The government has finally conceded that the conflict between its trade and monetary policies was one of the key reasons behind the continuously declining exports, as nearly 45 products lost competitiveness in the international market since 2013.
In a comprehensive report to parliament, the Ministry of Commerce candidly explained what went wrong with exports during the tenure of the current government.
There is a long list of endogenous and exogenous factors that are affecting Pakistan’s export competitiveness in the region.
On the endogenous side the most important factor is the conflict between the tariff policy and monetary policy. Currency appreciation in relation to competitors like India and Bangladesh is affecting competitiveness. Moreover, import tariff on the export inputs has further added to the cost of production.
Secondly, Pakistan’s exports are highly concentrated in limited items like cotton and cotton manufacturers, leather, rice and a few more products. These constitute more than 72 per cent of total exports during 2016-17 with cotton and cotton manufacturers alone contributing 60.1pc.
Besides this narrow export basket, exports are also dominated by primary and intermediate goods rather than value-added finished products; for instance 74pc of food items and 40pc textile exports are primary commodities.
In a comprehensive report to parliament, the Ministry of Commerce candidly explained what went wrong with exports during the tenure of the current government
There are also multiple supply side cons traints — severe shortage of energy supply, poor quality of infrastructure, outdated technology, lack of export culture, and weak contract enforcements.
Investment in export sectors has remained disturbingly low, as a cut-throat competition with emerging players such as Bangladesh and Vietnam has made margins fairly unattractive.
As a result of low levels of investment, exporters are not geared to position themselves against changing consumer preferences in partner countries.
Diversifying the export market is a major irritant in the enhancement of export proceeds. More than 50pc exports rely on only six markets — the United States, China, Afghanistan, United Arab Emirates, Britain and Germany.
Trade potential in regional markets remained highly under-exploited. These markets are the natural extension of the domestic market due to similarity of consumption patterns, short lead time and low delivery costs.
A third factor is the low production of certain commodities that have a high local demand. For instance, local demand for cement has increased while its availability as surpluses reduced for exports purposes.
At a World Bank seminar on export competitiveness, Secretary Commerce Younus Dagha — while admitting that Pakistan’s competitiveness has been under immense pressure for some time — said the government was taking all possible measures to transform the export-related challenges into opportunities.
“Investment in human resource and agriculture is imperative to make our products more competitive in international markets”, he said.
The commerce ministry report also listed exogenous factors that contribute in declining exports. A major factor constraining export growth has been the slowdown in the economies of Pakistan’s major importing partners— China, and the EU. Stagnation in these economies led to low demand for Pakistani goods.
According to the WTO, total world exports declined by 3.3pc in 2016. In a few of Pakistan’s major importing partners’ economies, a shift in demand has been noticed.
Secretary Commerce Younus Dagha said the government was taking all possible measures to transform export-related challenges into opportunities
China has continued to reduce its demand for Pakistani yarn and fabric as competing countries are undercutting their prices significantly. Moreover, China is now more inclined towards high-tech products instead of low-tech products like textiles and footwear.
A change in taste and preferences in global demand has also been seen. The market for man-made fibre products is expanding at a fast pace whereas Pakistan’s textile exports remain predominately based on cotton.
Another factor hurting exports is the depreciation in major currencies. The Euro is approaching parity with the dollar and has depreciated 11pc since the start of 2015. As a result of this depreciation, Pakistan’s exports competitiveness has been affected in the European market.
On the other hand, export of basmati and non-basmati rice varieties declined mainly because of a shift in demand from key markets like Saudi Arabia and UAE, away from Pakistani rice to other countries. The demand for cement also dropped mainly due to low demand from South Africa and Afghanistan.
But contrary to these factors, SDPI Deputy Executive Director, Dr Vaqar Ahmad, explained the different dynamics of export competitiveness in Pakistan and said that to improve, both the public and private sector would need to collectively find solutions.
“These may include regulatory constraints faced by businesses, rising cost of doing business in several key sectors and anti-export bias seen in the prevalent tax and tariff structure”, he said.
The limited entry of Pakistani enterprises in the global value and supply chains, insufficient trade facilitation measures as well as a lack of synchronised support from various government bodies at federal and provincial level, uncertain availability of export credit for small and medium enterprises, and an exchange rate regime — which is not based on economic fundamentals — were the key areas that needed work, Dr Vaqar said.
Published in Dawn, The Business and Finance Weekly, October 3rd, 2017