bank of Pakistan (SBP) has announced reduction in the rates of export refinance under the Export Finance Scheme for exporters by one per cent that is from 7 per cent to 6 per cent with effect from January 1, 2003. It has been decided that the rate of refinance under the export finance scheme applicable for the month of January 2003 will be 4.3 per cent per annum. The commercial banks will however ensure, where financing facilities are extended by them to the exporters for availing refinance facilities under the scheme, that their maximum margin, or spread, does exceed 1.5 per cent per annum.
The financing facilities under Part-B (Export Sales) of the Scheme for financing Locally Manufactured Machinery will also attract similar mark-up rate structure.
The refinance rate under the scheme has now been reduced to 6 per cent from 13 per cent in July, 2001.
The government has also announced lucrative incentives to attract new commercial exporters. Steps are also being taken to expedite payments of sales tax refund for expanding the export base. The Central board of Revenue (CBR) has also amended Sales Tax Refund Rules 2002 to implement the decisions.
The commercial exporters who have exported goods up to December 31, 2002 are entitled to claim sales tax refund under old sales tax refund rules 2000 instead of filing claims through refund procedure of 2002. The exporters showing performance of one year would qualify for allocation of Silver category. The qualifying period of three years of export performance has been slashed to one year. The definition of commercial exporter has also been broadened so that maximum number of Pakistani companies should have the
opportunity to avail the benefits extended to exporters. The definition of commercial exporters will now also include such commercial exporters who deposit the amount of sales tax on their purchases by filing sales tax returns on behalf of sales tax registered suppliers and produce the same for claiming sales tax refunds. This would enlarge the scope of definition of commercial exporters which previously meant only those registered persons who exclusively made zero-rated supplies of same state goods.