TRADE POLICY - AN OVERVIEW
FOZIA AROOJ (Fozia.firstname.lastname@example.org)
Aug 10 - 16, 2009
Government of Pakistan has recently unveiled a medium-term (2009-12) Strategic Trade Policy Framework, setting an export target of $18.84 billion for 2009-10 with a 6% growth rate. The policy has envisaged an export growth of 10% ($20.724 billion) for 2010-11 and 13% ($23.418 billion) for 2011-12. The entire policy is formulated keeping in view the historical performance as well as the global financial turmoil repercussions being faced by international markets to avoid any shortfall as happened previously.
The government had projected an export target of $22 billion for 2008-09, which fell short by over $4 billion because of the global financial crisis. During 2008-09, the export of textiles, which accounts for around 54% of Pakistan's total exports, dropped from US$10.6 billion to US$9.6 billion. The major losers were readymade garments, cotton yarn, bed linen, art silk & synthetic textiles, and cotton fabric.
On the other hand, rice, engineering goods, the specialized machinery, transport equipment, electric fans and jewelry registered an impressive growth in export market.
As far as Pakistan's trade and commerce is concerned the true scenario in the market is dismal. The share of Pakistan's exports in global trade is shrinking fast. A score of elements has been aggravating this situation including economic disequilibrium, infrastructural constraints, incoherent policies, low-value addition, a narrow range of products and markets, decline in investment, etc. Moreover, energy shortages, regional strife, worsening law & order and the global slowdown have slashed the exports.
HIGHLIGHTS OF THE TRADE POLICY
1. There is a provision of insurance cover for the buyers visiting Pakistan despite security threats in order to restore investor's confidence. The scheme will be funded from Export Investment Support Fund and managed by National Insurance Corporation.
2. A separate textile policy would be announced shortly by ministry of textile this year for promotion of new investment and modernization of machinery. This policy will be aiming at diversification of exports mix; custom duty may be zero-rated on import of Man-Made Fibers other than Polyester Staple Fiber. Customs duty on import of sizing chemicals may be withdrawn. Establishment of warehousing in major markets is to give direct storing delivery. Brand Development Program is to encourage the establishment of domestic and international brands. Rationalization of tariff on the principle of cascading is to provide the exporting industry with an environment, which supports manufacturing rather than trading.
3. The exports have been proposed to make completely zero-rated.
4. A scheme is to be launched to compensate inland freight cost to exporters of cement, light engineering, leather garments, furniture, soda ash, hydrogen peroxide, sanitary wares including tiles, finished marble/ granite/ onyx products.
5. A fund dedicated for research & development and technology up gradation named Technology, Skill, and Management Up-gradation Fund of Rs3 billion is being established.
6. Surgical instruments, sports goods, and cutlery sector would be granted 25% support on brand development activities.
7. A special fund of Rs2.5 billion is being created for product development and marketing for light engineering sector.
8. Export Investment Support Fund may be used for providing matching grants to district governments for installing flaying machines in slaughterhouse to avoid wastage of hides and skins.
9. The leather sector now would be able to share 25% financial cost of setting up labs with Export Investment Support Fund in the individual tanneries and to provide matching grant for setting up of effluent treatment plants in individual tanneries.
10. A 25% freight subsidy would be granted if live seafood products are exported by air. This will also compensate exporters to overcome losses incurred due to mortality.
General sentiment about the Trade policy 2009 amongst the business circles seems positive and encouraging. The orientation of the policy is towards diversification and making the economy competitive to claim a higher share in the international trade.
1. A remarkable point in the trade policy is making the exports completely zero-rated, which was an old demand of the industry. The fulfillment of demand of zero-rating exports will make Pakistani products cost-competitive in the world market.
2. There would be a six monthly review about the implementation status of the trade policy. As a matter of fact, the tall claims of the policy paradigm to improve the competitiveness of export sector in three years, largely depends on the close scrutiny of all the sectors.
3. The policy framework promises a number of interventions to lower the cost of production for exporters. Indeed, the proposed measures have the potential to reduce the cost of exports substantially and make them competitive in the international markets if these interventions are implemented in letter and spirit.
4. The government has set a very modest export growth target of 6% for the current fiscal, and 10% and 13% for each of the next two years. The export targets for the next three years are realistic and achievable because of two main factors one is that the rupee is likely to weaken this year and the global commodity prices are set to rise (cotton prices are up by 46% and rice by 4% since last February, improving the competitiveness of exporters).
5. This year, for the first time a separate textile policy would be announced for the sector, which would cover all issues, including exports. This is a very optimistic development that the government has allowed textile ministry to look after exports in the sectors, reducing the commerce ministry's involvement in this sector without amending rules.
6. This time the trade policy has equally focused on non-textile sectors, which used to be overshadowed previously. The new policy had focused on those non-textile sectors which had massive export potential, but were not getting due attention from the economic planners in the past. For instance, the setting up of Export Investment Support Fund to be used for providing facilities to leather and leather garment sector is a good step. In addition, it is also highly appreciated that funds are made available to local governments for installing flaying machines in slaughter houses because presently around 25% of hides and skins are rendered useless from butcher cuts. Light engineering sector is also given due attention.
Despite receiving a welcoming response from major business tycoons and chamber of commerce and industry members there are certain loopholes and grey areas in the policy:
1. The policy framework envisaged 29% growth in exports but there is no substantive measure to reduce the cost of production by reduction in power tariff as well as cut in trade credit. Prolonged power outages and absence of diversified markets have also been ignored.
2. No emphasis has been laid on the development of domestic market. Only export market has been catered. Policymakers must realize that no country has ever been able to improve its export performance without a strong domestic market. The strategic trade policy framework has totally neglected domestic commerce. All the brands are developed and prototypes are circulated and commercialized before heading to global markets. This is the reason that Pakistan has always been an exporter of low-value-added, low-cost products.
3. The provision of insurance cover for foreigners is of no consequence as no foreign buyer is prepared to visit Pakistan. Instead, local exporters have to go abroad to meet their buyers, resulting in adding business expenses
4. The government has projected in the Trade Policy 2009-10 to boost regional trade to 25% from current 17%. But, there is no clear mechanism devised and proposed for trade with South Asian countries. The aspect of trade with India is of utmost importance as India is the biggest trade partner of Pakistan in the Saarc region. Pakistan is importing certain products from far-flung countries in EU, Latin America and Oceana. These can be imported from India and we can save sizeable foreign exchange of $1.5 billion per annum.
5. Trade policy needs to evolve strategy for promoting export trade in Saarc and ECO region. Comprehensive regional strategy is imperative for achieving the target of expanding regional trade from 17% to 25% as envisaged under the trade policy.
6. Marble mining and blasting is one of the many small industries, which are badly hit due to unrest in the Frontier province. NWFP government had banned blasting for mining purposes. Moreover, all the marble cutting and polishing units in the NWFP are closed due to ongoing military operation in the area. This issue has not been addressed in the trade policy.
7. There is no mention of the Afghan transit trade in the policy that has developed into a bane for the local trade and industry.
Today Pakistan is in a deep economic crisis, which has led it to an extensive social disparity, unrest and frustration. This enigma is likely to culminate in a political crisis if these measures and promises are left unfulfilled once again. Indeed, the prospects of improving the productive capacity in the short-run look dismal. The situation in industry can not improve unless three major issues are addressed i.e. energy deficit, high cost of credit and alarming security situation. For securing millennium development goals, the government has to be watchful and accelerate economic activity by infusing a new spirit amongst trade partners.