After the budget: What's missing in Pakistan's export promotion policy?

The low value-added nature of exports is due to the limited focus on structural issues.
Updated 26 Sep, 2019 03:48pm

In his book Growth and Inequality in Pakistan, former Minister for Finance and Economic Affairs Dr Hafiz Pasha notes that the decline in Pakistan’s “ability to service external debt … is clearly demonstrated by the phenomenal increase in the external debt to exports ratio.”

Based on our calculations, the external debt to exports ratio has worsened from 246 per cent of exports in FY13 to 427pc in FY19. This has come to haunt the economy as the government continues to adopt demand compression measures to contain the balance of payments crisis. While this may be unavoidable, the government must formulate appropriate export-promoting policies if Pakistan is to avoid another similar crisis.

At a macro level, both the previous and current governments have taken several steps towards promoting exports. The most important of these measures is the depreciation of the currency exchange rate, which was started in December 2017.

In a recent paper, one of us shows that all of the slowdown in quantity of exports between 2015 and 2018 can be explained by the appreciation of the real effective exchange rate. Since then, exchange rate devaluations have helped to promote exports.

The State Bank of Pakistan (SBP) data shows that the quantity of exports has increased significantly during the first half of FY19. Data from the SBP further reveals that exports (in rupee terms) have increased by 24pc year-on-year over the same period.

—State Bank of Pakistan
—State Bank of Pakistan

More recent measures aimed at promoting exports include the decrease in custom duties on raw materials (April 2018, Sep 2018, March 2019 and June 2019), rationalisation of energy costs (Dec 2018), increase in the scale of SBP’s long-term lending facility (April 2019) and the partial resolution of refunds (April 2019).

The resolution of refunds has been a long-standing demand of exporters. It is easy to appreciate that business revenue is the cheapest source of finance available to any business. However, with funds stuck at the Federal Board of Revenue, firms had to rely on expensive external finance to run business operations. With the release of refunds in the form of cash and promissory notes, the cash flow of exporting firms should improve.

The measures listed above should continue to have a positive effect on exports in the coming months. On average, it takes between four to six quarters before exports (in terms of quantity) respond to changes in prices.

However, despite significant improvement in the quantity of exports, the SBP data demonstrates that the year-on-year increase in dollar value of exports has remained minimal at 1.9pc for the first half of FY19. More recent data for FY19 does not point to any increase in the dollar value of exports compared to FY18 either.

This is because, since most of Pakistan’s exports are low value-added, exporters can only compete in the international market by lowering the dollar price of their products. The implication is that, while the quantity of exports increases, the dollar value does not increase significantly.

Structural constraints

The low value-added nature of Pakistan’s exports is due to the limited focus by successive governments on structural issues.

These include the lack of focus on developing human capital necessary for high value-added production, poor linkages between high-tech defence industries and the private sector, a lack of emphasis on ensuring industry-wide standardisation and the limited access to neighbouring markets.

The low value-added nature of Pakistan’s exports directly relates to the availability, or lack thereof, of human capital. A recent survey conducted by Naqeebz Consulting finds that 78pc of employers (respondents) are dissatisfied with the quality of fresh graduates. This is concerning as it limits firms’ ability to produce high value-added products.

Explore: The start-up revolution of Pakistan

Pakistan can benefit from the experience of advanced countries in this regard. For example, most engineering degrees in the United Kingdom provide placement opportunities as part of their degree programmes. An alternate route of vocational training and a government-sponsored apprenticeship programme is designed to allow the apprentice to spend most of her time with an industrial partner. By the time these students graduate, they are skilled and become an active part of the UK’s workforce.

Industrial linkages between defence and the private sector are factors deserving policymakers’ attention as well. In a paper titled ‘The Intellectual Spoils of War?’ researchers at the University of California (Berkeley), Harvard and London School of Economics and Political Science show that an increase in defence-related research and development spending has positive spillover effects on productivity.

The domestic industry in the UK also benefits from government funded defence projects. Centres like the Forming Institute and The Welding Institute are linked to technology transfer organisations such as the Institute of Materials, Minerals and Mining, known as IOM3. These organisations then offer memberships to industry players at minimal cost and link them to relevant experts when needed.

While Pakistan spends a significant proportion of its tax revenue on defence, the lack of industrial linkages results in almost no spillover to the rest of the economy. Linking defence industrial establishments like the Pakistan Atomic Energy Commission and Heavy Industries Taxila to industry players and research institutions can potentially increase industrial productivity and, in the long run, export competitiveness.

Also read: What does the future of regional trade in South Asia look like?

Standardisation, the third factor on our list, has emerged and taken importance of its own. A study published by the German Institute for Standardization notes that “84pc of the companies surveyed use European and International Standards as part of their export strategy, in other to conform to foreign standards.” The study further notes that exporters also use standards as a marketing tool to enter new markets.

In Pakistan, one key sector which suffers due to poor understanding of standards is IT. Pakistan Software Houses Association’s data shows that IT exports crossed the billion-dollar benchmark in FY18. Nonetheless, this is minuscule compared to India’s exports of $126bn.

Freelancers most often rely on self-learning and go through several iterations before meeting required standards. Awareness campaigns by software houses, workshops by industry experts and short courses through technical and vocational institutes can go a long way to eliminate this bottleneck.

Finally, the most important constraint which Pakistan continues to face despite its geostrategic location is of market access. It is common knowledge in international trade literature that scale of production is critical for high-tech firms (or industries requiring large initial investments) to compete in the international market.

While Pakistan does have a large population of its own, the consumer base for sophisticated technologies is rather limited. Therefore, if Pakistan cannot guarantee potential investors market access to neighbouring regions such as Central and South Asia, there is no reason to believe that technology-intensive industries will find it worthwhile to establish their foothold in the country.

None of these reforms require significant expenditure. Instead, they require resolve.

Are you examining Pakistan’s political economy? Share your insights with us at prism@dawn.com


Author Image

Ahmed Jamal Pirzada has a PhD in Economics. He currently teaches at the University of Bristol and is a visiting fellow at the SDPI.

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Talha J. Pirzada is a PhD candidate at the University of Oxford. He is also a Chartered Engineer at the Institute of Mechanical Engineers.

The views expressed by this writer and commenters below do not necessarily reflect the views and policies of the Dawn Media Group.

Comments (22) Closed

Jun 14, 2019 05:06pm
Pakistan exports crude oil?
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Jun 14, 2019 05:27pm
A good analysis of our weakness regarding exports. One way to improve export earnings is to focus on new marketing channels i.e. on-line sales through Amazon, Ali Baba etc. I know it is difficult to manage from Pakistan. So why not the Chambers of Commerce with the assistance of Commerce Ministry work out a mechanism whereby warehouses in important markets are set up to store goods from where distribution is done locally. Overseas Pakistanis can be hired on part-time or casual terms to assist our exporters as well as provide local market information. The main advantage will be to raise unit export price by eliminating middlemen and brokers who take away a sizeable value added from our exporters. Hence export earnings of the country will go up.
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Jun 14, 2019 05:33pm
Useless analysis if not implemented in a timely manner and not used to mitigate the risk. Throw his funding and truth un a trash can.
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C P Madhusudan
Jun 14, 2019 07:12pm
Friendship with India would have solved a number of above problems but that is a different story
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Jun 14, 2019 07:30pm
The best ‘export promotion policy’ is an effective ‘import control policy’.
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Jun 14, 2019 08:40pm
Pakistan should follow strategy of Indonesia, and China. Train all your students in IT engineering. Open call centers, IT software/hardware professional can work as IT support team even over online. Like China open up small IT hardware manufacturing factories. eg CDS, CABLE WIRES, etc. Encourage IT startups. Need lot of focus in trained engineers. Focus on both software and hardware.
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Jun 14, 2019 09:21pm
While I agree with the figures and the general character of this article, the authors fail to discuss the strengths and weaknesses of Pakistani institutions that are responsible for implementing the export import regime, for example Ministry of Commerce, TDAP etc. Export is not just about figures and a weak understanding of IT. It is about the micro issues that afflict Pakistan's exports. What about best practices from similar nations like Bangladesh, India, Malaysia, etc. A very Phd sort of academic article which can be used for a paper publication in an international journal, but not enough action in it.
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Pran Mitra
Jun 14, 2019 09:46pm
Let’s keep Kashmir issue dormant for some period. Concentrate on trade relations. Experience elsewhere proves, this is efficient method of improving economy. People from both countries enjoy better pricing ( effect on run away inflation!) and brotherhood. I am confident Indians will reciprocate in big way. KHUSH RAHO.
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Perincheri gopinathan
Jun 14, 2019 10:12pm
Devaluation is the only salvation for Pakistan which will encourage exports and lead into import substitution culminating in improvement in employment potentials.
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Jun 14, 2019 11:05pm
Pak should aim to export, fruit and vegetables, fish, meat and other food produce to landlocked central Asian nations just as Mediterranean nations export to northern Europeans. The BRI should help with this but Pak needs to be in a position to take advantage.
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B.Patel U S A
Jun 15, 2019 12:33am
@C P Madhusudan, let Pakistan decide about friendship with India.
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Ravi Krishna
Jun 15, 2019 01:00am
@tzk, And they themselves will eat air and water ????
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Jun 15, 2019 01:55am
What’s missing? India
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A shah
Jun 15, 2019 02:15am
What are you going to export?
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wasim rathore
Jun 15, 2019 03:47am
A slightly baffling analysis. It compares a stock (external debt) with a flow (export earnings), and the total stock does not have to be paid off with the flow of a single year. Moreover, it is not clear whether the article's definition of "exports" comprises earnings only from physical items, such as merchandise, for it also includes invisibles such as worker remittances. In Pakistan's foreign exchange earnings, the invisibles are pretty much as important as the visible. Nonetheless, the article draws attention to an important point, namely, that Pakistan must increase its foreign exchange earnings if it is to flourish, or indeed to survive.
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Raja Parekh
Jun 15, 2019 08:37am
Indians, Please don't advise what Pakistan needs to do. It is neither solicited nor appreciated. In short they have their own advisors and your tips are unwanted. Just stay away.
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Jun 15, 2019 11:04am
There is nothing missing in the policy. What’s missing is exportable products. Pakistan simply has nothing to export which is wanted or is critical or is competitive in the global market. Selling tauliya, chaddars, fruits and rice is not going to be enough ever.
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Prof Dr Zahid Hossain Sharif
Jun 15, 2019 02:22pm
A excellent analysis for future action.
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Jun 15, 2019 02:58pm
@C P Madhusudan, To begin with, India cannot do much to alleviate Pakistan's economic woes and China is definitely much better placed to do that. Second, the resolution of issues between India & Pakistan would strengthen China's position vis-a-vis the US which is detrimental to India's strategic security. Third, I honestly do not believe that there can ever be friendship between India & Pakistan because if it were possible today, the country wouldn't have been divided in the first place. The two are irreconcilable & as an Indian, I do not think that it would be so bad if it were to remain that way for the foreseeable future. After all, how many of us want to see India flooded by nostalgic Pakistanis or vice-versa?
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Jun 15, 2019 04:31pm
@Ravi Krishna, Food production in Pak needs investment to bring it up to date. The recent announcement by Cargill, to invest in Pak is welcome.
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Jun 16, 2019 08:42am
It is impossible for Pakistan to enlarge the export platform without the diversification of defense manufacturing industry. Civil and military sector must join hands and explore new avenues for domestic and foreign markets. Sky is the limit as far as products are concerned: Light electric vehicles, commercial aviation, telecommunication equipment, public transport systems, tourism, real estate and mineral resources.
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K K. Mandokhel
Jun 16, 2019 06:10pm
Bleak outlook . We have been hearing the same ‘solutions’ for the past 50 years or so, ever since the Ayubian years. Let’s be honest. With the cream of talent migrating, there is no future prospect of an ‘economic miracle’.
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