Pakistan earned an additional $354 million in exports in July-December 2019 as foreign exchange earnings during this period rose to $11.53 billion from $11.18bn a year ago. This translates into an average monthly increase of $59m.

This is unacceptable. Prime Minister Imran Khan and our powerful establishment are unhappy. Mr Khan has instructed the Ministry of Commerce to ensure that a higher growth target be achieved in the next six months at every cost.

Unless exports grow by $200-300m a month from now onwards, a further cut in the trade deficit through a reduction in imports will not be sustainable. There are two reasons for this: first, a massive reduction in imports has already started hurting industrial and import revenue growth; and second, there is not much room for the further tightening of import tariffs.

Our trade tariffs are already far higher than those in regional countries. The State Bank of Pakistan (SBP) has acknowledged this fact in its first quarterly report for the current fiscal year.

If the trade deficit has to fall further — and it has to fall to keep the current account balance and foreign exchange reserves in shape — then that has to come from a mix of a surge in exports and a slip in imports. We also need to remember that the prevalence of higher import tariffs, particularly on non-essential goods, continues to discourage foreign direct investment. They also annoy our trade partners negotiating fresh deals with us.

We need to let raw material imports increase to achieve higher exports

Pakistan managed to cut the import bill by $4.79bn to $23.16bn in July-December 2019 from $27.95bn a year ago. That means it saved an average of $798m on monthly imports. This is optimal in our context as a steeper decline in imports in the future will make the task of reversing the declining trend in industrial activity almost impossible. In July-October 2019, the large-scale manufacturing output already receded by 6.5pc on a year-on-year basis.

Now the government must aim at accelerating exports while expecting that imports may not — in fact they should not — decline as fast as they did in July-December 2019. For achieving a faster growth in exports, we always need to let imports of raw materials increase. However, since we need to watch even a little rise in imports because of the paucity of foreign exchange, import substitution, a more productive use of imported stuff in exportable goods, higher value addition in exports and improved productivity of export industries will be the key to success.

But that is a tall order.

Real brainstorming and input-seeking from all stakeholders is necessary. A change in the sourcing of imported raw materials for price consideration and deeper penetration into export markets where our low-to-medium value-added goods are acceptable can provide some relief in the short term.

But the medium- and long-term goal of addressing structural flaws in our export sector ought not to be forgotten at all. SBP Governor Dr Reza Baqir made it a point during his address at a recent seminar in Karachi. That exports suffer from structural flaws is evident from the fact that in the best-case scenario total earnings in 2019-20 will be closer to what Pakistan earned 10 years ago.

Last week, NutriCo Morinaga, a joint venture of Japan’s Morinaga, ICI Pakistan and another local company Unibrands Ltd, started commercial production of formula milk in Sheikhu­pura, Punjab. The Rs5.5bn facility has an installed production capacity of 12,000 tonnes of formula every year.

It is a heartening development. We certainly need such joint ventures across agricultural and industrial sectors to cut imports.

In its first quarterly report for this fiscal year, the SBP laments the fact that the share of foreign value-added components in Pakistan’s exports is “quite small”. This is a worthy observation. Whereas import substitution is a must for foreign exchange–starved countries like ours, it is also essential that we learn to use imported stuff more efficiently for producing exportable goods. That can also help boost our forward participation in global value chains or GVCs.

The SBP report notes with concern that in a span of 15 years (2000–15), Pakistan increased its GVC participation by only $6.7bn. “This shows the low presence of Pakistani companies in the network of coordinated transactions among different layers of firms on a global scale.”

More meaningful participation in GVCs is a must for Pakistan to rationalise its external trade and take exports to a respectable level. But to make that happen, the government needs to work closely with the private sector. The services sector, particularly ICT, has real potential for Pakistan’s active participation in GVCs and reaping greater benefits. But the government must first come up with a comprehensive policy on this subject.

Owing to the absence of such a policy and leakages in the channelling of export proceeds through banks, the compound annual growth rate of Pakistan’s realised exports of ICT value chain remains very low. According to an SBP study, during the past 13 years, such proceeds grew between 3.4pc and 28.5pc, depending on the nature of the export service. Export earnings can get a quick boost if these two issues are addressed, immediately and adequately.

Published in Dawn, The Business and Finance Weekly, January 20th, 2020