Iceberg dead ahead! Iceberg dead ahead!
Amid yawning imbalances undermining every realm of the national economy, Pakistan Tehreek-e-Insaf- (PTI) led regime, with all its tardy actions on monetary and exchange rate fronts, has only so far tried to tinker with the tip of the iceberg of the economic mess.
There is so much that is yet to be done to bring order into the financial chaos various sectors of the national economy are mired from top to bottom.
On the external front, the government has somewhat decelerated the current account deficit through import compression but so far Islamabad has not been unable to achieve quantum leap for boosting the country’s dwindling exports.
The real challenge lying ahead for this regime in the upcoming budget will be taking steps on fiscal front as the heavy taxation will be required to jack up Federal Board of Revenue’s (FBR) tax collection as well as they will have to find out innovative ideas to increase non tax revenues to improve rapidly deteriorating fiscal position of the Center in the wake of last NFC Award.
So difficult time is ahead on all economic fronts including fiscal, monetary and exchange rate as well as on utilities of gas and electricity where the government will have to further hike their prices to keep them afloat.
Let’s discuss the strategy that is under the incumbent regime’s consideration to boost up exports. Beyond any doubt, the fundamental structural weakness in the economy is one of the main factors that are widening the gap between exports and imports.
This deficit, in the face of large inflow of workers’ remittances, remains to be the elementary cause of balance of payment vulnerabilities and macroeconomic disequilibrium. This conundrum has been compounded by a advancing imports and retreating exports.
According latest studies, in Pakistan only five percent of economic growth is consistent with the balance of payment (BoP) stability. This is under the long-term rate of GDP growth of 7-8 percent per annum to engage an aggressively expanding labour force in employment. A looming balance of payment crisis has foiled the attempts to push the economic growth over 5 percent per annum.
This is mainly due to the existing lopsided import-export makeup. As energy, industrial raw material, fertiliser, chemical, and machinery, make up three-fourth of our imports, even a modest uptick in economic growth would become springboard for imports.
The ministry of finance given prescription says that since 2000, rupee has remained overvalued for almost 90 percent of the entire duration, thus creating an unfavorable macroeconomic environment for the tradable sector and hence industrialisation.
Regardless of overvaluation, about 70 percent of our export comprises low technology products. It has blown a big hole in the competitiveness, which continues to grow larger and larger.
Low grade textiles command most of the exports because of our inability to introduce more commodities or explore new markets.
Our textiles and apparel sector, which adds about 5 percent to world trade, leads the country’s exports, making up around 58 percent of total exports in 2017–18. Alarmingly, we have only four destinations, i.e. USA, EU, China, and Afghanistan, for over 50 percent of our exports.
Our competitiveness in international markets is eroding fast and finding buyers in our traditional markets for our pet exports is just not that easy anymore. The overall exports-to-GDP ratio is showing no signs of budging.
Then there is this tariff structure that is mired in anti-exports bias. In that area, an army of Statutory Regulatory Orders (SROs) is at work to deform the trade regime by altering the notified import duties exclusively for which no economic explanation is put forth.
Owing to these ambiguities and lacunas importers keep guessing what taxes/duties apply to the merchandise being sourced into the country from overseas. FBR’s discretion to churn out SROs, whenever its functionaries deem right, without parliamentary or independent scrutiny/approval –this together with Section 31A of the Customs Act, results in adding to the uncertainty for importers as it allows FBR to modify applicable tariff for goods between opening of the letter of credint and landing at the port.
Expensive energy, a discriminatory regulatory environment, and an undereducated and low-skilled workforce, also continue to be some of the most critical drags for competitiveness and productivity growth.
Prime Minister’s Economic Advisory Council has made recommendations to move to more competitive, productivity-led export growth. They recommended ensuring competitive exchange rates by eliminating the remaining overvaluation of the currency and ensure that a competitive exchange rate is maintained in the future, provide reliable access to power and gas supply at competitive prices to export industries.
They also suggested that the government should convert the present short-term measures by institutionalised ones in a long-term plan, rationalise tariffs, reform the SROs regime, and increase transparency of the trade regime.
They further stressed trade policy decisions should not be driven by short-term fiscal considerations and should not be made by the FBR. Instead, they proposed such decisions be made by an independent policy board or the ministry of commerce and aim to reduce anti-export bias, cost of production, tariffs on imported raw materials and intermediate goods, while eliminating the distinction between industrial and commercial importers and reform the SRO regime.
The medium term plan for boosting exports banks upon increasing productivity as it is essential for improving competitiveness and for giving the industry a leg up for technology upgrade. Improved competition and liberalisation in domestic markets (particularly services) will also help do the trick.
Competition leads to innovation that subsequently takes production to the next level. These steps that aim at easing complexity and promoting transparency of the trade regime will spur domestic competition and as a result productivity will also jump.
Without increasing exports on sustained basis, Pakistan’s dependence on foreign loans could not end and the dream of achieving stable exchange rate would also remain a pipe dream.