July 9, 2006	Sunday	Jumadi-ul-Sani 12, 1427

ISLAMABAD, July 8: The government policy of increasing exports through subsidies in the past years led to mushrooming of exporters instead of improving the quality of products and developing skills of workers, officials and analysts told Dawn on Saturday.

Pakistan's export history is replete with subsidies, such as bonus voucher scheme, refinance scheme, cash compensatory rebates, freight subsidy and research and development support, which did not help in enhancing exports as envisaged at the time of their sanctioning.

In addition to these subsidies, both covert and overt, duty exemptions and tax concessions were also rampant. Despite all these incentives, country’s exports would barely touch $17 billion this year, said a senior official on condition of anonymity.

He said a closer analysis of these policies would in fact reveal that they were not helpful at all as originally thought. And at the same time, these incentives cast a pernicious impact on the growth of export sector.

Interestingly, the government provides exporters the profit which they would have earned from customers. Exporters lure customers merely on the basis of lower prices. But they ignored better quality, adherence to delivery schedule, promotion through modern techniques and other marketing tools.

"More people join the trade with eyes on incentives instead of adopting the profession seriously focusing on its improvement and innovation," the official said and added that this was even clear from the misuse of freight subsidy which was originally announced for the export promotion of new products to new markets.

Analysts said subsidies intensified cutthroat competition and price-war among the exporters, resulting in reduction in per unit price. Consequently, more goods are exported for a lesser price.

The exporters adapt to competition by lowering prices rather than improving the quality of products that earns a bad name to the country as suppliers of the low quality products.

An analytical report on subsidies impact on Pakistan's export sector reveal that subsidies push up the opportunity cost of the money allocated as subsidy. Dollar earned through subsidized exports cost much more than the prevalent exchange rate.

Pakistan follows multiple exchange rates which exerts strain on the currency ultimately necessitating devaluation. The exchange rate must be allowed to move freely with the changes in exports and imports of the country so that there was no need to make such policies where the government needs to subsidise from its own funds.

Subsidies also help in widening budget deficit. The deficit could be filled in by either printing money or new taxation or borrowing -- both internal or external or concomitant of these three. All these measures are inflationary.

After a certain period, the advantage of subsidy is levelled off. Internal borrowing by the government crowds out the private sector, pushing up interest rates and increasing debt burden. Repayments of internal as well as external debt and interests thereon further widen budget deficit.

The report cites the recent real estate boom which was partly fuelled by the concessionary finance obtained under the refinance scheme, particularly part-II. It was also observed that subsidies in Pakistan promoted the rent-seeking culture instead of earning profit through efforts or making improvement in their way of doing business, such as better marketing, higher productivity, etc. Exporters-cum-manufactures in Pakistan are just focusing on exacting concessions from the government while fair trade practices were put on the back burner.