ISLAMABAD, Nov 30: Independent foreign institutions have cautioned that Pakistan’s powerful textile and clothing industry was misusing export earnings for speculative real estate business to present a gloomy picture of foreign trade for getting maximum subsidies from the government.

The trend already had a negative impact on the manufacturing sector and created structural problems in the overall economy.

According to a research study by the ABN Amro Bank, to be released next week, the softness in export earnings is led by the textile and clothing sector, the underlying trend is not confined to T&C exports. T&C exports have registered a cumulative decline of nine per cent for July-October 2006, while exports receipts from non-T&C manufactures have fallen by 34 per cent over the same period.

"The recent trend in exports is worrisome," says ABN Amro’s chief Economist Sakib Sherani. For the July-October 2006 period, Pakistan's export receipts have registered a 1.3 per cent increase in dollar terms, according to FBS data.

Somewhat inexplicably, export performance has deteriorated from around July of this year. With no major or sudden catalyst such as a significant exchange rate adjustment by a competitor, for example, the trend appears to have picked up pace since.

Coinciding with the fall in US dollar receipts from exports, remittances from expatriate Pakistanis have picked up by over 20 per cent in the same period – from already elevated levels. "The combination of falling export receipts and an unexplained jump in remittances has fuelled suspicion that exporters have been concertedly diverting export receipts into non-bank channels in order to pressurise the government into granting further "relief" in the form of subsidies and/or exemptions," said Mr Sherani.

The fact that US Customs data for the July to September 2006 period indicates a 16pc increase in the dollar value of textile and clothing exports from Pakistan has reinforced the suspicion of an element of "manoeuvring" from the textile lobby, the report said.

However, whatever the short run dynamics of the situation, the decline in exports of manufactured goods underscores a broader issue – Pakistan’s fragile competitiveness in this area.

Clearly, this is not a new phenomenon; measured by almost any metric, the manufacturing sector has been in a long run secular decline since the early 1990s (in terms of share of GDP, or employment, or most worryingly, share of new fixed investment by the private sector).

The composition of foreign direct investment (FDI) into Pakistan over the past few years is also confirming a basic fact that by shunning manufacturing and pouring into the non-tradeable sectors like physical infrastructure, telecom, upstream oil & gas exploration, real estate development, leisure, financial and other services, the pattern of foreign investment is sending a strong signal about the state of play in manufacturing.

A significant contributor to the problem at hand is the rapid increase in cost of manufacturing in Pakistan over the past five years, partly a function of government policy and donor advice. The other important determinant of the relatively superior competitiveness of the Indian T&C export sector is scale economies.

However, despite a substantial degree of policy intervention on the part of the Indian government in favour of the Indian export sector, not all business costs are stacked against Pakistani exporters.

In addition, the fact that T&C exporters in Pakistan have, by and large, used their companies’ balance sheets to borrow heavily over the past 3-4 years and then utilised a significant portion of the monies for non-core investments (as in real estate purchases) should not be treated as a "business cost" requiring a bail-out subsidy.

At a fundamental level, the difference in competitiveness between exporters of manufactures in Pakistan and India appears to be in efficiency/productivity at the firm-level. This is as much a function of weak governance (a relatively appreciated fact) as it is of weak entrepreneurship.