HIGH INPUT COST A DRAG ON EXPORTS
Nov 1 - 7, 2010
Trade policy (2009-12) document has outlined a number of factors, external and domestic, as potential challenges to external sector economy, particularly the exports.
* Economic downturn in major markets
* Buyer's perception of Pakistan as a supplier of low quality products and inability to deliver in bulk and in time
* Negative travel advisories
* High cost of finance
* Energy crises (gas and power)
* Law and order situation
* Decline in investment
* Decline in large scale manufacturing growth
The factors related to enhanced market access are guided by world economic conditions and product and price competitiveness of the country. The world economic conditions have deteriorated during the last three years and Pakistan has hardly made any headway in product and price competitiveness during this period. Export sector has off and on benefitted from circumstantial factors that force the world community to soften its stance either out of sympathy or for some political reasons. After 9/11, textile sector benefitted from economic favors the US and EU showered on Pakistan for its role as frontline US ally against war on terrorism. Textile sector earned a lot of money but failed to consolidate itself. Once the concessions were withdrawn, the sector again went into a tailspin. The recent floods again brought us into the world focus but failure on the governance side and corrupt ways of business prevented the leading markets from granting Pakistan any worthwhile external economic concessions. The recently announced EU tariff concessions for Pakistani exports of certain goods have neither been taken well nor they deserved to. Analysts are of the view that the concessions mostly apply to raw materials or low-value-added items. Textile sector laments exclusion of bed linen and knitwears from the concessional list. Any US government initiative to enlarge the scope of export incentives to Pakistan is fiercely opposed by the US business and industrial communities as they feel that tariff concession will directly affect their job market, which is already in a bad shape in the wake of global recession.
Failure to make bulk, on-time deliveries stems from the fact that we have chosen distant export markets instead of following the gravity model according to which doing business with markets that are close to one's own country promotes efficiency and cost effectiveness.
The domestic factors are the by-products of fiscal/monetary policy failures and the political and economic mess that we created in the course of transition from a delivering autocratic rule to a non-delivering democratic system. All the five domestic factors listed above have, in one way or the other, increased the input costs making the product and price competitiveness of exports highly improbable. High cost of finance is the result of tight monetary stance that has not only failed to contain inflation, but has also strengthened the choking hold on the economy. SBP holds the dubious distinction of imposing the highest interest rate in the region. On fiscal side, huge government borrowings for non-development expenditure crowd out the private sector investment on one hand and keep the inflationary pressures on the rise on the other. Energy crises, instead of getting resolved, are being allowed to increase their force and scope. The unmanaged circular debt crisis has entangled all the basic subsectors - power, oil, gas, and refinery. While load shedding keeps the masses on the edge of their nerves, frequent gas and power supply cuts to industry and business cause huge economic loss. Decline in foreign investment emanates from a weak investor confidence. As if the abrupt political change that took place in 2008 was not enough, the ever-floating rumors of another change of government strengthen the foreign investor resolve not to stage an early comeback.
The law and order situation, though not perfectly good during the recent autocratic rule, has deteriorated greatly during the last two and a half years. This further supports the view that the return of foreign investor is only a distant possibility. The steep decline in the flow of foreign investment puts pressure on the domestic currency and, in turn, a depreciated rupee pushes the input costs further upward. Manufacturing sector contributes more than 18 per cent to Pakistan's GDP. During the five-year period (from 2002-03 to 2006-07) manufacturing grew at an average rate of 10.7 per cent. During 2007-08, the growth rate came down to 4.8 per cent and then in 2008-09 it recorded a negative rate of 3.7 per cent. According to the recently released State Bank report, the industrial sector recorded a growth of 4.9 per cent in 2009-10 due mainly to the picking up of construction industry in the wake of lower building material prices. Real manufacturing sector, particularly the large-scale manufacturing sector (LSM) is severely damaged by inapt monetary and fiscal policy designs. Hindered flow of credit and high interest charges raise the input costs to an unmanageable limit making the prospects of product and price competitiveness in export markets very dim.
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