Investment must for sustaining export growth

Published November 29, 2021
A machinist works at a textile factory in Faisalabad. — AFP/File
A machinist works at a textile factory in Faisalabad. — AFP/File

During July-October 2021, Pakistan’s total trade deficit surged almost 97 per cent to $14.845bn from $7.546bn in July-October 2020, according to the State Bank of Pakistan.

Little wonder then that the country’s current account deficit shot up to $5.084 billion from $1.313bn. And that caused an almost 9pc fall in the rupee value in these four months.

Clearly, things are getting out of hand as far as current account management is concerned. If the total trade deficit is not reduced drastically within this fiscal year ending in June 2022, the deficit would remain high in the next fiscal year, too. And, the rupee will depreciate further.

The PTI government, already challenged seriously on political fronts, can hardly afford it. As the 2023 elections loom closer, it is making hasty efforts to boost exports besides trying to retain growth in remittances — the second-largest component of the current account.

But the export-boosting efforts are aimed at achieving some results in the short term.

This means the next government that comes into power after the general elections of 2023 would not inherit a structurally stronger export sector.

To bring down the deficit without drawing down on forex reserves or without resorting to quick-fixes like seeking huge forex deposits in our central bank from “brotherly” or “friendly” countries, exports must grow at a high rate, say 15 to 20pc a year — for many years to come.

No reliable information is available on how much investment is being made in developing skill sets of employees of export industries or in acquiring new technologies

But for exports to continue growing at this high rate in the long term, investment in the export sector is a must. Is that investment taking place right now is the key question.

The government does not share exclusive data related to yearly investment in the export sector with the nation. But one good proxy is the capital investment (CI) as a per cent of GDP. Sadly, this indicator depicts a worrisome picture. In 2020, CI to GDP ratio for Pakistan was only 15.41pc, against 41.03pc for Iran, 31.54pc for Bangladesh and 28.42pc for India, according to the World Bank. A year earlier, in 2019 too, Pakistan’s CI to GDP ratio of 15.61pc stood far behind Iran’s 40.65pc, Bangladesh’s 31.57pc and India’s 30.66pc.

Another proxy for gauging the adequacy, or the lack of it, of the investment in the export sector could be the amount of foreign direct investment (FDI) flowing into some key export sectors like food and food packaging, textiles, leather and leather products, chemicals, fertilisers, cement and communication.

Even a cursory look at FDI flowing into these sectors reveals that it falls short of what is needed to make these sectors raise their export volumes and sustain the growth rate in the long term. For example, even gross cumulative FDI in the textiles sector in the last three fiscal years totalled $154 million or $51m a year. During this period, the food sector attracted $136m FDI or $145m a year.

Now, for the ease of making a comparison with other countries let’s look at total FDI as a percentage of GDP. (Looking at the total FDI inflows can give us an idea of how much foreign investment may have trickled into our export sector).

In the past 10 years (2012-2021), FDI inflows into Pakistan never exceeded 1pc of GDP, stats gleaned from the balance of payments statements reveal.

The World Bank stats show that other countries fared far better — over ten years, from 2010 to 2019, in India, for example, FDI inflows as a percentage of its GDP ranged between 1.3pc and 2.1pc. And in Vietnam, the percentage ranged between 4.9pc and 6.9pc. Little wonder then Vietnam has emerged as a strong export powerhouse in Asia.

Last month, Advisor to Prime Minister on Commerce and Industry Abdul Razzak Dawood informed the nation that “investment of approximately $5bn is in the pipeline under which 100 new textile units are expected to be established.” The minister gave no further details.

The actualisation of this investment in a key export sector — within a year or two — is all that matters. If that does not happen — and there are reasons to be sceptical keeping in mind

rising energy prices and the diminishing possibility of subsidising energy prices for industries, sustaining the current high growth rate of textile exports in future seems unattainable. (Textile exports during July-October grew 26.5pc primarily due to temporary relief provided under the post-Covid fiscal and monetary stimuli package).

A third proxy one can use to form an idea of how much investment is being made into the export sector can be imports of textile machinery. Here we can see a silver lining. In July-October this year, Pakistan imported $297m worth of textile machinery from just $141m in July-October last year. In the last two fiscal years, the country already imported a little less than $1bn worth of textile machinery.

But the world of industry — and exports — is the world of man and machine, technology and expertise. No reliable information is available on how much investment is being made in developing skill sets of employees of export industries or in acquiring new technologies.

If the government is serious about pushing exports, it should come up with periodical reports on how much investment is being made in key export industries like textiles, food, IT and IT-enabled services — and how this investment paying off. The private sector must provide timely inputs.

Published in Dawn, The Business and Finance Weekly, November 29th, 2021

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