SUMAIRA FAZAL (sumaira.fazal@gmail.com)
July 28 - Aug 03, 2008

Extraordinary surge in the import of petroleum products as well as imports of food group and raw material have all contributed to substantial increase in the import bill of Pakistan. While exports of the country registered a reasonable growth, the unprecedented upsurge in imports outpaced the growth in exports, thereby leading to widening trade gap. This resulted in misbalancing of PKR/USD parity also.

There are several issues involved on both, imports and exports, fronts. The rise in import bill was driven by both price hike and demand factors, the former playing the major role. Imports of food items were up by around 49% in the current financial year. Despite the fact that Pakistan is an agricultural country, we import the very basic item of our food wheat. Although Pakistan had a bumper wheat crop of 23.3mln tons, yet the country had to import 1.7mln tons of wheat at the time when international prices were all time high. This was the reason that in the food group import, wheat alone accounted for 67% of imports. This followed by extraordinary increase in imports of edible oil owing to sky rocketing prices of palm oil in the international market. An increase of around 47% in imports of petroleum products was the highest ever witnessed in the recent history of Pakistan, and this was an outcome of higher price as well as quantity increase in petroleum products. The international oil prices were touching the skies combined with increasing need for furnace oil for power generation led to unusual increase in imports of petroleum products.

While the export growth was higher compared to last financial year, it remained on slower pace relative to the targets set for the recently ended financial year. During the first ten months of the FY08, Pakistan's exports registered escalation of around 10.2%, which was much better than the growth of 3.6% in the corresponding period last year. Less then targeted growth was largely an outcome of the fact that Pakistan's exports suffer from serious structural issues which need to be addressed by the local industry itself, and corrective measures to be taken by the government. The bulk of exports comprised of textile exports are also facing lot of problems. Textile is the backbone of the country's economy, nevertheless, bears various issues. The structural problems of the textile industry relate to the entire chain of manufacturing and marketing. The major part of production is of a type and quality that is suitable primarily for producing low-to-medium count cotton yarn. Our industry is also characterized by segmentation of production facilities and lack of effective marketing infrastructure which is pre-requisite of success in the current international competitive environment. Although, post quota-free regime, the industry made investment in BMRE which helped in export expansion in 2006, the momentum could not be maintained in FY07 and onwards, with decline in global market share and in absolute level, reflecting an erosion of Pakistan's competitive edge. The loss in the country's competitiveness is partially attributable to the inability of the government to match fiscal and financial concessions offered by governments in competing countries. Although government had provided some benefits to the textile sector like removal of sales tax on all textile products, reduction in export refinance rate, induction of LT financing for export oriented projects and 3-6% R&D rebate for various textile exports these concessions are still considered inadequate by textile lobby for redressing Pakistan's inherent competitive disadvantage, particularly with regard to reducing the "relative cost of doing business" including finance cost and cost of energy.

Another point of concern is that Pakistan's exports are highly concentrated geographically and in terms of products. Apart from diversifying the country's exports, other broad-based measures are necessary to be taken to address the issues faced by export sector. In this regard, the private sector should increase its competitiveness by employing state of the art machinery, better management and cost effectiveness.

The government of Pakistan has tried to address issues related to the country's trade imbalances in Trade Policy FY09, which again is having pros and cons. While there are positive measures for our industry, some businessmen still expressed their apprehensions. The newly announced trade policy envisages total exports of USD22.1bln (15% YoY) while imports at USD 40bln translating into trade deficit of approximately USD 18bln (lower by 11% on YoY). In order to promote capital investment in export oriented industries, PME (Plant Machinery and Equipment) imported for setting up a unit under DTRE (Duty and Tax Remission for exports) are going to be exempted from import duties and taxes. The trade policy reiterates the need for diversification of exports. Measures taken in this regard include (i) encouraging investment in pharmaceutical production by giving 90% accelerated depreciation allowance in first year, (ii) allowing import of PET bottle scrap for DTRE export of regenerated PSF, (iii) 6% loan subsidy for setting up of effluent treatment plants, which specially aids in improving the marketability of leather products and (iv) promotion of horticulture and floriculture exports by providing concessionary financing for investment in cold storage facilities that would bring efficiencies in the supply chain and improve market accessibility.

Also, Pakistan has opened the doors further to Indian imports and appended another 130 items into the import list. Imports with the preferential treatment include CNG buses, diesel, fuel oil and various low value added items including chemicals and pharmaceutical products. There are several advantages related to this decision such as (a) lower transportation cost and thereby lower prices for domestic consumers, (b) import of raw material at lower price will curb trade deficit, (c) import of pharmaceutical products that would not only cater to the domestic needs but also encourage local producers to be more competitive and (d) enhanced trade ties with India is expected to minimize cross-border tensions. Nevertheless, there can be concerns as well, which can be (a) unilateral trade with India will only promote Indian exporters, no measures have been taken to promote exports to India, (b) higher dependency on Indian inputs is likely to make domestic prices more volatile in case of any negative political development and (c) any negative shock in India may translate into higher import prices for Pakistan. So the bottom line is that domestic industrial growth can only be sustained through availability of domestically cheaper input, in the wake of rising global commodity prices. Import from India is expected to help in reducing the cost of production for our industry only in the short run; nevertheless, in the long run, government of Pakistan should step forward towards bilateral trade with India.

The policy remained silent on core issues faced by Pakistan textile industry. Textile sector is the only sector, which contributes bulk to total exports of the country and can compete on the international level. Silence on textile sector in the Trade Policy FY09 may hamper the newly set export target. Going forward, increasing demand for furnace oil for the implementation of FO based power plant is expected to keep oil import on higher side; thus, oil imports are again likely to be the main drivers for trade deficit for FY09. Given this situation, export diversification seems to be the key solution to the external account miseries facing Pakistan, though the change will not come overnight. Moreover, consistency in government policies, investment in human resource to improve skill set and exploitation of global markets are the necessary measures to correct the adverse trend witnessed by our trade imbalances.