MAKING PAKISTAN A KEY ECONOMIC FORCE IN THE REGION

The forthcoming Trade Policy must address the outstanding issues pertaining to competitiveness of Pakistan's exports

By SHABBIR H. KAZMI
July 10 - July 16, 2006

It may be the rarest occasions that the Pakistan government is following a strategy, which is termed Trade Diplomacy. President Pervez Musharraf and Prime Minister Shaukat Aziz are taking keen interest in this campaign and are making efforts for achieving the most cherished national objectives. These include making Pakistan a key economic force of the region, introducing the country as a major source of goods and services at competitive rates and above all developing the country as the energy corridor. The strategy is based on the fact that now the world economic growth is being led by Asia, particularly by China, India and Pakistan. These countries not only have enormous domestic markets but also offer excellent investment opportunities.

The key strategy being followed has been termed Rapid Export Growth Strategy (REGS). This has helped the country boost exports from less than US$ 8 billion to more than US$ 14 billion in six years. The government plans to further increase export to bridge growing trade deficit, which touched almost US$ 10 billion at the end of recently concluded financial year. The government has been following REGS based on five pillars, which are:- 1) Ensuring improved market access through signing Preferential Tariff Agreements and Free Trade Agreements with priority countries. 2) Focusing on neglected regions and countries in Africa, Latin America, Eastern Europe, Central Asia and the Far East. 3) Strengthening of trade promotion infrastructure including the Export Promotion Bureau (EPB) and the trade offices abroad. 4) Improving skill level of the people involved in trade promotion. 5) Providing state-of-the-art physical infrastructure to spur investment, particularly Foreign Direct Investment (FDI).

The first three pillars of the strategy are the areas where most of the work has to be done by the Ministry of Commerce. The last two pillars relate to national supply side constraints and are to be handled by other ministries in close liaison with the Ministry of Commerce. Since trade diplomacy is one of the major functions of the Ministry of Commerce, it intensively interacts with other governments to obtain additional market access for Pakistani exports. In this context the Ministry has initiated discussions and negotiations with a number of countries for concluding Preferential Trade Agreements (PTAs) and Free Trade Agreements (FTAs). The first FTA with Sri Lanka became operational during last financial year. Pakistan concluded a PTA with Iran and also signed an Early Harvest Agreement with China as a prelude to an FTA. Apart from that, bilateral negotiations are underway with Malaysia, Singapore, Indonesia, Turkey, Kazakhstan, Tajikistan, Morocco and Mauritius. As far as regional bodies are concerned, Pakistan has also worked out preferential access arrangements in SAARC, ECO, OIC, D-8, Mercosur and GCC.

The European Union (EU) has always been a major trading partner as well as the investor with reference to Pakistan market. It has been a major focus of the trade diplomacy. Over the last five years Pakistan has benefited from the EU's drug-related G.S.P Scheme. Under this scheme Pakistan has availed duty free access for its exports to the EU except leather and leather products, yarn and fabrics. From 1st January 2005, Pakistan's clothing sector graduated and 80% of Pakistan's exports are not entitled for the benefits under this G.S.P Scheme. However, as a result of intense diplomatic efforts Pakistan would now be included in the EU's new G.S.P. Scheme as of 1st January 2006. This new scheme allows all of Pakistan's exports including textiles and clothing to enter the EU markets at concessionary tariff rates.

The EU is Pakistan's largest and most important export market. It has assumed even greater significance after its recent enlargement from 15 to 25 countries. In view of the unique nature of the EU, a special focus is required for enhancing exports to this region. The policy being followed by the government includes: 1) Undertaking the EU specific detailed market research studies for expanding the list of exportable products to this largest group. 2) Ensuring proper access for exporters, including development of an interactive EU trade information portal so that exporters are able to get latest supply and demand data regarding export opportunities in the EU markets. This facility will also help the exporters to redefine their marketing strategy with the fast changing global scenario. 3) Engaging a lobbying firm to help develop political clout in the market. Its effort should not be aimed at securing petty export orders but improving Pakistan's image as a credible source of supply and preferred destination for investment.

As a single country, the United States is Pakistan's largest trading partner. Lately, major diplomatic efforts have been made to ensure enhanced access for Pakistani exports. In this regard efforts have begun to conclude on a Bilateral Investment Treaty (BIT) with the US. This treaty is likely to be instrumental in promoting buyer driven FDI, which is an important factor for export growth. Pakistan's request to the US for free trade negotiations is under consideration. Besides this, some market access proposals are also being discussed between the two countries.

The US is the largest and most important export destination for Pakistan after the EU. However, bulk of the export belongs to textiles and clothing, with the share of textiles around 90% of total exports to the US. However, imports from Pakistan still constitute at a very small percentage. Given the potential of US market, there is a dire need for Pakistan to follow a focused approach to identify the impediments, which hamper the full exploitation of this market's potential. At present, Pakistan along with many South Asian countries comes low on priority list of the US importers as compared to East Asian countries. Therefore, Pakistan's export strategy for the US must focus on overcoming the supply side constraints and establishing its image as a reliable and efficient supplier. To overcome supply chain management problems, a special program focusing trade facilitation in the context of US has to be chalked out. At the same time, extensive lobbying has to be undertaken to enhance Pakistan's exports and market access.

The second pillar of the REGS requires focus on previously neglected regions and markets the government has been organizing investment conferences and participating in important exhibitions and fairs. As a result of these conferences, with the input from Pakistan embassies, consulates and commercial counselors, a well focused strategy based on the requirements of each region has been developed.

The strategy requires inputs from a number of government entities besides the Ministry of Commerce. The inputs have to be aimed at addressing the supply side constraints that limit the rate of growth of exports. The policy planners are fully cognizant of the fact that unless these issues are addressed expeditiously and effectively, the country will not be able to achieve quantum leap in exports due to non availability of exportable surplus. With the growing per capita income demand for almost every product is on the rise. Most of the industries which were suffering from poor capacity utilization and/or some exportable surplus face an opposite scenario. Though, there has been some major investment in various industries, it may take some time being the expanded capacities online.

To achieve the major objectives a detailed strategic plan has been prepared and being implemented. This plan has the eight areas of focus under which specific proposals have been formulated. These are: 1) diversification of exports, 2) trade facilitation, 3) increased market access, 4) enhancing export competitiveness by reducing cost of doing business, 5) capacity building on WTO and trade negotiations, 6) developing export of services, 7) improving compliance and quality infrastructure, and 8) technico-legal proposals.

In order to achieve quantum leap in exports, setting up of physical infrastructure and industrial estates is a pre-requisite. The initiatives announced in the previous trade policies included setting up of textile cities and garment cities, rehabilitation of industrial estates and establishment of combined effluent treatment plants to achieve this objective. These projects are to be undertaken by companies set up under public-private partnership, and will be managed professionally as corporate entities.

With the cooperation of State Bank of Pakistan, a long term fixed rate financing scheme was introduced in May 2004, to support project financing requirements of export-oriented industries and various policy initiatives. By June 30, 2005, an amount of Rs. 3.70 billion was utilized. Under this scheme the banks have allocated a limit of Rs. 8.60 billion and it is likely that over the years to come more funds will be allocated.

The unprecedented increase in trade between Pakistan and some of the adjoining countries shows a number of bottlenecks in the handling and clearing of cargo, particularly at border terminals at Chaman and Torkham. It is expected that in the near future trade with Iran through land route would also increase. In view of these developments, it has become imperative that these facilities should be upgraded to facilitate international trade. The National Logistics Cell has been awarded the contract to build modern border terminals at Taftan, Torkham, Chaman and Wagah. Since a number of government agencies like the Central Board of Revenue, Ministry of Communications, Ministry of Interior and provincial governments of NWFP, Balochistan and Punjab are involved in this endeavor some agency has to play the role of coordinator for making concerted efforts.

In this regard specific emphasis has to be placed on improving Pakistan's trade with SAARC member countries, particularly India. Though, the potential is enormous it is often linked with many ifs and buts. To resolve the situation both the countries have to show their commitment by resoling some of the outstanding disputes, with Kashmir on top of the list. Though, the confidence measures are being made, it is yet to be seen how effective these could prove. There are many pressure groups, some of them having vested interest, which often derail the process. There is also a strong belief that formal and direct trade with India just cannot improve because of the stake of groups in informal trade. They say that formal trade is still a dismal percentage of the informal trade.

With international trade being governed by articles of the World Trade Organization (WTO), it is pertinent that a pool of knowledge and expertise on WTO related issues be developed and maintained within the country. Besides the government, such capacity also needs to be created in the private sector particularly among the academia. While most of the barriers are being removed under the WTO regime, many countries, including Pakistan, are also trying to become part of regional trading arrangements or free trade agreements in order to increase market access for their exports. However, in order to derive maximum benefit from these recent phenomena in the world trade order, it is desirable to have access to relevant expertise in the country.

Trade policies announced over the last five years may have yielded very positive results but a lot more remains to be done. It is believed that Trade Policy for 2006-07 would be more pragmatic offering opportunities to the business community to expand its business and also help the country earn extra foreign exchange. This policy should also facilitate constructive public-private partnership, which is necessary for the economic development of the country. The ultimate objective of rapid export growth strategy should be poverty alleviation and broad based prosperity for the people of Pakistan.

The government's role as the facilitator should be ensuring consistency in policies, making changes to face the emerging challenges, intensifying trade diplomacy efforts for achieving greater market access and, above all, creating a level playing field. It may be true that the government has to develop and implement pragmatic policies, however, desired results cannot be achieved unless the exporters play their due role and have to seize the opportunities. In the past the governments have been following policies, which were often aimed at import substitution. Now it is the time to follow an export-led growth strategy. This policy has been in place in many countries and also helped in achieving rapid growth in most of the emerging economies.

Though Pakistan has been earning bulk of its foreign exchange from export of textiles and clothing it needs a paradigm shift. There is enormous potential for boosting export of processed food and milk products, seafood, gem stones and software and IT services. Pakistan has developed special export zones and clusters. If these segments are effectively exploited, Pakistan will be able to achieve new highs. This optimism is based on continued inflow of foreign exchange, increased expenditure for the improvement of infrastructure and trade liberalization. Pakistan has to come up with a road map for further deepening of reforms and addressing emerging policy issues, legal and regulatory distortions for the sustained economic development.

The effectiveness of macro economic reforms and policies at the micro level (on firms operating in the economy) is linked with strengthening competitiveness. However, various factors impair competitiveness. The players need conducive environment for exploiting the comparative advantage which Pakistan enjoys in various sectors, besides elimination of anti-export bias. The recent economic turnaround can be attributed to the sound macro economic reforms, improved fiscal discipline, deregulation and privatization, capital market as well as the financial sector reforms. The government's commitment to the reform agenda has elevated Pakistan's relative position compared to its peer group countries. The improvement in non-debt flows such as increase in remittances, increase in foreign investment and decrease in external debt to GDP ratio as well as declining public debt has resulted in up-gradation of Pakistan's sovereign rating.

Due to right monetary stance taken by the central bank, the inflationary pressures have started to ease off. Continued vigilance will be the key going forward given the demands of growing requirement. The private sector is the engine of growth and indicated that credit, which is vital to facilitate its growth and robust performance, has been increasing steadily over the past many years. The good build up of foreign exchange reserves has eased Pakistan's external position and played an instrumental role in bringing exchange rate stability. No one can undermine the importance of a stable exchange rate regime in ensuring inflow and subsequent retention of foreign portfolio investment. The stable exchange rate is one of the factors behind the recent buoyancy shown by the Pakistan's stock markets.

To conclude one cannot resist from highlighting the advantages available to the foreign buyers and investors for doing business with Pakistan which have resulted in achieving a better ranking compared to its peer countries in World Bank's "Doing Business in 2006" annual ranking.

MAJOR IMPORTS
11 MONTHS COMPARISON

 

July - May' 05 
($ in billion)

July - May' 06 
($ in billion)

Change

Machinery

5.2

7.02

35

Petroleum

3.6

5.9

64

Metals

1.08

1.65

52.77

 


 

MAJOR SOURCES OF IMPORTS (PERCENTAGE SHARE)

Country

92-93

94-95

96-97

98-99

99-00

00-01

01-02

02-03

03-04

04-05

05-06*

U.S.A.

9.4

9.4

12.0

7.7

6.3

5.3

6.7

6.0

8.5

7.6

5.8

Japan

15.9

9.6

8.6

8.3

6.3

5.3

5.0

6.6

6.0

7.0

5.6

Kuwait

3.3

5.8

6.9

5.9

12.0

8.9

7.1

6.6

6.4

4.6

6.2

Saudi Arabia

5.4

4.9

6.0

6.8

9.0

11.7

11.6

10.7

11.4

12.0

11.2

Germany

7.4

6.8

5.6

4.1

4.1

3.5

4.3

4.6

3.9

4.4

4.7

U.K.

5.2

5.1

5.0

4.3

3.4

3.2

3.4

2.9

2.8

2.6

2.8

Malaysia

5.1

8.8

4.7

6.7

4.3

3.9

4.4

4.6

3.9

2.6

3.0

Sub-Total

51.7

50.4

48.8

43.8

45.4

41.8

42.5

42.0

42.9

40.8

39.4

Other Countries

48.3

49.6

51.2

56.2

54.6

58.2

57.5

58.0

57.1

59.2

60.6

Total

100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

* July-March Source: Ministry of Commerce