ESCALATING COSTS DWINDLING EXPORTS
FOZIA AROOJ (Fozia.email@example.com)
Jan 18 - 24, 2010
The significant role of exports in economic growth of a country can not be denied. Japan, Korea, Germany and Taiwan are good examples of economic revival with exports. Like most of the developing countries Pakistan is an exporter of primary products, 80% of its exports consist of primary products and 60% of its imports consist of consumer goods. The expert elasticity of Pakistan for manufactured products is low because of various factors which include high price of critical inputs like water, gas and electricity. With such handicaps, it is not realistic to expect that our exporters can compete in fiercely competitive world markets. Pakistan is not competitive in international trade due to the fact that low quality expensive primary products are used in contrast to our regional competitors, i.e. India, China, and Bangladesh.
Incessant price hike in utilities and upsurge in inflation is leading to a disaster for trade and industry. Local businesses as well as exports have nosedived during last one year owing to ever increasing cost f ding business. Recent increase of 18% in gas price with sporadic supplies and frequent outages has aggravated the situation. The government is increasing prices of utilities gas, electricity etc. off and on. Around 30% of industries have gone sick during the past three years. These industries were unable to compete locally or globally due mainly to inefficiency and partly due to the high cost of doing business because of high interest rate and inflation. Industry can not bear the rising cost of production which has surged astoundingly with the implementation of the 24% increase in power tariff this fiscal year 2009-10.
Moreover, the increase in Federal Excise Duty (FED) which has in fact edged up the cost of doing business in the country at a stage where industries are fighting for their survival. This will not only increase cost of production and narrow down profitability but will also lead to flight of capital, massive unemployment and decline in government revenues.
Besides, State Bank of Pakistan has raised export refinance rates by 0.5% from Nov 1 2009. Business leaders and exporters have strongly criticized this decision and claimed that it would hit the industrial sector fatally. It is generally believed that this has been done to meet IMF's conditions, but it would have a negative impact on economy as a whole. This raise has been introduced at a time when high season for apparel exports and receiving of orders was under way. Because of this inflated rate the symptoms of recovery in textile sector would fade away as exports would become costlier with equal margin and it would further erode exporters' competitiveness in the world market.
The export-oriented sector particularly the textile industry has been complaining of their products loosing competitiveness in the international market because of higher cost of doing business as a result of increase in gas and power rates. The unprecedented hike in electricity rates for industrial and commercial consumers has added to their woes. As a matter f fact, over 4,000 business units have closed down and more could face the same fate with the hike in power tariff. The value-added sector was already facing problems due to higher prices of yarn and its shortage; therefore increase in the interest rates would further aggravate their problems. The first two quarters of the financial year 2009-10 have passed with no initiative in sight. Manufacturing and textile exports have seen decline in exports. In the first five months the export of leather products declined by 23.93% with exports touching $111.129 million as compared to $146.09 million in the corresponding period last year.
Pakistan's massive foreign exchange earnings come from textile sector products, i.e. cotton, yarn, fabrics, readymade garments and related products. Our entire export receipt depends on a good cotton harvest which unfortunately is exposed to floods, bad weather, and virus attack. The first quarter of 2009-10 has been average for export of food commodities and traditional products like rice, sports goods, leather products, footwear and surgical and engineering goods, despite the fact that the input cost of such products had witnessed a substantial increase. Pakistan, the world's fifth-largest rice exporter, was hoping to export about 4 million tonnes in the 2008-09, but sold about 2.9 million tonnes after government intervention in the market pushed up prices. Rice accounts for about 8% of Pakistan's exports and 12% of gross domestic product. Businesses condemn hike in export refinance rates
Exporters have stressed the need for a closer cooperation and active coordination between the government and the private sector. They demand that export oriented units be exempted from electricity and gas load shedding and the government should refund the duties and levies paid by exporters on raw material and inputs, in order to reduce the cost of doing business in the country. Government should make every possible effort to bring down interest rates of banks, cut utility tariffs and energy costs, contain inflation and restore law and order so as to revive closed industrial units, generate employment and enliven business environment in the country.
The success of the government policies as well as revival of export industries requires considerable support from the government both in terms of investment as well as improving the overall regulatory framework in the Export sector. Modernization of technology, building of infrastructure for new industries, de-fragmentation of industry, enhancement in skills pool, marketing support and use of information and communication technology and better market access for country's exporters are key international markets. However this can only be materialized when basic inputs i.e. energy, credit and raw materials are provided to the industry at optimal rates and render the products competitive in the market.