An overly ambitious export target

February 26, 2018

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THE draft Strategic Trade Policy Framework (STPF) 2018-23 aims at taking annual exports to as high as $61 billion in the next five years.

The target, although not unattainable, is very ambitious, considering the country’s export performance in recent years.

The STPF 2015-18 targeted exports to scale up to $35bn. However in 2016-17, exports were only $20.45bn. From $25.11bn in 2013-14, exports fell to $23.67bn in 2014-15 and further to $20.79bn in 2015-16.

During the current financial year, the decline in exports has been arrested, as proceeds amounted to $11.77bn during the first six months (July to December) compared to $10.62bn during the same period a year ago.

This means exports increased by 10.82 per cent year-on-year during the first half of 2017-18. At this rate, they will reach $22.62bn during the entire year.

If the country achieves only 10pc annual growth in exports over the next five years, the proceeds could go up to $36bn by 2023. With an annual growth of 15pc, exports could rise to $47.28bn. But exports will have to grow by 20pc every year to cross the maximum STPF target of $61.03bn.

The lacklustre exports’ performance during the last three financial years has been accompanied by low cotton prices in the international market: 70.41 cents in 2015 and 74.23 cents in 2016. Corresponding to these two calendar years, textile exports went down by 0.88pc in 2014-15, 6.22pc in 2015-16, and by 3.19pc in 2016-17.

In 2017, however, cotton price surged to 85.99 cents, which mainly accounts for the 7.70pc growth in textiles’ exports, and 10.8pc increase in overall exports in the first half of 2017-18. Likewise, rice exports went up by 12.48pc during the same period mainly because of price effect.

This correlation makes sense, because the country’s export basket remains largely dependent on cotton manufactures, such as home textiles, cloth and garments.

Since as a rule, world commodity prices tend to be volatile, they play a very important part in export receipts. Herein lies one of Pakistan’s greatest weaknesses: it remains primarily an exporter of commodities, such as rice, or commodity-based semi manufactures.

High value-added or technology-based products, such as electrical and mechanical goods, have a very low share in export portfolio. This is because our manufacturing base is narrow and commodity-dependent.

Regrettably, nothing worth mentioning has been done over the years to broaden or upgrade the manufacturing base. By contrast, the conventional sectors remain the principal beneficiary of government support.

If firms are wedded to a culture of quality, value-addition and competitiveness, their products will have a high demand in foreign markets. Businesses in Pakistan by and large prefer playing safe: producing the same product mix, and using the same processes with the same management style.

Risk taking, venturing into new areas, product and process up-gradation and innovation — entrepreneurship— which have been the principal drivers of economic development all over the world, are hard to come by in Pakistan.

Nor are government policies geared towards encouraging entrepreneurship, because the well-entrenched business elite may see it as an affront.

Even the most meticulously drawn-up trade policies cannot achieve their targets in the absence of a supportive environment

Different government institutions and policies may work at cross purposes to the detriment of exports. Here are some examples. For nearly four years, until Dec 2017, the present government did not let the exchange value of the rupee depreciate.

While that decision helped to maintain exchange rate stability as well as keep inflation in check, the overvalued rupee contributed to a fall in exports. The import tariff policy is a perennial area of disagreement.

The Federal Board of Revenue, which is concerned with revenue collection rather than export increase, wants high tariffs to achieve revenue targets.

The ministry of industries and production is geared towards protecting the domestic industry, while in the interest of export expansion, the ministry of commerce advocates that intermediate goods and capital equipment have minimum tariffs.

Low tariffs also serve to drive up the import bill and thus accentuate trade and current account deficits. Last year, with a view to containing imports and increasing revenue, the government imposed regulatory duty (RD) on 136 new items and increased the RD on another 220 items.

(The RDs have recently been scrapped by the Sindh High Court on technical grounds). Being an indirect tax, RDs contribute to raising prices. Besides, higher duties may compel trading partners to reciprocate by restricting market access for Pakistan’s products.

In both cases, exports will be affected. Finally, the government’s overwhelming reliance on bank borrowing for deficit financing raises interest rates, which crowds out private sector investment by enhancing the cost of borrowing.

This affects manufacturing and thus exports. In recent years, a lot of capital has gone into speculative or real-estate investment at the expense of manufacturing.

hussainhzaidi@gmail.com

Published in Dawn, The Business and Finance Weekly, February 26th, 2018