PAKISTAN'S STAGGERING EXPORTS: WHAT NEEDS TO BE DONE?

AROOJ ASGHAR (arooj.asghar@hotmail.com)
July 28 - Aug 03, 2008

Pakistan's economy gained strength during the period of 2003-07 whereas since last May economy has not been moving in the right direction. It was believed that wide-ranging structural reforms, prudent macroeconomic policies, financial discipline and a consistency and continuity in policies have transformed Pakistan into a stable and resurgent economy, which has happened to be very short lived. Pakistan's exports to GDP ratio stands in between 10 - 13% as compared with 33% for Indonesia, 42% for Philippines, 51% for Thailand, 40% for Korea, 96% for Malaysia, and 27% for Sri Lanka. This simply suggests that Pakistan has to catch up with others. Pakistan's export performance has been impressive in recent years (2002-03 to 2005-06) with exports registering an average growth of 16% per annum on the back of strong macroeconomic policies pursued at home and international trading environment remaining hospitable. Pakistan's export performance was dismal in 2006-07, 2007-08 as it witnessed abrupt and sharp deceleration to less than 4%. In comparison with East Asian Countries Pakistan's export performance has been less than satisfactory. It took 10 years to add $ 2 billion in exports during the 1980s and it took 9 years to add $1.5 billion in exports during the 1990s. It is only during 2003-07 that Pakistan has made considerable progress in exports. During these years, Pakistan has added more than $ 5 billion in exports.

The excess of imports over export, or trade deficit, has received considerable attention from policy makers recently. Increasing trade deficit is a natural consequence of fiscal imbalances. Business community has expressed their apprehension on trade deficit. It is expected that trade deficit may increase during the current fiscal year and it would be difficult for the government to achieve the export target of $ 22.1 billion. Pakistan's annual trade deficit for 2007-08 closed at $20.745 billion, which is 52.92% more over $13.563 billion for 2006-07 because of food import bill and steep increase in prices of crude oil in the global market. First time in the history of the Pakistan current account (CA) deficit has crossed $8 billion mark, as during the last fiscal it was at all time high level of $7.016 billion. Official figures released by the Federal Bureau of Statistic showed that the country imported goods worth $39.968 billion against $19.922 billion exports in 2007-08. The growing trade deficit, experts says, would not have only put pressure on foreign exchange reserves but would amass more inflation because the country imports a number of food items to meet its domestic needs. Many fear that Pakistan was becoming increasingly an import-dependant country with the growing list even of food items, despite being an agricultural country.

It is now important for the private sector to take the lead in for economic growth of the country. Export is critical for any country for a variety of reasons. First, export sector usually has a high rate of profits. Its profits are high because of world trading, greater economies of scale, and production efficiency. Second, export sector generates foreign exchange earnings and overcomes the foreign resource constraints for greater imports. Third, exports and particularly manufactured exports are highly employment intensive. An increase in exports creates jobs for workers directly engaged in the production of the export commodities. If raw materials and machinery used in such production are supplied by domestic industries, increased demand for their products creates more employment. Finally, higher exports growth help achieve higher economic growth. Given the apparent importance of exports in the economic transformation of nations, the ability to achieve strong export growth has become vital for Pakistan's overall economic progress and prosperity of the nation.

Broad categories of exports suggest that with the exception of textile manufactures, all other categories of exports registered growth. For example, exports of food group were up by 22.4%; petroleum group exports registered an increase of 38%; exports of other manufactures and other item's posted handsome growth of 33.2% and 59.5% respectively. Textile manufactures, accounted for almost 57% of total exports, performed poorly as it registered a decline of 2.5% due to which overall performance of exports suffered. Textile exports are suffering from structural issues which need to be addressed by the industry itself. The government provides financial support to textile sector through R & D but few of the textile owners misuse this. With the exception of raw cotton and other textile materials, all other major components of textile manufactures registered negative growth.

According to the Economic Survey of Pakistan 2007-08, quote 'Textile is the backbone of Pakistan's exports but bears various tribulations. These include: (i) low value added and poor quality products fetching low international prices; (ii) machinery installed in recent years has depreciated considerably relative to Pakistan's competitors; (iii) these machines are power-intensive, less productive and carry high maintenance cost; (iv) augmented wastage of inputs adding to the cost of production; (v) little or no efforts on the part of industry to improve their workers' skills; (vi) industry spending less money on research and development; and (vii) export houses lacking capacity to meet bulk orders as well as meeting requirements of consumers in terms of fashion, design and delivery schedule." Unquote.

ROLE OF THE PRIVATE SECTOR

The first thing that the private sector must do is to improve their competitiveness by employing state of the art machinery; through better management; through cost effectiveness; and by improving their working environment. They have a comparative advantage in terms of relatively cheap labor, relatively low cost of capital, a strong macroeconomic environment represented by a stable exchange rate, relatively low inflation and strong growth. The electricity charges are though high but these are not bad when compared with other countries in the region. For example, Sri Lanka has much higher electricity charges than Pakistan. Keeping in mind, the new government has inherited higher electricity prices which cannot be reduced in a short period of time. The efforts are underway to introduce other cheap energy resources but that will take time to materialize. The second most important task that private sector must undertake is to look for new markets and new products. Today our exports are highly concentrated in few items and going into few markets. More than 75% of our exports originate from four items, namely cotton, rice, leather and sports goods. Similarly more than one-half of our exports go to 7 countries in the world. This state of affairs will not take us at higher export path. Diversification of exports, both in terms of commodity and regions will be needed. For new markets we need to look at China, Japan, Latin America and in ASEAN Region. A more diversified export mix may enable the country to accomplish stability and growth oriented policy goals. Further, by providing a broader export base, replacing commodities with positive price trends and adding value to commodities through additional processing and marketing a diversified export portfolio would be expected to minimize the volatility in export earnings and to foster economic growth. It is also suggested that export diversification initiatives need to be undertaken within a broad policy approach where the government should design and support a coherent macroeconomic policy framework consistent with export promotion strategies. While export diversification programs should be implemented primarily by the private sector the role of the government, in this context, should be to prevent distortion and create an environment which promotes diversification.

ROLE OF THE GOVERNMENT

The Government should play its supporting role in achieving the objectives of raising exports. The first and foremost duty of the government is to provide a strong macroeconomic environment, an environment where exchange rate is stable; a comfortable foreign exchange reserves; low cost of capital; low inflation, low budget deficit and no debt crisis and consistent and transparent macroeconomic policies. Whereas in reality, rupee is not stable, inflation is out of control, electricity is not available, and cost of capital/debt is increasing quarter by quarter. The second most important duty of the government is to provide strong infrastructure, transport & communication, roads & highways, power, well-functioning ports etc. In highly competitive international markets, poor and overstretched infrastructure facilities can greatly limit the potential gains from an export-oriented trade regime. Buyers in the international market have a range of alternative suppliers, and they value on-time delivery, ease of communications with their suppliers, and other attributes that exporters can only achieve if infrastructure is adequate. The third most important duty of the government is to enter into active Trade Diplomacy. Our Commercial Attaches in Embassies abroad will have to change their attitude. The government will have to work hard in getting market access and providing level playing field in major countries and regions. This is something which is not achievable easily.

Institutions can also play an important role in increasing exports for any country. East Asia is full of examples as to how their institutions have succeeded in enhancing exports. The case of Malaysia is before us. The main features of their success have been the level of professionalism of their agencies responsible for export promotion. We need to reorganize and strengthen our Export Promotion Board (EPB) by inducting trained and skilled professionals. This organization needs to be reorganized as a corporate body and not as a government organization. There is also a need to establish more Export Processing Zones (EPZs) like Textile City in Karachi.

It is also vital for the economy to look for FDI in export sector. This is what we need to pursue. It is generally observed that exporters some time demand that government should pursue discriminatory policies in favor of exports and provide ad hoc incentives for export promotion. Historic analysis suggests that discriminatory policy and ad hoc incentives to promote exports have not worked on sustained basis. Therefore, it is not appropriate to pursue discriminatory policies. In order to increase export proceeds, it is important that increase in exports should be done through increasing quantity and not solely relying on price increase. Some increases in price is understandable if we move to higher value addition but our efforts should be to increase exports through increasing quantity for which we have to find new markets.

Falling export and staggering trade deficit of the country has reached alarming levels. But it is a matter of great concern that despite the enormous potential and attractive business opportunities in Pakistan, the potential investors did not come out with money at the desired level due to various reasons, especially the unpredictable policies and law and order situation in the country. Therefore, government should play its role in stabilizing the political environment and play the role of a facilitator. While private sector must take the lead in materializing polices. Together they can transform Pakistan into an export-oriented country. Export is Pakistan's future.

BARCLAYS BANK GETS LICENSE TO OPERATE AS SCHEDULED BANK

State Bank of Pakistan (SBP), in exercise of the powers conferred on it by clause (a) of Sub-Section (2) of Section 37 of the SBP Act, 1956, declared "Barclays Bank Plc." as a scheduled Bank with effect from July 23, 2008.