THE OBJECTIVE CANNOT BE ACHIEVED WITHOUT PRODUCING EXPORTABLE SURPLUS, PRODUCTION EFFICIENCIES AND OPTIMIZING COSTS
SHABBIR H. KAZMI
July 28 - Aug 03, 2008
The Trade Policy was announced after the lapse of 18 days of the current financial year. The export target has been fixed at US$ 22.1 billion, envisaging growth of 15% compared to 13.2%YoY growth achieved during last financial year. However, it did not indicate the level of import, mainly due to unpredictability of oil and food import bill.
Numerous measures have been announced in the Policy to help attain the export target. At seems that the GoP aims at lowering production costs and improving competitiveness of the local manufacturers. However, the policy does not contain measures to contain trade deficit. The current foreign exchange reserves are far less than the anticipated trade deficit.
MAJOR HIGHLIGHTS OF THE TRADE POLICY ARE:
1) Duty free import of plant, machinery and equipment has been allowed for setting up export manufacturing units under the Duty and Taxes Remission for Export (DTRE) scheme.
2) Import of cheap raw materials and machinery has been allowed from India through both land (Wagah) and sea routes.
3) "Zero rating" will be provided to exports by refunding indirect taxes on input costs to exporters.
4) Export clusters will be developed in Sialkot, Faisalabad, Hyderabad, Gujranwala and Charsada.
5) Incentive package consisting of reduced tariff rates, subsidies, infrastructure development etc for pharmaceuticals, seafood, gems and jewelry, leather and horticulture sectors in order to achieve diversification in exports.
6) Enhanced emphasis will be on trade promotion by organizing exhibitions, participating in trade fairs and sending trade delegations.
Analysts have contrary views about achieving the export target. Some of them are of the view that boosting exports by 15% is realistic considering the export trend registered during January-June period of 2008, as exports grew at an average monthly rate of nearly 23%YoY. The sharp improvement in export performance was attributed to depreciation of the Rupee vis-‡-vis leading currencies particularly US dollar and Euro since beginning of 2008.
Taking into account the pressures emanating from high oil bill, the depreciating trend of the Rupee is likely to continue in the medium term if foreign investment inflows fail to pickup. Therefore, export competitiveness is expected to improve further due to an anticipated continued weakening of the Rupee and because of gains of trade with India, which should contribute towards reducing manufacturing costs.
However, the critics believe that not only the newly elected government has chosen an easy target but the Policy also lacks measures but do offer many promises. The government is also relying on foreign assistance and aid, which may not be there at all. The package offered by the Saudi Arabia to ease mounting pressure of oil import bill may provide a temporary relief but the amount has to be paid off.
In fact the country has to come up with multi-pronged strategy to avoid the virtual default, similar to the situation faced in nineties. Country's foreign exchange reserve may deplete completely over the next six to eight months if the inflows fail to improve. The exportable surplus of different sectors is shrinking, exporters are losing competitiveness and no investments are being made to improve productivity of the manufacturers.
The exiting capacities of textile, PSF, fertilizer and cement will not be increased over the next couple of years because no new capacity is being added. In fact the BMR activities are also missing indicating that the country will have to import all sort of products to meet the local demand. Lack of attention to agriculture sector will also necessitate import of cotton and sugar. Fertilizer import will also grow because most of the existing plants have already exchanged 'name plate capacities' through debottlenecking. Cement demand is subdued only because local sales are not growing due to erosion in purchasing power of the masses.
Till recently cement exports have been earning substantial foreign exchange reserves. However, once indigenous capacities come on line in the importing countries the quantum of cement export may decline substantially. Rising prices of coal are also increasing the cost of production. In the prevailing scenario manufacturers may find it hard to pass on the increase in cost to the buyers.
Sugar industry has a lot of potential to lessen import burden but also to earn substantial foreign exchange but continues to add to the burden due to non-pragmatic policies. Reportedly, the installed capacity has surpassed 6 million tons per annum. However, due to an acute shortage of sugarcane the average capacity utilization is below 50%. The government has to facilitate the farmers in bringing more area under sugarcane cultivation as well as improving yield through harvesting better verities. However, no strategy will yield any result unless the government removes embargo on sugar export and discontinue prevailing practices of fixing support price of sugarcane.
As stated earlier effort has to be made to achieve exportable surplus and remove barriers in the exports. In fact manufactures have to be given incentives for exports. Freight cost is on the rise due to hike in crude price but its negative impact can be contained by offering subsidy.
It is also necessary to remove the incorrect perception that erosion of the Rupee against the leading currencies can boost exports. The adverse impacts of declining Rupee are more contentious than the much talked about increase in exports. The single largest factors eroding competitiveness of the local manufacturers is rising energy cost.
It is also necessary to highlight the incompetency of the Trade Development Authority of Pakistan (TDAP). It will not be wrong to say that its contribution in export promotion is marginal and the amount being spent on this monstrous organization simply goes down the drain. One of the reasons is that it is highly bureaucratic entity also suffering from red tapism and a large number of senior officials do not belong to Trade & Commerce Service Group. It is still carrying the legacy of 'Textile Quota Regime' which has been completely phased out.
It is true that textiles and clothing still contribute the largest share in exports but the credit must not go to the spinners. It is the producers of made ups who earn the largest share of total exports. Spinners have enjoyed subsidized raw material and financing for decades, now it is obligatory for the policy planners to support the sectors making real value addition.