The past few months have seen a decent uptick in Pakistan’s merchandise exports. The first five months of 2017-18 have seen exports grow by 10.5 per cent over the same period during previous fiscal year. The November 2017 monthly export data indicates a growth of 12.3 per cent in comparison to November 2016.
Similarly, during the first four months of the ongoing fiscal year, large-scale manufacturing has posted a growth of 9.6 per cent. Sectors which have posted positive growth include: iron and steel, automobiles, petroleum, food and beverages, electronics, non-metallic products, pharmaceuticals and textile.
While several of the above-mentioned sectors are beneficiaries of the ongoing investments under China Pakistan Economic Corridor (CPEC) programme, it is noteworthy that some key sectors with export potential have seen falling production in the current fiscal year, including leather, engineering products, and chemical sectors.
This begs the question: whether Pakistan will be able to sustain the recent uptick in merchandise exports during 2018? This question is particularly important as several of CPEC’s early harvest projects will see their completion this year.
The government seems confident that the export incentives, which include a reduction in export refinance rates, long term export finance scheme, prime minister’s export package, zero-rated sales tax and drawback of locally levied taxes will continue to render favourable results.
However, the business community feels that there are limits to what such incentives can achieve. They point towards structural issues which, if not addressed soon, can result in curtailing the achievement of export targets being envisaged for the next Strategic Trade Policy Framework being formulated at the Ministry of Commerce.
First, Pakistan will need to improve its performance on all indicators of doing business index, which currently ranks Pakistan at 147 out of 190 countries. Second, a key contributor to this declining rank has been the inability to reform national and provincial tax regime across the country.
The tax authorities continue to tax even those enterprises who may have incurred a loss during the reporting year. The arbitrary imposition of regulatory duties on imported inputs and raw material has also hurt manufacturing and exports.
Despite specific recommendations by Tax Reform Commission, there is reluctance on the part of the government to introduce forensic audit which could, in turn, bring down the compliance and transactions costs faced by tax paying enterprises.
Third, export incentives need to incorporate specific timelines for localisation, transfer of technology requirement and binding conditions to find new markets in non-traditional export destinations. Similarly, there is lack of customisation in most incentive schemes. For example, textile sector gets to have a tailored export package; other sectors do not enjoy a warm reception in the power corridors.
The pharmaceutical industry’s market size in Pakistan, for example, currently stands at USD 3.5 billion. The same is projected to increase to USD 5 billion by 2020. The share of local manufacturing is now at 65 per cent. Yet this industry is finding it hard to export its output due to lack of well-functioning chemical industry, overly strict control of price regulations, rising input costs in particular energy prices, increased taxes and duties on imported raw material, and lack of compliance with product standards.
Similarly, there needs to be customisation of export incentive package to boost Pakistan’s services exports. The encouraging growth in Pakistan’s fintech sector, including lending and payment technologies, crowd funding applications, and insurance technologies is all something which is locally concentrated. The services sector enterprises are not being facilitated to become exporters of sophisticated services with dynamic demand abroad.
We understand that potential foreign investors in Pakistan’s information and communications technology (ICT) sector have been concerned about piracy, privacy, and data protection issues. They have emphasised the need to resolve these issues if Pakistan wishes to embrace the fourth industrial revolution. The recent hacking of ATM machines in key urban areas, telecommunication companies selling user data to third parties and a general threat of data breach with high costs of resorting to relief through legal sources ultimately curtail the export potential of ICT sector in Pakistan.
Fourth, a sector-specific regulatory impact assessment is urgently required to gauge the (regulatory) burden on Pakistani enterprises, particularly those who could be future exporters. Consider the case of Auto Development Policy 2016. While this policy has generated interest among potential investors to initiate vehicle assembly and manufacturing inside Pakistan, the status and role of Engineering Development Board (EDB) may continue to undermine the policy objectives.
EDB still has: a) discretionary powers to decide regarding the permissible list of importable items, and b) power to issue manufacturing certificates. Such powers only strengthen the existing players in the markets and lead to a decline in fair competition.
Fifth, a lot of clarity is still required as to why the country continues to sign bilateral free trade agreements (FTAs). With no consensus on how past FTAs have helped Pakistan, the government continues to pursue similar agreements with Brazil, Thailand, Turkey, South Korea and several others.
If we agree that a key motivation for FTAs should be enhancing competitiveness of Pakistan’s exports, then perhaps there is a need for deeper trade agreements which allow for investment cooperation, technology transfer requirements, provisions to enhance services trade, relaxation of visa policies, and currency swap arrangements.
Sixth, the currency regime in Pakistan needs to be made more certain and transparent. The ability of Ministry of Finance to intervene in exchange rate management needs to be curtailed by law. There is very little knowledge within the business community regarding how currency is managed or allowed to float and what may be the implications of an overvalued exchange rate for Pakistan.
The business associations within the country have also informed that the government did not undertake any consultation before taking a decision which now allows the use of yuan for trade and financial transactions with China.
Seventh, we need to make 2018 the year when we actually revive our trade with the neighbours. Our trading volumes with Afghanistan, Iran and India remain low. We may also take that extra step of expanding scope of transit trade for our neighbours and actually earn substantial amounts of (transit) fee. Once CPEC’s early harvest projects come to a completion, Pakistan’s key economic priority should be to re-imagine how best it can offer its ‘connectivity dividend’ to the Central and South Asia region.
Eighth, the ongoing infrastructure programmes which strengthen trade logistics need to be expedited. To bring down the dwell time for goods, the already planned border complexes (at Chaman, Torkhum and Wagah) as part of the Integrated Transit Management System of Federal Board of Revenue need to be made operational. This should then also allow Pakistan to open more trading routes with economies in the region.
Similarly, elevated expressway to be built by Karachi Port Trust should be expedited to facilitate the inflow and outflow of vehicles carrying the merchandise. While the government has made an effort to make Gwadar port operational for commercial traffic, however the wider business community still lacks knowledge on how to access this port. The prevalent port charges, in particular those of Karachi port, have been termed high in comparison to the region.
Finally, as the country enters the next phases of CPEC, the focus will be on making special economic zones (SEZs) a success for both foreign and local businesses. One hopes that in 2018 the government will be better prepared with feasibilities of all nine SEZs. As of now we understand that even in the existing industrial estates across Pakistan it is a challenge to get new electricity and gas connections.
There are varying views across federal and provincial governments regarding who will bear the expenditure of tax breaks which will be allowed across the SEZs. Perhaps a high-powered inter-governmental coordination committee may be set up to take the planning of SEZs forward.