THE announcement of the Strategic Trade Policy Framework 2012-15 is being delayed apparently because of divergent views within different arms of the government on the core issue of subsidy.

The first pertinent question facing the policymakers is how much money can be spared by the cash-strapped finance ministry for subsidy.

Secondly, how well-established is the efficacy of the subsidy regime in producing quality of exportable goods at globally competitive price.

Financial analysts argue that continuation or otherwise of any export support scheme should be determined by a performance-based audit.

There are widespread reports of export subsidy having been diverted to unintended purposes in the past.

Because of not so positive a response from the ministry of finance, the ministry of commerce is believed to have scaled down its subsidy proposal for cash and capacity building initiatives from an estimated amount of Rs60 billion to almost Rs30 billion.

It may recalled that billions of subsidy provided in the three-year trade policy 2009-2012 did not materialise but for an insignificant amount.

So, the ministry of commerce is now focusing on a proposal to establish an export-import bank perhaps as an anchor of the new trade policy framework. The aim is to enhance access to export credit, supplier’s credit and export credit guarantees on the plea that commercial banks are not specialised in handling export businesses and also have no inclination to provide such services.

The investment in setting up the EXIM bank is projected at Rs25 billion spread over a period of three years. However, the commerce ministry has projected a seed money of Rs5 billion.

Exim banks are operating in India, Bangladesh, China and Vietnam etc, which are stated to be he main competitors of Pakistan in textile and clothing and some other products in the international markets.

The setting up of EXIM bank is not a new proposal. In 2004, the then Governor of State Bank of Pakistan had recommended the establishment of Export Credit Agency (ECA) after a task force report on Thai, Malaysian and Indian models.

The same task force recommended to turn the Asian Development Bank assisted Pakistan Export Finance Guarantee Agency into export credit agency. However, the recommendations were not put in place and the agency became inoperative in 2007 and was liquidated in 2009. The ministry of finance, however, agreed with Competitiveness Support Fund (CSF) proposal in its Work Plan for 2010-13, to carry out a study on the creation of an export credit agency. However, the CSF had ceased to work.

Neither a new study has been done on the subject nor is the finance ministry willing to accept the proposal of the commerce ministry to establish the proposed EXIM bank.

The commerce ministry has argued that exporters desperately need legitimate trade financing support as they are hit from different directions. These include crowding out of private sector from debt market, high interest rates, limited availability of export financing, and very little credit risk coverage etc

No one will disagree that major economies including regional countries provide export subsidies and Pakistan cannot stand alone. The question is how to eliminate the misuse of these subsidies? How to make it targeted and linked with substantial outcome in export proceeds.

It has been observed that most of subsidies in the past have been diverted to certain profitable industries, like cement, sugar and power generation. Secondly, the cash subsidy on exports is transferred to the buyers with no tangible impact on overcoming the shortcomings in the export sector through research and development or up-gradation of technology

Also the government subsidy regime has also led to mushrooming of exporters instead of improving the quality of products and developing workers skills.

The history of export subsidy over the decades has been replete with subsidies, such as bonus voucher scheme, refinance scheme, cash compensatory rebates, freight subsidy and research and development support, which did not help in enhancing exports to the anticipated levels as envisaged at the time of their sanctioning.

In addition to these subsidies, both covert and overt, duty exemptions and tax concessions were also rampant. A closer analysis of these policies would in fact reveal that they were not helpful at all as originally thought. And at the same time, these incentives cast a pernicious impact on the growth of export sector.

Interestingly, the government provides exporters the profit which they should have earned from customers. Exporters lure customers merely on the basis of lower prices and low quality products. But they ignore quality issues, adherence to delivery schedule, adoption of modern production techniques and marketing tools.

Subsidies intensify cutthroat competition and price-war among the exporters, resulting in reduction in per unit price. Consequently, more goods are exported for a lesser price.

Also subsidies push up the opportunity cost of the money allocated as subsidy. Dollar earned through subsidised exports cost much more than the prevalent exchange rate. Subsidies also widen budget deficit. .

Now two ministries—textiles and commerce- are supposed to work with different mandates when they seem to work on the same lines for export promotion.

The mandate of the textile industry is to work on the production side and improve bottlenecks on supply side. But the textile policy announced a couple of years ago only focused on export promotion measures, instead of steps to improve quality of production.

Without amending the rules of business, the government issued two policies for the promotion of exports — the three-year trade policy announced in July 2009 focused only on non-textile products. The new proposed trade policy for 2012-15 is no different from the previous one and focuses only on non-textile products.

So, the most important factor for the government to do away with multiple export policies and come up with a single policy. It is the mandate of the commerce ministry to formulate the export policy for both textile and non-textile products. Also there is a need for a regular forum to oversee and monitor the implementation of the trade policy. Nearly 70-80 per cent of the initiatives announced in the last trade policy were not implemented.

In short one thing was clear, that not only the cash subsidy failed to promote exports but fake claims were also submitted to get funds from the government under the facility. It would be better that the government avoids cash subsidy schemes and only supports schemes which are related to capacity building like certification, laboratory testing etc.