Money Matters

Policy trance

Money Matters
By Mehtab Haider.
Mon, 09, 20

The Pakistan Tehreek-e-Insaf (PTI)-led regime has yet not finalised the much-awaited Strategic Trade Policy Framework (STPF) despite being in power for the last two years. At the twilight of Pakistan Muslim League-Nawaz (PML-N)-led regime, the initial draft of STPF was prepared, but during the tenure of the caretaker setup in 2018, it was decided that the crucial policy level document should be deferred till coming of elected government after the general elections. Although, Advisor to PM on Commerce undertook policy reforms especially on front of tariff rationalisation after stretching powers of the Ministry of Commerce by reducing the domain of the Federal Board of Revenue (FBR), the STPF could still not be finalised. Now the government is seriously thinking over unveiling STPF for five years from 2020-25 despite this fact that the PTI led tenure will end in 2023.

The Pakistan Tehreek-e-Insaf (PTI)-led regime has yet not finalised the much-awaited Strategic Trade Policy Framework (STPF) despite being in power for the last two years. At the twilight of Pakistan Muslim League-Nawaz (PML-N)-led regime, the initial draft of STPF was prepared, but during the tenure of the caretaker setup in 2018, it was decided that the crucial policy level document should be deferred till coming of elected government after the general elections. Although, Advisor to PM on Commerce undertook policy reforms especially on front of tariff rationalisation after stretching powers of the Ministry of Commerce by reducing the domain of the Federal Board of Revenue (FBR), the STPF could still not be finalised. Now the government is seriously thinking over unveiling STPF for five years from 2020-25 despite this fact that the PTI led tenure will end in 2023.

The government envisages jacking up exports to $46 billion over the next five years till 2025. The STPF for the next five years envisaged basic ills of Pakistan’s trade sector, and illustrated that during the last two decades, the global epicentre of growth gradually shifting to Asia, specifically in Pakistan’s proximity.

Since 2003, India, China and Bangladesh have increased their market share by 111 percent, 120 percent and 163 percent respectively. The South Asian region has also increased its share in the world market share by 88 percent. On the other hand, Pakistan has been an outlier in the high export growth zone, as its share in the global market has decreased by 23 percent since 2003.

Had Pakistan’s exports grown at the SAARC region’s average growth rate, its export value should have been $ 66 billion in FY2019, instead of $23 billion.

In the global ranking of exporting countries, during the last 15 years, China has improved its ranking from 4th to 1st, India from 30th to 18th and Bangladesh from 68th to 54th. On the other hand, Pakistan’s ranking has dropped from 59th in 2003 to 69th in 2018.

Pakistan’s export performance during the last decade has been inconsistent. During 2008-10, the exports remained at around $18-19 billion; in 2010-11, the tailwind of international commodity bonanza (cotton and rice) enabled a quantum leap in exports from $19.3 billion to $24.8 billion; for the next three years (2011-14), the exports remained range-bound between $24 and $25 billion.

During 2014-17, exports declined by 19 percent to $ 20.4 billion, primarily due to 16 percent contraction of global market, 43 percent slump in global commodity price index and a sustained currency overvaluation of around 15 to 20 percent. During FY2018, exports had an impressive recovery of 14 percent, affected mainly by the 12 percent expansion in global trade, 10 percent recovery of commodity price index and the Prime Minister’s Export Package.

In FY2019, exports remained stagnant at $23 billion. During the fiscal year 2018-19, the fundamentals of the export sector have significantly improved due to a set of policy measures.

First, the gradual rationalisation of exchange rate has improved the export competitiveness, by decreasing the cost, in dollar terms, of rupee- denominated inputs eg energy, wages, overheads and indigenous raw materials.

Second, the export sector remained insulated from hike in electricity and gas prices, though the impact has been passed on to the commercial and domestic consumers in the wake of price hike in the global energy market.

Third, the interest rates under export schemes ie Export Refinance Scheme and Long-Term Finance Facility have been retained at the previous level, despite the multiple rounds of policy rate increases by the State Bank of Pakistan.

Fourth, the import duties have been reduced on more than 2,000 raw materials of export-oriented industries in the two supplementary budgets (in October 2018 and March 2019) and the Annual Budget FY2020, with a cumulative annual relief of Rs40 billion.

Fifth, the support provided under the Prime Minister’s Export Enhancement Package has been extended for three-years to lend predictability to the export-oriented investment.

Despite the above-mentioned tailwinds, export growth remains sluggish because of the offsetting impact of equally strong headwinds. First, the contractionary monetary policy has gradually increased the cost of capital, especially for the small and medium enterprises, which cannot secure concessionary finance under the export schemes.

Second, the availability of exportable surplus has shrunk as a natural corollary to the slow GDP growth. Third, despite a partial relief of customs duties on 1,635 raw materials in the Finance Act 2019-20, the tariffs on all other imports have been further increased, in turn, escalating the cost of doing business and generating anti-export bias.

Fourth, the volatility of exchange rate during the first half of 2019 increased exchange-rate risk for the exporters, since at the time of quoting the price they did not know how many rupees would be realised for a dollar when the export proceeds arrive after 6 to 9 months of production.

During the last 15 years, Pakistan’s imports have increased from $15.6 billion in FY2004 to $54.8 billion in FY2019 at a compound annual growth rate of 8.7 percent.

During FY2019, the imports declined to $55 billon, mainly due to (a) exchange rate rationalisation making the imports expensive, (b) reduction in one-time imports of capital goods under CPEC projects, (c) tightening of regulatory controls on non-essential imports and (d) the demand compression due to sluggish GDP growth. The trend of import compression continues during the current financial year (FY2020) as well.

Though balance of payment remains an endemic concern for the economy, Pakistan’s imports-to-GDP ratio of 19 percent compares favourably with the comparator countries–China 19 percent, India 23 percent, Bangladesh 23 percent, Thailand 56 percent and Malaysia 63 percent.

It means that for an economy of the size of above $300 billion, the import bill of $53 billion is not outrageous. The problem, however, remains the composition of the imports. A meagre four percent of total imports are used as inputs in the export-oriented production; whereas, 96 percent are either consumed directly as finished products or the raw materials for the goods consumed in the country.

Pakistan’s exports have remained range-bound between $20 and $25 billion during the last decade. The product portfolio remains constrictively concentrated – few products exported by few exporters to few markets. The trade policies have not been able to alter the export paradigm over the decades.

The investment in industrial production has remained predominantly market- seeking and has seldom leveraged the domestic economies of scale to become competitive for export. Therefore, the policy advocacy by the industry remains protection-seeking rather than improving competitiveness and efficiencies.

The trade policy operates at three levels. At the bottom of the policy spectrum is the enterprise level interventions, which aim at creating entrepreneurial culture, supporting the SMEs to internationalise, and providing strategic short-term financial support through targeted time-bound incentives to boost their competitiveness.

The trade policies in Pakistan have predominantly focused on this policy level, with little planning for sunset scenarios. Though the cash transfers were able to win the buy-in of the policies by the exporting enterprises, such cash support is known to engender corruption and endemic inefficiencies.

The second policy level is the institutional framework which usually has a gestation period of 3-5 years. As the institutional inefficiencies and gaps increase the unease and cost of doing business, the policy interventions seek to optimise the performance of the existing trade support institutions (TSIs) and create new ones, wherever institutional gaps exist. Successive trade policy frameworks in Pakistan have attempted the reform of TSIs with mixed success.

The restructuring of existing institutions eg Trade Development Authority of Pakistan has encountered strong resistance to change and the establishment of new institutions eg EXIM Bank, Land Port Authority has taken longer than anticipated, due to internal bureaucratic impediments.

The third and most important trade policy level is the structural one that defines the strategic vision of exports. Trade policies in Pakistan at this level have been at their weakest to cover supply and demand sides.

On the supply side, there has been little appetite to invest in long-term structural reforms which extend beyond the tenures of political governments and government functionaries. On the demand side, the stakeholders’ of existing export sectors have a vested interest in continuation of financial support to the existing sectors and resist the structural reforms, which seek to supplant the existing sunset sectors with futuristic ones.

The writer is a staff member