In a move to reverse the trend of de-industrialisation, the PTI government announced on Nov 19 a tariff policy that will be effective from next financial year.
Its salient features include a shift from the current focus on revenue collection to an industrial growth-oriented taxation policy besides strategic tariff protection to infant and import-substitution industries with timelines to make them competitive.
The tariff policy will be shaped by intensive interaction among various ministries and institutions rather than a single agency entrusted to boost revenues. The Federal Board of Revenue (FBR) will no longer set the recommended tariff rates for approval by the cabinet. Instead, the responsibility will be delegated to a newly created tariff policy board headed by the commerce minister or adviser.
The board will comprise the chairman of the tariff commission and representatives of the FBR and relevant ministries. The board will oversee the implementation of the policy, supported by the proposed tariff policy centre serving as its secretariat.
The new arrangement may be seen as part of the PTI’s institutional reforms. Earlier, the government had decided to ease control over the financial releases for the Public Sector Development Programme (PSDP) by reducing the involvement of the finance ministry.
Prolonged de-industrialisation has resulted in sluggish exports and unaffordable import costs
Given the past experience when protecting the infant industry led to production inefficiencies and rent-seeking, the proposed policy will “provide a time-bound strategic protection to the domestic industry” during the infancy phase. To promote competitive import substitution, it will be “phased out to make the industry eventually competitive for export-oriented production”.
Without improving the quality of governance, there are risks in the “time-bound strategic protection” for which strict oversight is required. The solution lies in nurturing free trade within the national frontiers with required restricted international trade practices for different phases of industrial development. For this to happen, domestic market reforms have to be expedited.
It is industry that leads growth in all segments of the economy. Prolonged de-industrialisation has resulted in sluggish exports of manufactured goods, unaffordable levels of imports, record-high foreign debts and erratic economic growth. Domestic production must increase to reduce dependence on foreign goods.
Tariffs on imported raw materials and intermediate and capital goods, proposed to be gradually reduced, may help boost domestic production but will raise the import bill.
The recurring external sector crisis has brought pressure on the government to begin focusing on the much-needed trade-related industrial investment. Recently, the State Bank of Pakistan (SBP) recommended to the government that it should put in place “a coherent industrial policy on an immediate priority”.
Aware of its obligation though constrained by the stability agenda, the government had recently tasked the ministries of industries and commerce to come up with a 10-year draft industrial policy by Nov 30.
Pakistan’s former ambassador to the World Trade Organisation Dr Manzoor Ahmed says the government should ask some pertinent questions while formulating the industrial policy: why is Pakistan not part of the global value production chain, which now forms a major share in global exports? How can the new policy measures discard anti-technology bias? Why is the share of engineering goods in the country’s exports less than 0.2 per cent compared to India’s 25pc?
With an oblique reference to the failure of Pakistan’s previous industrial policy, he points out that formulating industrial policy is getting out of fashion in many countries that have concluded after much debate that market failures are less damaging than government failures.
The PTI government is banking on Chinese investment under the second phase of the China-Pakistan Economic Corridor (CPEC), which is focused on industrialisation, agriculture development and some initiatives for social uplift.
But CPEC is beset with its own problems. Speaking at the Woodrow Wilson Centre in Washington DC, US Assistant Secretary of State Alice Wells said the CPEC agenda would “push Pakistan deeper into already stifling debt burden”. The current phase of the stability programme with an undervalued rupee and a high interest rate is doing the same.
In his rejoinder, Chinese Ambassador to Pakistan Yao Jing said: “Unlike the IMF, if Pakistan was in need, China would never ask Islamabad to repay loans in time.” China was also determined to build capabilities of Pakistani businesses and industries to boost productivity that, he asserts, will ultimately help boost Pakistan’s exports.
The Chinese envoy reportedly expressed concerns about the inability of three key ministries — communications, railways and planning and development — to make stick to timelines. The appointment of Asad Umar as minister for planning and development will, however, make a difference.
The critical question here is: will Chinese investment ultimately lead to the balancing of the external trade? It is in the interest of both sides to reduce imbalances in the bilateral trade, with an initial focus on Pakistani exports to China to facilitate the repayment of CPEC-related debts, while the employment of Chinese men and material needs to be minimised to control the dollar/yuan cost of projects. So far, CPEC projects have contributed to a surge in foreign debts.
The production of diverse goods and services is a nature-imposed necessity to meet the needs of the people. The critical test of all policies and programmes lies in the mode of production and distribution: policymakers should not forget that producers are also consumers. Capital formation and poverty reduction should go hand in hand.
Published in Dawn, The Business and Finance Weekly, December 2nd, 2019