The impact of the expansion in EU
By AMANULLAH BASHAR
June 07 - 13, 2004
One of the most significant factors, which helped the export sector to achieve the target of $12.5 billion set for 2003-04, was of course the low rate of export refinance which is said to be the lowest in the region.
During the current financial year, the export refinance rate of the State Bank of Pakistan were from 1.5 to 2 percent while the commercial banks were charging at 3 percent which played an effective role to facilitate the exports sector in Pakistan during the financial year 2003-04.
However now the State Bank of Pakistan has decided increase from 2 percent to 3 percent which means that the commercial banks would be extending that facility at 3.5 per cent by adding their margin. This increase would certainly bring a negative effect on the momentum of the exports which were generally picking up in the last quarter of the current financial year. What is the wisdom behind the increase is better known by the financial wizards running the affairs, the fact remains it may have effects on our exports during next financial year.
The export refinance had come to the lowest in the region when the SBP had fixed at 1.5 percent for the commercial banks who facilitate the exporters by adding their financial charges. There was a cap on the financial charges of the banks which were allowed to charge within a limit of 1.5 percent on their lending to the exporters. That means that the maximum export refinance rates were 3 percent in Pakistan which was appreciably low throughout in the region. The major export house did not appreciate the step of raising the level of export refinancing.
The sensitive stock market also took a notice of the increase reflected in a sharp decline in the volume of trade as soon as the news was on the air.
Though, the overall performance of the export sector was satisfactory as it has comfortably achieved the target set for the year, however, the role of textiles was conspicuous in the whole scenario.
It is really a matter of concern that despite all out efforts, there is no other sector which could be called the second major export earner in our set up. It is the textile and textile related products which earned about 70 percent of the total exports while remaining 30 percent of the exports were contributed by other 19 sectors in tits and bits. This is a situation which calls for serious efforts to develop other areas as well so that the economy could survive in case of any eventuality. In fact, we have put all the eggs in one basket by depending on textiles for exports earnings.
EXPORT OF TOP 20 PRODUCTS FROM PAKISTAN
Value in 000 $
Ready Made Garments
Madeups Of Textiles
Chemical & Its Products
Petroleum & Pet. Prds
Leather Garments (Excl. Gloves)
Leather Manf. Ns
(Excl. Leather Garment/ Gloves)
Carpets & Rugs
Fish & Fish Preparations
European Union (EU) which was a strong economic zone formed by 15 member countries of the European economies has been further strengthened with the expansion of the member of countries from 15 to 25 states from May 2004.
The EEC was formed as a result of the Treaty of Rome (1957) and was subsequently enlarged by inclusion of Denmark, Ireland, the United Kingdom, Portugal, Spain, Finland and Sweden.
The EU is considered as the strongest economic zone in the world with a huge 381 million plus population. This economically strong zone was further strengthened with addition of another 74 million of the 10 East European countries who were given the membership last month. The EU now forms 7.3 per cent of the world's population which is considered as the most affluent and productive economic power.
Today, EU has a distinction to compete with the USA in the economic sector, with a GDP of approximately $15 trillion, accounting for 28 per cent of the global GDP.
The immediate impact of the expansion of the ten new member countries in to EU club will be on the per capita GDP which is estimated to decrease by Euro 300 to Euro 21,100 as a result of allowing 10 Eastern underdeveloped or the developing economies in the EU fold. Its share in global trade in goods will also decrease from 19.4 to 17.7 per cent. This decline will be on account of increased inter-EU trade rather than any slowdown in the economy.
IMPACT ON PAKISTAN'S EXPORT
EU is a major trading partner of Pakistan. Our export to the EU estimated at $3 billion in 2002/2003. This volume of exports amount almost one-fourth of Pakistan's total export which places that EU as the largest export destination for Pakistan.
So far, the major items exported to EU include textile, clothing and made-ups accounted for $1.5 billion, $570 million were accounted for by yarn and fabric; of the remaining non-textile products, Hand knotted carpets, leather and leather garments, seafood, rice etc were other major exports. Pakistan's export to the 10 new members was to the tune of $52 million during the same period comprising mainly of fabrics. However, with the increase access to the new market, the volume of trade is likely to take quantum jump in the coming years. Though the purchase power of the newly included member countries was low as compared to the Western European countries, yet unlike the West, they are not so choosey buyers and would be willing buyers of different types of food products especially sea food, fresh fruits, vegetables and other food stuff from Pakistan.
Recently, a European Commission delegation visited Islamabad to facilitate food and agriculture trade with Pakistan. The EU is the world's largest customer for farm products from developing countries, importing as much as the US, Japan, Canada, Australia and New Zealand taken together,
The EU alone absorbs around 85 percent of Africa's agriculture exports. And the average tariff for imports of farm goods to Europe is 10.5 percent, whereas the average tariff in Brazil is 30 percent, and among developing countries 60 percent.
The Euro has grown stronger compared to the Dollar, thus the EU will remain a better market for our exporters on this account alone. The EU has provided zero per cent custom duty access to almost all Pakistani products except a few sensitive ones like seafood and rice and those which have graduated out of the GSP scheme like yarn and fabric and leather.
Major benefit is in the clothing and bed-linen and towel product group where there has been increase in exports to the EU since 2001. This zero per cent facility has been allowed under the EU's GSP scheme as Pakistan along-with 11 other countries are classified by the EU as effective combatants of the menace of drug production and trafficking. The EU thus seemed an ideal market to concentrate for export enhancement.
All this has changed recently or will change for the worse soon for the Pakistani exporters. The first negative signal came from the EU in mid-2002 when it refused to grant an extra quota of 4000 MT under its bilateral obligation to Pakistan by using legal basis rather than implementing the spirit of the agreement.
When it did allow this facility, it reduced equivalent quota for 2003 against all norms and practice though its position was legally and technically tenable. The second sign came in end 2002 when it initiated anti-dumping investigation against Pakistani bed-linen.
The irony is that while it provided zero per cent duty benefit and increased the quota by 15% in 2001, it suddenly claimed surge in imports and injury to its domestic industry.
Again, while the EU's action may be legally and technically tenable, it was against the very spirit of benefits it extended to Pakistan. The enhancement in quota and zero per cent duty benefits was meant for Pakistan's export to increase, its export of bed-linen could however not exceed the quota limits in any case.
The allegation of surge and injury was thus not very logical. In 2003, the EU continued to demonstrate that it is not open to any constructed solution as envisaged in the WTO agreement.
In end 2003, the EU also removed Pakistani 'super' Basmati rice from its abatement scheme and simultaneously announced that Pakistan's clothing and made-ups will cease to benefit from its zero per cent concession under the EU GSP's complex and covert calculations.
Many Pakistani exporters see this as a sign of things to come. As the new members have strong stake in textile and clothing and agriculture, the EU may continue to seek refuge in its complex rules and regulations and devise ways to neutralize the earlier benefits given to Pakistan or it may even actually make the situation worse.
From the regular press clippings about Pakistan-EU bilateral trade issues, it is evident that the government has been very active in protecting the exporter's rights.
Even the President and the Prime Minister have been talking of economic and market access issues wherever they visited. While there were good intentions, positive results have not been achieved and perhaps will not be achieved by these actions.
So what can Pakistan do about it? While to some extent, there may be no option but to adapt to these new developments and threats, two recourses are available. One is to fight out with the EU within the EU legal system and the other recourse is to the WTO.
The EU weakness is going to be its voluntary and conscious violation of WTO commitment when it imposes quota. It will be willing to negotiate mutually acceptable compensation. Pakistan can get increased market access for its textile for 2004 if the negotiations are handled well.
Under both the WTO and the EU regulations, if there is a change in circumstances, a review is to be undertaken on anti-dumping. On 1st May there will be a substantial change in circumstances. Either Pakistan may negotiate termination of anti-dumping duty on its bed-linen under final stages in the EU's heretical system or seek review on 1st May if the EU imposes anti-dumping duty.
More important, it must negotiate better tariff rates for its clothing and made-up sector if zero per cent duty is expected to be removed on any account. This is the time to play hardball with the EU.
If the EU does not agree, Pakistan may go to the 'dispute settlement body' of the WTO and have the EU's unilateral action of expanding the quota regime to the 10 new members challenged as illegal and seek compensation which may, however, not come before 2005.
With the new entry of the 10 members, there is a danger of increased use of NTBs and anti-dumping allegations. Pakistan must address this issue with its like-minded partners in the WTO and any concession on the so-called 'Singapore issues' in the future must include agreement on this aspect besides the agriculture sector.
While the above measures relate to trade defence mechanisms, Pakistan can also try out some positive confidence and market access building measures by engaging the EU in mutually beneficial trade deals.
While at present, Pakistan is a relatively small market for EU with only $2 billion import, Pakistan can become a major market in the future with more imports of textile and leather machinery, chemicals, dyes, synthetic staple fibers, pharmaceutical electrical and non-electrical machinery and transport equipment and cars when Pakistan reduces import duty.
The EU companies have a stake in Pakistan as they have large investment in Pakistan and their investment may increase in the future. In return, Pakistan should seek easy access in textile, clothing and made-ups, agriculture products.
Pakistani exporters can contact European textile tycoons for relocation or joint venture or brand name manufacturing. At the macro level, Pakistan may enter into a free trade agreement with the EU. At the micro level, our textile tycoons may import from the EU only on the assurance that their export will not be resisted.
Some of the above actions may alter the otherwise negative implication of the EU's enlargement for Pakistani textile exporters. The timing is crucial. While they were expecting a better deal in the post-quota era beginning 2005, they will be faced with tariff and NTBs.
This will place them at a disadvantage compared with LDCs and those countries and regions with which the EU has FTAs. They cannot suddenly divert their exports to the other major importer, viz, the USA as there also they will face major resistance and competition.
This is all the more reason the government should make export friendly policies. While the Ministry of Commerce and the State Bank of Pakistan have virtually de-regularized the regulations, the CBR-initiated rules are still major constraints.
The problem stems from commitments made by Pakistan to IFI's in terms of withdrawing SRO 410 and replacing it with DTRE, non-friendly sales tax regime and its refund scheme, irrational tariff for raw material in the name of protection of local industry etc. The CBR and the customs are not responsible for enhancement in exports; its sole duty is to collect revenue and implement the trade policy.
All such rules and implementation of regulations like SRO 410, DTRE, and ST refund for exports should be made by the Ministry of Commerce and/or the EPB who are responsible for facilitation and enhancement of exports.
HIGHER GROWTH IN 2004 AND 2005
Boosted by continued buoyancy in domestic and external sectors, Pakistan's economy is expected to grow 5.5% in FY 2004 and 5.8% in FY 2005, says the Asian Development Bank (ADB).
The Asian Development Outlook 2004 (ADO), forecasts economic trends in the region, says that the foundation has been laid for significantly higher growth in Pakistan, and the economy could possibly move to a path of over 6% in subsequent years.
The economy in Pakistan started recovering in the second half of FY 2002 (1 July 2001 to 30 June 2002), gained momentum in FY 2003, when the economy grew at 5.1%, a pace not seen in the preceding 6 years. The current account surplus increased sharply, foreign exchange reserves touched new highs, the overall fiscal deficit declined further, and inflation remained low. Export growth was also the highest in over a decade.
Pakistan's economy is supported by the global economic recovery, and improved relations with India will further enhance the investment climate and give a boost to economic activity. In addition, the positive economic outlook is backed by a significantly strengthened economic base.
Agriculture will get a lift from investments made in irrigation infrastructure in the past few years to combat drought. Adoption of water-saving techniques by farmers during the drought years will also benefit agricultural production.
Pakistan's largest industry, textile production, has seen a sharp increase in investment, as indicated by the more than doubling of imports of textile machinery in the past three years. This has substantially improved the prospects of the industry. The large scale manufacturing sector, especially the textile industry, is expected to grow by 8% to 9% in the next two years.
Exports shot up by 19.6% to $11 billion and imports by 20.1% to $11.3 billion in fiscal year 2003. Better access to European Union markets, improved competitiveness of the domestic textile industry, and greater availability of export finance at lower interest rates encouraged exports, while the surge in imports reflected the upturn in the domestic economy, the ADO reports.
A sharp rise in worker remittances, as well as a decline in interest payments on foreign debt, pushed up the current account surplus by 49.5% to $4.1 billion. The capital account also showed a significant improvement because of substantial increases in foreign direct investment, suppliers' credit, and disbursement of foreign assistance. Consequently, foreign exchange reserves at SBP more than doubled to $9.5 billion on 30 June 2003, compared with $4.3 billion held 12 months previously.
The country's external debt and liabilities also declined, by $1 billion to $35.5 billion in fiscal year 2003. Since 2001, the government has implemented a comprehensive debt reduction strategy of paying off expensive outstanding liabilities. It has achieved much in implementing this strategy. The ratio of total public debt to GDP fell from 106.9% in fiscal year 2000 to 94.7% in fiscal year 2003.
"This has created fiscal space for the government to increase expenditures on poverty reduction and the development program," the ADO states.
The government's active debt management policy and tax reforms are expected to lead, respectively, to further reduction in debt servicing and to increase in revenues, the report says. The resulting fiscal leeway will allow it to spend more on operation and maintenance in the public sector. This will in turn improve physical infrastructure, which along with continuing low interest rates, is likely to further encourage investment.
With robust growth in the real sectors of the economy in the first half of FY2004 and presence of a number of factors conducive for growth, the GDP growth forecast has been raised to 5.5 percent. The agriculture is expected to grow at 4.2 percent, as prospects of winter crops have improved due to greater availability of water, increase in support price of wheat, a sharp increase in disbursement of agriculture credit, and larger off-take of fertilizers. The manufacturing sector is expected to post a higher growth (9-10 percent) because of continuing double-digit growth in textile exports and higher domestic demand for consumer durables fuelled by increase in consumer credit and higher cash incomes of farmers resulting from higher cotton prices. The service sector looks set to record strong performance with robust growth in the financial sector, telecommunication, particularly cellular phone service, and electronic media.
Tax receipts, which exceeded the target in the first eight months, are expected to be above the target for the whole year. Public expenditure is expected to remain under control.
Hence the fiscal deficit target of 4.0 percent of GDP should be achieved in FY2004. With tight fiscal policy, continued excess capacity in the manufacturing sector, and appreciation of the rupee, the annual inflation rate, while higher than last year, is not likely to exceed 4.2 percent.
Double-digit growth in exports, as well as high level of remittances in the first half of FY2004, point to a comfortable balance of payments position for the whole year.
With global recovery gaining momentum and domestic economic upturn continuing, both exports and imports are expected to maintain double-digit growth during the year. The current account for the year will remain in surplus, however, the magnitude of the surplus will be lower than last year.