TRADE POLICY FY08

MARIAM NASIR
Manager Research

July 23 - 29, 2007

Government recently announced the trade policy for the new fiscal year in which it outlined the future strategy of the country. The policy was much-awaited as in the outgoing fiscal year the deficit touched US$13.5bn growing by 11%, as a consequence of a scanty 3.3% growth in exports to US$17bn. However, imports continued their dominance and grew by 7% to reach US$30.5bn. Majority of the steps highlighted in the trade policy are long term and do not directly address to the short-term problems faced by the domestic textile industry, especially spinning. The new policy for FY08 has come up with reasonable target. Exports and imports are targeted respectively at US$19.2bn and US$32bn, up 13% and 5% from the last year's numbers. These numbers and targets would yield a trade deficit of US$12.8bn, down 5% over a record deficit of US$13.5bn recorded in FY07. The policy emphasized the need to achieve exports growth to make the current economic growth sustainable. However, it envisages only 11.0% growth in exports by setting the target of US$19.2bn in FY08 over US$17.3bn achieved in FY07. The policy aims to gradually improve exports to US$45bn by year FY13, suggesting the CAGR of 17% over next 6 years to bring the Exports-GDP ratio at 16% from the current 12%. The policy also mentioned the impediments of negative travel advisories on Pakistan for security concerns. The law & order situation seems to get worse these days. The policy mentioned about some favorable steps taken in the past including- concessional credit to export oriented industries, 25% freight subsidy for industries located beyond 250km from the seaport and reduction in average tariff rates to 25.0%. Incentives for minor sectors like electronics, Gems & Jewelry, fruit and pharmaceutical sectors have also been announced.

EXPORTS STRATEGY

Government has targeted exports at US$19.2bn, up 13% when compared with the last yearís figure. In the outgoing year, for the first time in the history of Pakistan's exports have crossed the barrier of US$17bn. Services exports for 11 months of the year 2006-07, were US$3.1bn. Defense exports for 2006-07 were US$63m. During the first 11 months of 2006-07, the exports of Textiles Group increased by 6%, engineering goods by 8.7%, Gems by 15.9%, and Jewellery by 120%. Exports of some textiles products have almost doubled in the first 11 months of 2006-07.

For the next year targets government has taken following steps:

*To establish an equity fund through pooling the resources of private and public sector organizations for Brand Acquisition.

*Encourage new investments particularly in hi-tech and core and developmental products. The government has decided to allow First Year Allowance on investment in Plant Machinery and Equipment to be set off against statutory income in the year of assessment.

*The Long Term, Fixed Rate, Export Projects Financing Scheme has been enlarged to cover: Export oriented, core and developmental sectors.

*Introduce a scheme of Export Oriented Units. The scheme will essentially have the same incentives as are available to units in the Export Processing Zones.

INCENTIVES FOR BRAND ACQUISITIONS

To improve penetration of Pakistani exporters into international markets the government has taken a number of initiatives. The government is going to support exporters in meeting international standards, compliance certification, opening exporters' offices abroad, marketing of branded products, retail sales outlets and e-marketing. The government is also willing to support companies for acquisition of brands. The government is going to treat all export-oriented units as part of Export Processing Zone, and any unit which is exporting 80% of its production is eligible to apply for the status.

INCENTIVES FOR INVESTMENT IN PLANT, MACHINERY AND EQUIPMENT

To enhance investment in plant, machinery and equipment the government has allowed tax credit up to 90%. Same rate applies to reinvestment as well as BMR and expansions. The government has decided to facilitate SME exporters by restructuring PEFGA, which is going to cover risk for exports on other terms than L/Cs. Diversification of exports has been a problem for Pakistan, as more than 60% of Pakistan's exports are still dependent on textiles. The government has given incentives for exports of jewelry, gems, engineering goods, pharmaceuticals, fruits and vegetables etc. and meat.

IMPORTS STRATEGY

Imports continued their dominance and grew by 7% to reach US$30.5bn in the outgoing fiscal year. The new policy for FY08 has come up with reasonable target. Imports have been target at US$32bn, up by 5% from the last yearís numbers. The policy mentioned favorable steps taken in the past including concessional credit to export oriented industries, 25% freight subsidy for industries located beyond 250km from the seaport and reduction in average tariff rates to 25.0%. Incentives for minor sectors like electronics, Gems & Jewelry, fruit and pharmaceutical sectors have also been announced. Summarizing the imports, the import policy is based on the pillars of liberalization, deregulation, and facilitation. The initiatives proposed will encourage businessmen and entrepreneurs to install new machinery, add capacity, and thereby improve their competitiveness.

Apart from that Pakistan is seeking Free Trade Agreement with different countries. Recently, a historic comprehensive FTA is now effective as of 1st July 2007. Further more FTA's are planned with Malaysia, Srilanka, Mercosur countries and Russia.

OUTLOOK

Pakistan likely to benefit from Global tariff reductions, expansion in Services sector and growth in Electronics and electrical goods. But we need to address a host of Challenges like low competitiveness, low productive capacity, export diversification, low quality products, export industries, unprecedented demand for energy, market access for the EU and US requirement of compliance with social, environment, and health standards. Although the targets seem reasonable in achieving. Government is yet to announce the power packed textile policy. Expected to be a jumbo packet full of incentives and enticements the new textile policy would cater to the higher exports targets.