How to diversify exports

Published August 24, 2020
WB experts have advised Pakistan that keeping up with global demand requires ‘constant investments in technology upgradation.’ — Dawn/File
WB experts have advised Pakistan that keeping up with global demand requires ‘constant investments in technology upgradation.’ — Dawn/File

A World Bank study has recommended to the State Bank of Pakistan (SBP) that export refinance schemes should be open to all sectors of the economy if these are to be made more impactful.

In particular, it explains, the new and existing firms that are diversifying into new markets or products can benefit more from the facility of access to export finance. The SBP should prioritise new ventures in allocating funds because they could be more efficient than continuing to lend to established exporters.

What the World Bank (WB) researchers are suggesting as stated above is not something unique. A senior multinational sales executive says that developed European countries offer cash subsidy to companies which export products for the first time to a new market.

It is a foolproof system with well-defined procedures which ensures that the funds are not misused. The subsidy is paid after exports of goods actually take place. The executive says export-oriented firms keep improving their products in innovative ways and pricing is not such a major problem for them as in the case of Pakistani counterparts. They also do a lot of research on export markets.

The United States also helps exporters in different ways. For example, a Pakistani company which has set up a poultry plant in America has sought the guidance of the US Commerce Department on how to go about the business of exporting Hilal poultry products to Europe.

Firms that are diversifying into new markets or products can benefit more from the facility of access to export finance

WB experts have advised Pakistan that keeping up with global demand requires ‘constant investments in technology upgradation.’ They point out that export markets are more sophisticated and more competitive than domestic ones.

An important issue in developing a globally competitive domestic market in Pakistan is the presence of oligopolies which prevent new entrants in their respective segments of business. The cumbersome procedures involved in any possible punitive action have made the anti-competition regulatory authority virtually toothless.

The domestic private sector has its own views. To quote the reported remarks of a Karachi businessman “the talk about geographical and product diversification is a farce when the industry is crippled.” He says we need a wide stream of products to sustain and gain new export markets. Manufacturing contributes to the bulk of the exports of merchandise.

The WB study also did not find any evidence on whether the refinancing facilities affected the growth rate in the number of products exported or the number of foreign markets reached by firms participating in the SBP refinance schemes.

The Export Finance Scheme (EEF) provides short-term liquidity needs and Long Term Finance Facility (LTFF) access for investment in plant and machinery for exporters. Both have had a limited short- to medium-term positive impact on the value of exports.

The latest WB data shows that EFS provided $3.18 billion per annum or 17.4 per cent of Pakistan’s total exports between 2015 to 2017. In the same period, the FTFF outstanding loans were equivalent to 1.3pc of the country’s exports. This trend is still continuing. Textile exports jumped up by 14.4pc in July after a sharp fall in virus-hit international demand but the import of textile machinery dropped by 33.91pc.

In fact, WB experts point out that Pakistan has experienced a notable deceleration in exports after the financial crisis of 2008 and has lagged behind relative to its peers in South Asia. In the last four months, remittances sent by overseas Pakistanis have been rising much faster than export proceeds. In July, remittances increased by 36.5pc to $2.768bn on a year-on-year basis. This is attributed to less expenditure on Hajj pilgrimage because of coronavirus. The increase over June was 12.2pc.

On the other hand, in July the export earnings grew by 5.8pc to $1.889bn over the same period last year but were less than the inflow of remittances. Owing to the sharp pick up in the last quarter of the last fiscal year, the annual remittances at $23.12bn exceeded export earnings of $21.4bn in 2019-20.

Pakistan is focused on major established export-oriented industries. For formulating Tariff Policy 2019-24 the Tariff Commission Policy Board (TCPB) has just selected the textile sector to rationalise its tariff structure.

Presiding over the TCPB meeting, Commerce Advisor Razak Dawood underscored that the tariff-related measures should promote equitable development and competitiveness of the local industry, resulting in export-led ‘Make in Pakistan’ growth.

Quite a few decisions to boost industrialisation for the past two years have largely bogged down at the implementation stage, lately also owing to the outbreak of the pandemic. But to borrow a phrase of Fitch Ratings, the low governance indicator scores, seen by many as the deep-seated legacy of past several decades, is a key issue facing PTI-government today.

Another WB policy research paper says a part of the failure of exports to grow after Real Exchange Rate (RER) depreciation lies in the inability of sectors to create an exportable surplus — or increase supply when conditions improve.

The study the Link between Exchange Rates and Exports: A Case Study for Pakistan details various factors limiting the role the competitive RERs have had in boosting export growth elsewhere. Many independent economists and trade bodies argue that continuous rapid depreciation of the rupee and high policy interest rate raises the cost of investment and lead to de-industrialisation Both the supply side and domestic demand are adversely impacted.

In the case of local continuing currency depreciation, export earnings in dollars grow at a slower rate than in terms of rupees. In July export earnings grew by 5.8pc and rupee proceeds by 11.3pc year-on-year basis. The tariff rates on import of industrial inputs including raw materials are reduced to cut production costs. And industrialisation for import substitution to meet domestic demand, cut trade deficits and reduce foreign dependence suffers a setback.

Dwelling on SBP refinance schemes, the WB report says the lending at negative interest rates is costly and disturbs the allocation of credit at an aggregate level.

Based on a cost-benefit analysis of EFS and LTFF the study advises SBP to reassess the financing rates it offers to commercial banks with a view to making these schemes more cost-effective.

To boost exports it is imperative for the government to support on a priority basis existing and new firms diversifying into new products and new markets. It could consider incentive both in the form of cash subsidy and SBP refinancing.

However, extra care should be taken to ensure such a virtuous exercise does not turn into a rent-seeking instrument.

Published in Dawn, The Business and Finance Weekly, August 24th, 2020

Follow Dawn Business on Twitter, LinkedIn, Instagram and Facebook for insights on business, finance and tech from Pakistan and across the world.

Opinion

Editorial

Energy inflation
Updated 23 May, 2024

Energy inflation

The widening gap between the haves and have-nots is already tearing apart Pakistan’s social fabric.
Culture of violence
23 May, 2024

Culture of violence

WHILE political differences are part of the democratic process, there can be no justification for such disagreements...
Flooding threats
23 May, 2024

Flooding threats

WITH temperatures in GB and KP forecasted to be four to six degrees higher than normal this week, the threat of...
Bulldozed bill
Updated 22 May, 2024

Bulldozed bill

Where once the party was championing the people and their voices, it is now devising new means to silence them.
Out of the abyss
22 May, 2024

Out of the abyss

ENFORCED disappearances remain a persistent blight on fundamental human rights in the country. Recent exchanges...
Holding Israel accountable
22 May, 2024

Holding Israel accountable

ALTHOUGH the International Criminal Court’s prosecutor wants arrest warrants to be issued for Israel’s prime...