Doubling the quantum over the next five years is a realistic target
By SHABBIR H. KAZMI
Jan 03 - 09, 2005
Pakistan achieved two landmarks during last financial years. One of these was that the country's exports exceeded US$ 12 billion in a year for the fist time in its more than five decades long history. A lot has been written and said about this achievement. However, many critics say that maintaining the growth momentum will be difficult. As against this others say Pakistan has the potential to double its exports in next five years. They also say that it is not wishful thinking if all the stakeholders are willing and prove this by their acts.
To double the exports Pakistan has to achieve around 15% growth in exports annually over the next five years. Historically and despite all odds the country has been able to achieve nearly 10% annual growth rate. All those skeptical about achieving the target need to count country's strengths rather than looking at the threats only. It is good to be fully aware of threats but ignoring the strengths diminishes the strength to face the challenge courageously.
THE MACRO PERSPECTIVE
Both agriculture and industry have performed better than anticipated during the initial months of current financial year, laying a strong foundation for the economy to exceed the 6.6 percent real GDP growth target for the year. Provisional estimates place value-addition by Kharif crops slightly above target following a robust cotton production. The growth of approximately 14 percent recorded by large scale manufacturing during Q1-FY05 is also well above the 12.0 percent annual target.
However, while leading indicators suggest that the services sector will turn in a strong full-year performance, the outlook for agriculture and industry during H2-FY05 still remains uncertain. Specifically, hopes of achieving the full-year agri-growth target rest crucially on the wheat harvest, which may be substantially below target due to a worsening water supply. Similarly, the prospects for industry are clouded by concerns over the impact of the increased competition in global textile markets post-December 2004 on Pakistan's exports.
The outlook for agriculture and industry during H2-FY05 still remains uncertain. Specifically, hopes of achieving the full-year agri-growth target rest crucially on the wheat harvest, which may be substantially below target due to a worsening water supply. Similarly, the prospects for industry are clouded by concerns over the impact of the increased competition in global textile markets post-December 2004 on Pakistan's exports.
The latter concern has been boosted particularly by the apparent fall in exports in key textile categories in months leading to December 2004. However, a closer look at leading indicators does not suggest grounds for excessive pessimism on export prospects. The industry has invested heavily in BMR and capacity enhancements, imports of raw material has remained strong, and net credit growth (particularly for working capital) has risen sharply even as the price of a key input — cotton — has dropped because of a bumper cotton crop.
The support for the Rupee by the State Bank of Pakistan (SBP) is simply a continuation of the policy seen during preceding years of providing a degree of stability to the economy. The SBP had earlier purchased forex in the inter-bank market to prevent an abrupt depreciation of the Rupee during FY03 and part of FY04, and similarly, it has sought to prevent a sharp depreciation in the latter half of FY04 and the beginning of FY05. However, this does not mean that the parity will remain unchanged — only that any change would be gradual, and stability in the market will be maintained
It is in this perspective that the SBP had initially allowed the Rupee to weaken in the inter-bank market, until it became clear that decline of the Rupee was increasingly driven by excessive speculation, forcing a self-fulfilling decline of the domestic currency. It is only in this context that a drain on forex reserves is justified, and a central bank has to therefore strike a balance between allowing the local currency to find its footing in the market, and preventing instability. It should be kept in mind that the SBP's ability to intervene heavily in the inter-bank market stemmed directly from the much-criticized large reserve holdings, and it shows that the presence of substantial central bank reserves play an important role in enhancing confidence on the stability of the domestic currency and thus preventing 'runs' on.
However, the sustainability of higher growth path warrants that Pakistan has to take advantage of the opportunities offered by the end of the Agreement on Textiles and Clothing (ATC) regime in January 2005. The domestic industry has certainly invested heavily to this end, but this needs to continue. Moreover, the government is supporting this endeavor by providing a conducive legal and regulatory environment (particularly social and environmental compliance), supportive infrastructure and logistic management, as well as through heavy investments in training and skill up-gradation of the labor force. It has become crucial to enable the substantial productivity increases needed to keep Pakistan's economy competitive and attract the necessary FDI.
The strategic location of Pakistan as the least cost mover, supplier and buyer of internationally traded goods, energy supplies, and IT & financial services, to Central Asia, Western China, the Middle East and South Asia, can be exploited on the back of Gwadar Port and the highway network, oil and gas pipelines, hydel electricity imports and export, SAFTA, transit trade arrangements and liberalization of services trade.
In the shorter-term, there is also an opportunity for Pakistan to reduce the costs of business by reducing red-tape, improving governance, and ensuring policy continuity. One major opportunity lies with the reforms to WAPDA and KESC — studies show that the high cost and low reliability of energy supply is one of Pakistan's key competitive disadvantages. Another important bottleneck is the Karachi port; a substantial improvement in throughput (and attendant cost reductions) could make a crucial difference to the country's competitive standing.
The trade deficit for July-November FY05 rose to US$ 2.5 billion as compared to a mere US$ 0.4 billion during the corresponding period last year. This rise was caused by a steep growth of 49.3 percent in imports, which outstripped the 11.1 percent export growth during this period. In fact, the trade deficit had begun to widen significantly during the latter half of FY04, amidst a general rise in imports as economic activities accelerated, and international oil prices rose; approximately two thirds of the total FY04 imports were recorded in the last four months of the year. This trend appears to be continuing into FY05, with the Jul-Nov imports at 47.2 percent of the US$ 16.7 billion annual import target.
Export performance, on the other hand, also raised a few concerns during this period. Country' textile sector recorded 2.4 percent rise during Jul-Nov FY05 as compared to the 11.8 percent growth during the same period lat year. This deceleration in this sector was caused by a sharp fall in two major categories namely: bed wear and synthetic textiles. This weakness in the performance of bed wear exports might be attributable to the imposition of antidumping duty on this category by the EU and the embargo imposed by the US on bed wear exports in mid-November 2004 to check over-shipments in this category. On the other hand, synthetic textile exports were affected by a significant rise in the price of polyester staple fiber due to rising international oil prices since April 2003.
Of greater immediate concern is the export performance, as the aggregate July-November exports are marginally lower than the target set for this period. A closer look at the provisional trade data reveals an apparent deceleration in textile exports. Also, with effect from January 1, 2005, Pakistan's textile exports will face a more competitive trading environment, as the end of the ATC removes access restrictions (quotas) to key Western markets.
Exports reached US$ 5.4 billion during July-November, recording 11.1 percent rise over the same period last year, which is 0.9 percent lower than the export target set for the period. The analysis of monthly export performance reveals that the sharp fall in the exports of October & November is largely responsible for the shortfall in exports against the target for the period.
This below-target aggregate export performance is attributable to the deceleration in the textile export growth during this period. It is worth noting, however, that since the data set used in the analysis contains final numbers only for the months of July and August, there is a possibility of an upward revision of export values once the final data for the remaining months is available.
One bright spot in the export performance is the rising exports of some developmental export categories especially chemicals & pharmaceuticals and engineering goods as well as other manufactures namely molasses and articles of plastic. The rise in these exports in particular, probably reflects the supportive measures by the government in recent years aimed at providing better incentives to exporters of non-traditional items.
Textile export growth slowed down mainly due to a steep fall in the bed wear and synthetic textile exports. Also the share of textiles in total export earnings fell to 59.9 percent during this period as compared to 65 percent in the comparable period of the last year. The weakness in the performance of bed wear exports might be attributable to two reasons: (1) Imposition of antidumping duty on this category by the EU; and (2) the Embargo imposed by the US on bed wear exports in mid November 2004 due to over-shipments in this category. On the other hand, synthetic textile exports are affected by a steep rise in the price of polyester staple fiber due to rising international oil prices since April 2003. In this connection, the downward revision of duty drawback by CBR on polyester staple fiber has added to the concerns of the textile industry. On the positive side, however, knitwear exports reached record high level of US$ 888.8 million, followed by cotton fabrics exports, which recorded 10.3 percent growth reaching U$ 673.1 million. The improvement in these categories came both from rising prices and quantum. In this connection, the increase in unit prices of these categories despite a steep fall in the international cotton prices hints at higher value addition.
The share of quota exports in total rose from 39.2 percent in Q1 FY04 to 44 percent in Q1-FY05. This rise came from higher growth in quota exports to the US and the EU, with the latter having larger share on account of increased exports of cotton fabric to this region. However, the real test for country's textile exports would come after the implementation of the last phase of the Agreement on Textile and Clothing. The impact of liberalization of textile trade so far is not very significant for Pakistan as the integrated categories account for only a small share in country's total textile exports. This poses a difficult challenge for the textile sector as almost entire phasing out of the remaining quota restriction affecting Pakistan would take place in the final year leaving less time for Pakistan's textile sector to adjust to the new environment. Saying this, Pakistan already enjoys a strong position in bed wear and cotton fabric exports to USA, whereas its share in knitwear exports is gradually improving. In the EU market, knitwear, cotton fabric and bed wear are important export categories. Keeping in view country's current encouraging performance in the major markets of EU and the US, Pakistan is expected to maintain its present status of a large textile and clothing supplier in the international market despite facing tough competition from China and India.
A second opportunity available to Pakistan lies in the relocation of textile manufacturing units from industrial to developing countries in order to take advantage of lower production cost. Since Pakistan is world's fourth largest cotton producer after China, the US and India, it can be considered as a country of choice by some of the big foreign textile producers. Realizing this opportunity, government has already announced certain incentives in the trade policy for FY04. Despite these strengths, country's textile sector is also faced with certain issues in the post liberalization era.
In the absence of quota restrictions, countries having preferential access to the big markets seem likely to be the largest gainers. It may be pointed out here that most of the developing countries enjoy such preferences either under GSP (from EU) or in the context of free trade agreements (FTA). For example, in case of the US market, African and the Caribbean counties have zero duty access under the Trade Partnership Act. Pakistan also enjoyed zero duty access to the EU market (from 2002) under the GSP scheme, which helped a long way in enhancing exports to this country. However, from January 1, 2005 this concession would be withdrawn and an average tariff rate of 12.5 percent would be imposed on the textile and clothing imports from Pakistan. But in October 2004, the European Commission proposed a simpler method of trade preferences for the period 2006-08 under which the current five GSP arrangements would be reduced to three:1) A general arrangement (reduction of 3.5% over the normal customs duty for sensitive products, reduction of duties to zero for non-sensitive products). 2) Every thing but arms", giving duty-free and quota free access for all products for the world's 50 poorest countries. 3) A new "GSPplus" giving tariffs preferences to vulnerable countries that meet the new objective criteria for sustainable development and good governance (this arrangement offers zero duty for a total of 7200 products). Pakistan can be a beneficiary from GSPplus scheme, subject to the fulfillment of the condition that the beneficiary country have less than 1 percent share in EU imports under GSP.
Another issue is the increasing trend in the developed countries (such as Australia, Canada, the EU and the US) to impose anti-dumping duties so that they could not only restrict their import levels but also provide implicit protection to their domestic industries. As a matter of fact, under WTO an importing country can impose an anti-dumping duty if there is a proof that dumping is occurring and it is causing injury to the local firms. Since the use of this measure is not always fair, there is a need to make this procedure more transparent. Currently Pakistan is facing anti-dumping duty on one of its major textile export category i.e. bed wear, that has resulted in a steep fall in country's bed wear exports during Q1-FY05.
OUTSTANDING EXPORT BILLS
During Q1-FY05 the stock of Outstanding Export Bills (OEBs) held by the commercial banks and exporters increased by US$ 57 million. The increase in the OEBs appears simply to reflect the rise in exports. Interestingly, the share of overdue export bills in total OEBs (exporters) has increased during Q1-FY05. This could potentially reflect the significant Rupee depreciation during the period under review, which created an incentive to defer repatriation of revenues.
QUOTA FREE REGIME
Historically, the textile and apparel sector is an important contributor to economic growth in Pakistan. It accounts for a significant portion of traded goods, contributing 65.0 percent of the total value of exports in FY04. The dismantling of the quota regime therefore represents both an opportunity as well as a threat. An opportunity because markets will no longer be restricted; a threat because markets will no longer be guaranteed by quotas, and even the domestic market will be open to competition. Several studies have attempted to estimate the likely impact of the post-quota scenario on Pakistan's textile industry.
In a recent report prepared by Will Martin (World Bank) on the "Implications for Pakistan of Abolishing Textile and Clothing Export Quotas" which was released on April 30, 2004 by the World Bank, the author used general equilibrium analysis to examine the consequences for Pakistan of abolishing the system of quotas installed under the Multi-Fibre Arrangement (MFA) that are being dismantled under the ATC. The aim was to capture vertical product linkages and the rent transfers associated with quota abolition. The main findings of the report are as under:
1- Whether Pakistan will be better or worse off depends, inter alia, on the extent to which exports from Pakistan are restricted relative to exports from other suppliers; the strength of the competitive relationship between suppliers; and the extent of complementarities associated with global production sharing — particularly the benefits from increased demand for textiles and clothing as inputs.
2- The abolition of quotas in January 2005 will eliminate some, but not all, of the distortions affecting global trade in textiles and clothing. While the quotas will be abolished, tariffs on textiles and clothing will remain, frequently at very high levels.
3- Pakistan will benefit substantially from the abolition of its own quotas, with the benefits resulting from improvements in efficiency of resource allocation and in world market prices outweighing the loss of quota rents.
4- Pakistan may suffer a fall in output and exports of clothing, a result of stronger competition from countries currently more restricted in this sector.
5- Output of the apparel sector could decline by over 10 percent and exports by 17 percent if the productivity is not improved.
6- The adverse impacts of increased competition may be softened by the diversity of the industry, with many of the products in which Pakistan specializes, such as men's knit shirts, being much less important to competing countries.
7- The removal of the quotas on China in the EU and the US and expansion of the Chinese textile and clothing sector is likely to lead to increased demand for intermediate inputs such as yarn and textiles from Pakistan.
8- Overall, the MFA abolition would result in a decline perhaps half a percent of real income, if no actions are taken to improve productivity.
9- Raising productivity — either by improving the efficiency of the production process or the range and the quality of the products produced — is a key to reaping the benefits from the abolition of the MFA.
10- The increase in textiles and clothing sector productivity in Pakistan by around 60 percent — to reach China's prevailing productivity levels — would result in the welfare gain of over US$ 1 billion per year.
EXPORT SUPPORTING MEASURES
In order to ensure enhanced market access, Pakistan is focusing on joining various regional and bilateral trade blocs. After signing a Preferential Trade Agreement with ECO countries in July 2003, and with China in November 2003, Pakistan is now focusing on increasing exports to Japan. The plan is to start collaboration with Japanese trading houses on cost sharing basis for market research, product identification and subsequent joint marketing in Japan.
The government plans to establish textile and garment cities to help boost export earnings from textile sector. The textile city will be an exclusive production area with necessary infrastructure. This city will specialize in large-scale production of value-added textile products. For this purpose, land has already been identified for garment cities in Lahore and Faisalabad; whereas Pakistan Textile City Limited has been set up by government in Karachi, which has been listed with the Securities and Exchange Commission of Pakistan.
The ginned cotton was exempted from sale tax in the trade policy for FY05. In addition, with a view to support the towel manufacturers, import of waste material of textile has also been allowed.
Some industries are relocating from developed countries to countries where production costs are lower. The Export Promotion Bureau (EPB) has launched a scheme to assist Pakistani companies in this industrial relocation by sharing 50 percent of the transfer costs.
In order to improve the financing facility available to the manufacturing sector, the SBP revised the scheme for financing Locally Manufactured Machinery in July 2004. Under the new scheme, manufacturers and purchasers of locally manufactured machinery would be provided credit on concessional terms with mark up rates of 5 to 7.5 percent repayable over a period of 2 to 71/2 years.
For the diversification of export products and markets the government had earlier allowed 25 percent freight subsidy on products whose exports were not more than US$ 5 million and for all products exported to countries where country's average annual export in the preceding three years were not more than US$ 10 million. This scheme would continue in FY05.
In order to increase country's exports, the government with the help of Export Promotion Bureau has launched various schemes. In addition, various initiatives have been undertaken to improve quality and volume of developments exports including fisheries, horticulture, gems and jewellery, footwear, sports, surgical instruments and carpets.
Important import liberalization measures include:1) Removal of the necessary condition of obtaining NOCs from ministry of commerce has been removed for the import of all permissible items. 2) Relocation of industrial projects from abroad has been allowed in all manufacturing and industrial projects in order to reduce the cost of doing business in Pakistan. 3) Import of plant, machinery and equipment that is required in national interest has been allowed in second hand condition for enabling transfer of technology at lower cost.
To boost up exports, the EBP has prepared a comprehensive strategy. Some of these need specific mention. Enhance world market shares of the Core Product Categories by Increased penetration of our best performing Categories in the top 10 respective countries and selectively increase the top penetration of the Core Product Categories in the next top 10 countries.
OTHER CORE CATEGORIES
Raw Cotton Yarn (All Types)
Leather / Products
Carpets and Wool
Made Ups (Excluding Towel)
Art Silk and Synthetic Textiles
Pursue enhancement of manufacturing and marketing capabilities and efficiencies with a view to achieve value-addition and increased competitive strength for our Core Product Categories.
Pursue with national alignment and focused resource application, selected Developmental export opportunities where Pakistan currently enjoys, or can achieve, a strong competitive edge. The identified Categories are:
Fruit, Vegetables & Wheat
Marble & Granite
IT-Software & Services
Gems & Jewellery
Pursue in the less explored Geography, exports of our Core Products Categories and Services and any other, but significant opportunities. The geographic areas identified are:
Oceania (Australia/New Zealand)
Central Asian Republics
Bilateral Trade enhancement would be achieved with countries where Pakistan traditionally/potentially enjoys close relationships. Enhance market access based on proactive and innovative management of current or emerging world economic/trading blocs and bilateral trading arrangements.
After understanding the potential, the threats and having developed a pragmatic policy let all the stakeholders play their role. However, the government, which is also the largest stakeholder has to follow a proactive approach. The policy planners must remove the irritants as they ultimately lead to serious problems.