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Major driver of economic growth

Zero-rating for the major export industries aims at increasing country’s exports

Major driver of economic growth

While the share of regional countries in world exports have considerably increased over the last 35 years, Pakistan’s exports have remained stagnant during this period spanning from 1980 to 2015.

According to a study carried out by the UN, India’s share in global exports has improved from 0.43 per cent to 1.7 per cent; Bangladesh from 0.04 per cent to 0.14 per cent; Malaysia from 0.74 per cent to 1.34 per cent and Thailand from 0.37 per cent to 1.35 per cent from 1980-2011. However, at 0.15 per cent Pakistan’s share has remained unchanged during this period. As regards the last fiscal year, Pakistan’s exports declined by 9.6 per cent and stood at $18.1 billion as compared to $20.1 billion in the year earlier.

To jack-up exports, the government has announced to reinstate zero-rating (no tax, no refund) for five major export-oriented sectors — textiles, leather, carpets, surgical instruments and sports goods — from the fiscal year beginning July 1, 2016. The zero-rating facility will be available on the purchase of raw material, intermediate goods and energy — electricity, gas, furnace oil and coal. The trade and industrial sectors have hailed introduction of zero-rating for the major export industries.

Unless attention was paid to all factors that hamper the growth of exports, we may not be able to achieve the desired results. Some of the impediments to the growth of exports include: cost of production, poor governance, obsolete technology, low productivity, lack of competitiveness, supply constraints and energy shortage.

If we cast a cursory glance over the country’s international trade, we find that till recently Pakistan’s narrow export base has continued to be dominated by cotton textiles and apparel, which constituted 55 per cent of the country’s export bill; while its imports included petroleum and petroleum products, edible oil, chemicals, fertiliser, capital goods, industrial raw material and consumer products. Pakistan’s exports of textiles dropped 8.15 per cent to $9.363 billion during the first nine months of the current fiscal year against $10.194 billion in the corresponding period last year.

“Following the addition of more efficient spindles by India, China and Bangladesh, it is not possible for our textile sector to compete internationally…To catch up with competitors, textile industry in Pakistan needs to invest heavily in balancing, modernisation and replacement,” says the State Bank of Pakistan.

In a recent study, ninth review of Pakistan’s economy, the IMF has also raised concerns about further loss of Pakistan’s export competitiveness if it “falls behind competitors in securing favourable treatment in major markets.”

Meanwhile, WTO (World Trade Organisation) Director General Roberto Azevedo told media persons, in Islamabad, on May 2, 2016 that his organisation will help enhance Pakistan’s export capacity through its Aid for Trade initiative, by adding value to products, training people and providing support to explore new markets. However, Pakistan will have to diversify its exports basket, he added.

In the first nine months of the current fiscal year, the export of non-textile products, which constituted 45 per cent of the country’s total exports, fell 19.2 per cent — to $6.243billion from $7.72 billion.

In the food products’ sector, which is another major foreign exchange earner for the country, the exports decreased 11.59 per cent to $3.040 billion in July-March, 2015-16. Carpets and rugs exports edged lower by 20.34 per cent, engineering goods 20.7 per cent, cement 28.94 per cent, sports goods 1.63 per cent, tanned leather 27.15 per cent, leather products 14.66 per cent, footwear 19.79 per cent, gur 58.53 per cent, handicrafts 99.74 per cent, molasses 4.53 per cent, furniture 29.46 per cent and gems 49.75 per cent in July-March 2015-16.

Since the country has now acquired the capability to crack petroleum naphtha at home, Pakistan’s export of petroleum products declined by 74.74 per cent, primarily because of a 99.55 per cent drop in the export of naphtha. This bodes well for laying the foundation of a strong chemical industry in the country. However, during the first nine months of July-March, 2015-16, the export of footballs went-up 3.20 per cent, surgical goods and medical instruments 3.08 per cent and jewellery 5.11 per cent.

Meanwhile, oil import bill shrank 37.24 per cent to $5.583 billion and telecom sector imports decreased 2.18 per cent to $1.047 billion, but the country’s overall import bill registered a meagre decline of 4.29 per cent to $32.489 billion, leaving a trade gap of $13.188 billion, during the first nine months of the fiscal year 2015-16.

However, machinery imports increased 14.05 per cent to $6.212 billion, power generating machinery imports surged 42.68 per cent to $1.332 billion, electric machinery imports rose to 51.21 per cent to $1.320 billion, food imports increased 2.68 per cent to $3.938 billion, import of textile products shot up 27.59 per cent to $2.394 billion, and raw cotton imports climbed 161 per cent to $588 million in July-March, 2015-16.

The European Parliament (EU) has granted GSP Plus status to Pakistan from January 1, 2014 till 2017, enabling the country to export goods at preferential rate to 27 EU countries. The duty in EU countries ranges between 5.6 per cent and 9.6 per cent, therefore, as a result of GSP Plus facility Pakistan got benefit in terms of reduction in duty in the range of 2.5 per cent to 5.6 per cent. After grant of GSP plus status, Pakistan’s exports to Europe increased by 21 per cent, but this happened at the cost of other markets.

Traditionally, some 60 countries had been exporting garments to the West. After expiry of the quota regime on January 1, 2005, exports of several dozen of them had been witnessing a decline as trade and manufacturing consolidated in nations that excelled in skills, machinery, marketing techniques and the ability to cater to the rapidly changing global market trends and fashions.

Meanwhile, Bangladesh and India have been striving hard to boost their exports in general and that of textiles in particular. For Bangladesh, the recent global economic turmoil proved a boon for its garment industry, making it the top choice for low-priced basic items like T-shirts, denim pants, sweaters and shirts.

Accounting for 80 per cent of exports and employing 40 per cent of industrial workforce, Bangladesh’s garment sector specialises in low-end clothing and is the impoverished nation’s main industry. Bangladesh has already emerged as the world’s second largest producer of apparel, according to IMF, and it might continue to dominate in the basic apparel sector if it scales up investment in new factories.

To give a boost to Pakistan’s exports, analysts have been stressing long the need for building deeper economic connectivity with the regional countries. Heeding to the advice, the Trade Development Authority of Pakistan recently organised a Pakistan Trade Caravan to display Pakistani products for two days each in Kazakhstan, Kyrgyzstan, Uzbekistan and Tajikistan. In addition to textiles, on display at the Trade Caravan were surgical goods, pharma products, leather, agro, engineering goods and handicrafts (including wooden furniture, marble and brass).

Meanwhile, improvement in energy management and law and order situation has led to an upturn in the confidence of the business community, as acknowledged by the Overseas Investors Chambers of Commerce and Industry (OICCI) in its latest business survey released on May 15, 2016. The Business Confidence Index (BCI) touched a record level of 36 per cent, showing an improvement of 14 per cent over the previous survey result announced in November, last year.

All stakeholders need to redouble their efforts with a view to reaping maximum benefits from the GSP Plus status during the remaining period of this facility, which would be expiring in 2017. In particular, they need to focus on value addition in cotton and production of quality products, keeping in view the emerging styles and trends in the global markets.

Considered as one of the main drivers of economic growth, increase in exports could bail the country out of its current economic woes.

Alauddin Masood

alauddin masood
The writer is a freelance columnist based at Islamabad. He can be reached at [email protected]

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