KARACHI July 22: The trade policy for fiscal July/June 2002/ 03 has attracted mixed response from businessmen and bankers as well as economists.

Whereas some feel that it aims at preparing the exporters to learn to survive through the challenges of globalization others believe it fails to address some key issues.

“The policy calls for rollback of subsidies and elimination of fiscal incentives that I think is aimed at preparing us to survive through the challenges ahead,” says convener of exports committee of the All Pakistan Textile Mills Association, Iqbal Ibrahim.

“Subsidies breed inefficiencies,” he remarks. Ibrahim applauds the trade policy measures aimed at encouraging the exporters to start aggressive export marketing. He also says that the policy seeks to enable the exporters to adjust to the dictates of a free foreign exchange rate regime but he insists that the central bank must continue to defend the US dollar at a certain level.

He says that the State Bank must also help the exporters hedge their commercial exposure in the non-dollar currencies.

“The exchange rate stability is crucial for exports and if it means defending the dollar at a certain level this practice must continue,” he said when reached by Dawn over telephone.

Commerce Minister Razak Dawood had said in his trade policy speech that exchange rate was being determined by the market and there was a limited extent to which the State Bank could intervene. His remark was taken as a warning to the exporters that they should not expect the central bank to keep the dollar -rupee parity at an artificial level to benefit exporters.

Earlier this month, the SBP discontinued defending the dollar at Rs60 and let it slip to around Rs59.60. Though the central bank has re-started defending the currency at the new level there is growing concern among the exporters that the SBP may gradually allow the US unit to fall further. “That means making exporters uncompetitive in the international market,” says Iqbal Ibrahim.

President of state-run National Bank Syed Ali Raza is also in favour of defending the dollar at an appropriate level to ensure that Pakistani exporters are not priced out by their competitors.

“In India, for example, the cost of financial input as well as energy prices and labour charges are far lower than in Pakistan,” he says. “So if the cost difference between Pakistan and Indian exporters inputs comes to X level there has to be a difference between Pakistani and Indian rupee closer to that level.”

“We should also look our currency value in this context,” says the NBP chief though he would not deny that if the dollar had been allowed to fall freely the resultant rupee appreciation would have lowered the external debt in rupee terms and imports would have become cheaper. The NBP chief (unlike foreign bankers) does not support the idea that the exporters be allowed to hedge their commercial exposure through option and derivatives.

Responding to the point raised by Iqbal Ibrahim regarding the hedging of commercial exposure in non-dollar currencies he said that the exporters could still do that through swaps.

“I fear they (the exporters) can end up facing problems rather than solving them (if options and derivatives are allowed in the foreign exchange market).”

“Unless we have a completely open and deregulated market it is difficult to come up with FRAs (forward rates arrangements) and derivatives,” he says implying that this could lead to speculative trading.

But head of a major foreign bank who declined to be named said development of sophisticated financial products is very crucial if the government wants to prepare the exporters to fit into new freer trade regime by 2004.

“Had the importers been allowed to take foreign exchange cover in euro and Japanese yen against dollar they would not have to burn their fingers deep after the recent spectacular rise of the two currencies vs dollar.”

Noted economist and Associate Professor at IBA Dr. Qazi Masood said it was quite logical that the non-dollar currencies should be treated at par with the US dollar when it comes to protecting the exporters or importers against exchange rate fluctuations.

Commenting on the statement made by Razak Dawood about limited scope for SBP to intervene in the exchange rate market he said “apart from the debate about at what level the SBP should defend the dollar the basic question is should the central bank defend it at all?”

He said had the SBP left the dollar to the market forces—and had it come down to say Rs55 the benefit in the shape of reduced external liabilities in rupee terms—and cheaper imports—would have been greater than the benefits gained by the exporters. “We should not forget that cheaper imports would also have lowered the imported inflation.”

Dr. Masood said he saw a clash between the government’s fiscal policy and trade policy because the former has raised the cost of manufacturing and the later aims at diversifying the export base and finding new markets.

“You cannot reach out to new market for exports or diversify the export base if your manufacturing sector does not perform well,” he said. Dr. Masood quoted for example the 5 per cent increase in the regulatory duty on import of machinery announced in the budget. “How on earth the businesses can expand if the duty rate is increased?” he questioned. Earlier Iqbal Ibrahim raised this issue during his telephonic conversation with Dawn and demanded its reversal. The demand seemed quite logical to NBP President Syed Ali Raza also who said that increasing duty on any machinery that is used in value-addition could impede the growth of exports.

Noted economist and Dean College of Business Management (CBM) Dr. Javed Akbar Ansari said the trade policy should have focused on increasing technological capability of the industrial sector without which the economy could not grow. Criticizing the IMF he said because of the IMF-sponsored programmes the input and output link had weakened in Pakistan. “The local economy (a major chunk of which is in the informal sector) is very healthy,” he said and underlined the need to make it play its role in the development of the overall economy.”

Commenting on the trade policy objective to focus more on the export markets of Africa he said Pakistan should rather target “Iran, China and Bangladesh” because increasing exports to these countries is much easier.

“African countries are heavily under influence of the US and the UK...penetrating in those markets is simply very difficult.”

Commenting on the lacking of sufficient focus on smuggling in the trade policy he said it was an irony that despite the so- called liberalization of imports smuggling was still rampant.