July 24, 2006	Monday	Jumadi-ul-Sani 27, 1427

BY keeping the import bill at the last year’s level of $28 billion, against a record rise 39 per cent in 2005-06 and decelerating the annual export growth rate to 13 per cent ($18.6 billion) from over 14 per cent, the government proposes to reduce the trade deficit by about $2 billion to $9.6 billion during the current year.

On the face of it, ambition appears to have taken a back seat in the government’s foreign trade scheme of things. But it still seems to be clutching fast to misplaced hopes of getting its fiscal and monetary policies which the current year’s budget did not change much, to put a sudden break on the country’s appetite for imports. More so in the face of the escalating world oil prices.

To keep the import bill under control, the new trade policy has allowed import of a lot of second-hand items. But you don’t get second hand oil or essentials like cement, sugar, pulses and vegetables etc. Uncertainty looms large on the domestic supply situation of essentials. And the demand for high end imported products from the rich is going up steeply. And since there are no incentives for the real economy or social services, there would hardly be any keenness on the part of the investors to avail the second-hand machinery and capital goods import facility.

Of course, a number of concessions, incentives and facilities have been made available to the textile sector. Officially it is estimated to cost as much as Rs25 billion to the exchequer. In the first place, nobody knows from where the government has arranged these resources. Has it diverted these from the social sector development budget, because that is the easiest thing to do? An answer needs to be found.

Secondly, on the face of it the low-end textile exportable surpluses face no competition from either China or India as Pakistani currency is too weak against the Chinese yuan (you get only 13.279 yuan for PK Rs100.0) and relatively fairly weak against the Indian rupee (you get Rs77.69 Indian rupees for PK Rs100.00). Bangladesh and Sri Lanka exporters do not have the advantage of local raw material and the capacities.

The cost of doing business, though on the face of it appears to be relatively very high in Pakistan, but if you take a closer look, you get a very different but anecdotal picture as you cannot have firm estimates of the level of utility (power, water, gas) pilferages the industrialists indulge in. Recently, it was revealed, again, anecdotally that even during these days of extreme power shortages in Karachi, our manufacturing units siphon off as much as 600MW from the system.

And a number of official and non-official studies have come up with the devastating findings that our textile sector pays only a paltry part of the taxes due from it. This is happening for ages now. Also, the textile tycoons get banking resources at comparatively very low rates as it is they on whom the banking sector has come to depend on making profitable uses of their depositors’ money.

However, since this sector is politically very powerful, it has got away with all this and more without being subjected to any accountability. The continuing burden of this sector on the successive budgets and trade policies has resulted in total distortion of both— our agriculture and industrial policies — which serve as a bar against developing other industries so that the economy’s overwhelming dependence on the textile sector is reduced to manageable levels.

This sector has, indeed, made so much of profits over all these years that it should have been able to stand on its own two feet in the international market by now without requiring the tax payer’s crutches every time there is a threat to its profit margins. Or at least it should have been able to use some of its profits to meet the challenges of occasional market reversals.

We keep on talking about making Pakistan the trading hub of the region and spend a lot of breath on making grandiose announcements about making Pakistan the trade corridor for this part of the world. But when it comes to taking concrete steps in this regard, we fall prey to bureaucratic foot dragging. China and India have already set up rail links in the most inhospitable regions. But we have yet to convert our dreams for such links with neighboring countries into reality.

Our borders with Afghanistan need to be pacified at the earliest so that a free trade area between NWFP and Afghanistan could be established for mutual benefit which today is being hijacked by the smugglers on the two sides. At the same time, we must also set up a free trade area between Iran and Balochistan. Here it must be recognised that both these markets—NWFP and Balochistan—are being catered by informal trade.

We also need to give up the self-defeating notion of forcing India to come around to our way of thinking on Kashmir by refusing it transit facilities, the MFN status and delaying a meaningful adoption of SAFTA arrangement. We have already agreed to the transit of gas from Iran to India through a pipeline passing across Pakistan. So it appears economically illogical to resist the other kinds of transits. Every one knows how much Pakistan would gain by entering into normal trading activities with India.

Indeed, the information technology revolution has made the world into one big manufacturing plant. Fabrication of different components of one whole thing are made in different locations without any regard to the geographical borders but depending on the availability of best skills at the most economical price and then these components are assembled in another location to be shipped to various destinations. This is a futuristic scenario. But then this scenario is just around the corner. Let us take the plunge now or we will be left on the road side once again.

It is time, therefore, to formulate a new trade policy which would allow Pakistan to import raw materials, intermediaries and components at zero duty, do value addition to these to the extent we are skilled to do at the most economic rate and then pass them on to the next destination. In order to enable such a policy to flourish we should then have a new industrial policy and in keeping with its goals a new human resource development policy.

We should also be requiring a new foreign direct investment policy which should be aimed at inviting investors to put up units with export bias and not those that produce things for domestic consumption because this latter arrangement puts pressure on our foreign exchange reserves (repatriation of profits) rather than adding to the foreign exchange reserves.