A seminar on “Addressing Pakistan’s Declining Exports” was organized by the Centre for Policy Studies on March 2, 2017 at Business Incubation Centre, COMSATS Institute of Information Technology (CIIT), Islamabad. The objective of the Seminar was to evaluate the export performance and suggest policy recommendations which would be helpful in setting policy direction to improve the performance of the exports. Dr. Talat Anwar, Advisor CPS, CIIT gave welcome remarks to the participants and said that despite claim of good economic performance Pakistan’s depressing export performance for the last the three years has been a cause of concerns. It is, therefore, essential to discuss the country’s declining exports and recommend policies to avert the balance of payment crisis in future.
Prof. Dr. Khalid Riaz, Dean, Faculty of Management Sciences, CIIT said in his keynote address that Pakistan’s exports have declined by 12% during the last year. The country has been losing its share of textile exports relative to other countries mainly because of loss in competitiveness.
The long term performance of Pakistan is much more disappointing than other countries in the region. Telling a story as to how competitive advantage is gained and how it is lost, Dr. Riaz added that in the early 1970s Pakistan decided to develop its nuclear program as a peaceful use of its nuclear program. One of the institutions was Nuclear Institute for Agriculture and Biology (NIAB) at Faisalabad which was working for this purpose. NIAB developed a variety of seeds in 1978. Incidentally, all other cotton variety performance was not good but NIAB 78 produced much more yield than other varieties of seeds. Hence, it was adopted widely later on in the country. Within three years Pakistan replaced the US as the largest cotton exporters in the world.
However, in the 1990s there was outbreak of cotton leaf virus that has affected our cotton production till now. This virus has made unbearable losses. As a result, we have been bearing losses of US $2 billion per annum. Had we addressed this issue, the total gain in exports would have been more than $50 billion which is much than the CPEC related foreign inflows.
Many international companies were providing cotton seeds to other countries that do not produce virus. Unfortunately, we did not provide intellectual property rights to these companies and failed to get benefit. We have two reasons for our failure to increase cotton exports: we failed to protect intellectual property rights and we failed to produce national public good in cotton varieties. This is where our higher education policy should be linked to trade policy.
Dr. Khalid Riaz further said that we have a higher education policy which does not promote the public good. We have lot of publications by Pakistani academia but of no use because they are not focusing on Pakistan and thus are not providing gains in exports competiveness. This is how our pilferage of higher education is happening. There is a need for better targeting of higher education policy. The failure of trade policy is reflected in worsening of our trade deficit with China since we have not been able to penetrate in China. This has happened because there was no proper homework done before signing Free Trade Agreement (FTA) with China. He added that there are 600 product lines where Pakistan has comparative advantage whereas China has comparative disadvantage. We have been able do to only 5% product line in the agreement. There a need to produce better linkages between Ministry of Commerce and Universities.
Going forward, he highlighted his views on future economy and said that we need to work on knowledge economy. We need data on artificial intelligence. Citing a recent study in Yale University, he said that firm does not want to grow because it wants to stay in the informal sector in order to avoid taxes. But in reality this is a very costly mistake as it loses 50%-70% gain in the productivity. In Pakistan, informal sector is much bigger than the formal sector because we have not been able to adopt information and communication technologies (ICTs). As soon as you adopt ICTs, you fall into the tax net. Due to this mind set firm are not able to produce knowledge based product through adopting information and communication technology that also is affecting our competiveness adversely. We have seen that every time when government wants to impose General Sales Tax on business there is a push back by the business community. This is not a good attitude.
Dr Vaqar Ahmed, Deputy Executive Director, Sustainable Development Policy Institute said in his presentation that during 2015-16, the value of merchandise exports reduced by 8.3%. Pakistan’s share in global exports has dropped from 0.15% in 2011 to 0.13% in 2016, while peer economies, like Bangladesh, India and Vietnam stood at 0.19%, 1.61%, and 0.97% respectively in 2016. This points out that there is a need to examine the macro and micro level issues affecting competitiveness. In addition, there is also a need to explore how Pakistan can elevate the current levels of export competitiveness by making use of its Generalized Scheme of Preferences (GSP) plus status and bilateral and regional trade agreements (e.g. with China, Malaysia and Sri Lanka).
He said, long term exports trend suggests that there appears to be a decline in export contribution as overtime falling competitiveness has led to a reduction in export as percentage of GDP. Our major exports destinations in 2015 remained limited to five countries and we are not able to diversify our exports away from traditional partners.
Dr. Vaqar Ahmed highlighted the key challenges. This included: the fragmented management of export promotion measures that undermined the ambitions of past trade policies; the regulatory regime faced by the private sector constrained the addition to installed capacity of exporting entities; the exchange rate regime could not be used as an effective instrument for export promotion; the country’s ability to participate in global value chains and conduct regional trade has weakened overtime; Pakistan’s ability to fully exploit its GSP plus status granted by the EU remains uncertain; past FTAs were not accompanied by lowering of regulatory burden on industry; and deep-rooted business interests continue to influence the political process making the business environment opaque and non-competitive.
Highlighting the short-term options, Dr. Ahmed said that the focus should be on increasing the competitiveness of the private sector in general and the export-oriented sectors in particular. This could be done through reducing the costs of businesses in order to get the required product compliance certifications essential for entering foreign markets; using the Export Development Fund (EDF) to cover part of the costs of energy and inland transportation (including transit levies) faced by SMEs in export sectors, especially in the case of trade with regional neighbors and transit trade; and expedite outreach and implementation of other measures announced under Strategic Trade Policy Framework (STPF) aimed at enhancing knowledge and capacity of current and potential exporters.
Highlighting the medium-term tasks for the Ministry of Commerce (MoC), Dr. Vaqar Ahmed added that it needs restructuring as a merger of Ministries of Commerce, Industries and Textile Production is required in order to focus on competitiveness strongly. A greater regional integration through deep agreements that go beyond market access can support the objectives under STPF and a research and evaluation unit within MoC is also required to provide timely analysis.
Emphasizing on the inter-ministerial medium-term tasks Dr. Ahmed said that ensuring efficient and timely implementation of No duty-No refund regime for exports is essential. The availability of refinance under Export Finance Scheme (EFS) needs to be expanded. Post-Brexit situation will require a more focused approach by Pakistan to enhance its trading benefits from GSP plus scheme. There is a need to curtail informal trade to safeguard local competitiveness. MoC in consultation with FBR should pursue rationalization of the tariff regime. To complement these measures there is a need for a scheme for ‘Common Bonded Warehouses’. There is also a need to assist exporting sectors to integrate with global value chains. In case of the services sector, a strong effort is required to become part of the regional value chain of initially providing low end, low value-added services. To accomplish these ministerial tasks, the role of political leadership is important. Government should constitute a high-powered Cabinet Committee on Exports along with formation of federal plus inter-provincial Working Groups on tax harmonization.
Highlighting long-term options, Dr. Ahmed said that there is a need to negotiate with provincial government to create a more conducive environment for business. The country’s energy costs also remain high because of the high fuels cost used for power generation, the contracted rates for electricity generation and governance issues reflected in energy theft. To reduce the high energy cost for SMEs, the government needs to conduct their energy audits to make their processes more energy efficient.
Dr. Ahmed concluded that the highest levels of political and administrative leadership in the country will need to focus on implementation of STPF and branding of ‘make-in-Pakistan’, reconsider the working relationship between key institutions at the federal as well as at the inter-ministerial and inter-governmental level for reducing the cost of doing business. The implementation of trade facilitation measures, and improvements in trade-related infrastructure, especially to benefit from the opportunities of transit trade, China-Pakistan Economic Corridor (CPEC) and Central Asia Regional Economic Cooperation (CAREC)programme should also be the focus of the political leadership.
Mr. Rehan Bharera, Chairman, Faisalabad Garment City said that since its inception Pakistan has performed very well but unfortunately energy crises and outdated technology have led it to a far below potential performance of exports. In last 50 years China and India have increased exports 6 and 5 times, respectively, but Pakistan has only increased 2.7 times. Our performance remained poor in 2015 and 2016 as we have been lagging behind with our exports competitors. He added that despite various incentives by the government the average tariff rates fell slightly from14.4% in 2013 to13.4% in 2016.
We have a big problem of tax system we need to reform Federal Board of Revenue (FBR) to solve this problem. People are willing to pay taxes but they do not want to get into problems as those who are paying taxes are in trouble as they face a lot of problems. Rather than broadening the tax base by bringing more people into the tax net, FBR has been pinching those who are already paying taxes. This is a big problem and government should resolve it.
The exporters and importers have faced lot of problems because FBR did not allow timely refund over the past two years. Exports need zero rated imported goods but industry has paid more than 50% taxes even after the announcement of the last year budget. Commenting on the recently announced export package, he said that despite tight fiscal position, government decided to provide the package. He added that it is not a textile package, it is package of all five textile oriented products. The package included: withdrawal of 4% custom duty on import of cotton, withdrawal of 5% sales tax on the imported machinery and drawback of local taxes in terms of value addition.
Mr. Bharera added that earlier we signed FTA with China without doing proper homework. As a result, we did not benefit and our trade deficit with China increased following FTA. Similarly, CPEC will be a threat if homework has not been done properly. How can we transform it into an opportunity when government ministries are not functioning to assist the business community? Citing an example, he said Faisalabad Chamber of Commerce has some questions about the export processing zone near Kalashah Kaku under CPEC projects. We don’t know much about CPEC and we tried to get the answers to those questions from the Planning Commission (PC). We were not informed and referred by the PC to the Punjab Government who was not willing to provide information on the export processing zone. Punjab Government has not a good attitude towards Pakistani investors who try to do a joint venture with Chinese. He added that he has been trying to convince Chinese investors to come to Pakistan for a joint venture in textile but they question why we would come to Pakistan while we are getting more incentive in Kashgar China.
Mr. Bharera added that previously during 2003 and 2004 due to the government oversight, the export package was misused by the big industrialist. They made investment in non-value added sector like spinning. That was the time when Bangladesh took the lead. As a result, though cotton is not produced in Bangladesh but it now exports US $30 billion per annum whereas we only export US $11billion cotton related products. Due to the erratic policies, our investors have been borrowing at the lowest interest rate from banks and taking yarn at very cheap rate to the Bangladesh. Our neighbors have been using our raw material to increase their value added in exports whereas we are not focusing on value addition.
Pakistani currency is overvalued against the foreign currency. We have shown our concerns many times but government is not paying attention. As a result, imports are cheaper and competing with domestic industries. Having a strong comparative advantage in agriculture, Pakistan can do wonder with its human resources, engineers and finance and IT experts who can increase country exports.
We have GSP plus status but did not use this opportunity very well. Our global image is a producer of low quality product and bonded labour is also pulling us back. In this environment, our investors are shifting their investment abroad. We need to increase our productivity by increasing our efficiency and profitability through enhancing export incentives. We need to have private-public partnership, and good business environment to attract FDI, through economic diplomacy, social and international compliance. SME sector is the key factor in exports but we do not have an effective role of SMEs. People don’t know about SME bank since it is not playing its role properly. Our industry is not producing competitively because of higher production cost.
TDAP is mandated to have a holistic view of global trade development. Scientific research and product based research is essential to promote exports. Our human resource is not competitive and we need to invest in skill upgrading and new knowledge. Pakistan cannot become an economic giant unless human resources are competitive. Lamenting on the performance of legislators he added that NIAB variety was made in 1978. A bill was presented in 2002 for intellectual property rights and our legislators took 14 years to pass the bill which was passed in 2016 by the Senate.
Pointing out the failure in production of cotton he added that we used to produce 15 million bales in 1995 whereas production in India was 8 million bales in the same year. However, India has produced 38.9 million bales last year while we have produced only 7 million bales which is even lower than that we produced in 1995. Mr. Rehan Bharera concluded that there is big gap between academic and industry. A lot of work has been done but people in the business do not know about it. Industry is now fighting for its survival. These linkages can help in surviving the industry.
Dr. Talat Anwar, Advisor CPS, CIIT said in his presentation that despite government claims of good performance and certification by IFIs and international credit agencies country’s poor export performance has been a cause of concerns. Pakistan’s exports plunged from 25 billion in 2013-14 to $24.1 billion in 2014-15 and to $22 billion in 2015-16. On the other hand, exports of other developing countries like Bangladesh’s and Vietnam were at $31 billion, and $97 billion, respectively during the same period.
A number of factors including low global demand in the wake of lukewarm global economic growth and overvaluation of exchange rate have affected the country’s exports. In addition, there was a structural shift in Chinese economy, which has reduced its demand for low value added textile products from Pakistan. The long-standing competitiveness issues in the domestic economy have not been addressed by the government. Moreover, there was a sharp fall in cotton production from 10.6 million bales in 2014 to 7 million bales in 2015 and to 8.2 million bales in 2016. This trend has only led to a visible drop in exports of cotton yarn and raw cotton, but also necessitated heavy imports of the cotton raw material.
The fall in exports was broadly occurred in all major product categories except meat, readymade garments and surgical instruments. The weak external demand because of lackluster global economic activity coupled with lower domestic production of major crops (especially cotton) affected the export performance. The performance was worsened by the relatively high cost of production, and continuing issues in competitiveness.
Dr. Anwar added that the lack of diversification remains the key issue. Country is heavily dependent upon textile for its exports that contribute 60% to overall exports. The concentration of Pakistan’s exports (in terms of both products and markets) exposes it to adverse developments in the countries of destination of exports or products. For example, Pakistani exporters suffered from a loss in market share in the US market owing to inability to capture the shift in US consumers’ preference from cotton to synthetic fiber. Our exporters need to conduct a complete analysis of the shifts taking place in the US market in order to readjust their product lines. Government has to play an important role in identifying such shift through promoting and disseminating studies on global trade development.
He added that GSP Plus status played a critical role in rising share of exports in EU from 3.5% in 2014 to 4.3% in 2016 but there is a need to strengthen Pakistan’s position further in EU.
Food group exports accounted for 19% of country’s exports also affected by the decline in international commodity prices. The cement exports continued to decline from 2009 to 2016. Exports in volume fell to 6.0 million tons, from 7.7 million tons in the preceding years. The large decline in 2016 is largely due to weak demand from Afghanistan, and the imposition of anti-dumping duty by South Africa.
Giving his recommendations, Dr. Talat Anwar said that exports diversification is critically needed as Pakistan’s major exports are still concentrated in a few markets and products. Policymakers need to develop a strategy that promotes innovation, R & D, and trade diversification. This would help domestic industries to improve its production base and integrate with global businesses. A continuous supply of energy will remain crucial for promoting exports.
In addition, an export-oriented industrial policy like Southeast Asian economies is also needed to provide broader institutional support to exporters along with duty-free regime for inputs into exports. In addition, a strategic collaboration between public and private sectors, capacity building through education and trainings toward specific sectors, agreements to ensure transfer of foreign technology and making export credit available for smaller firms for technology up-gradation are needed to enhance export competiveness of exports.
As emphasized by other speakers, growth in any industry needs a legal protection to intellectual property rights (IPRs), as developing new varieties requires huge investment cost to firms. Exports of textiles, rice, fruits, vegetables and related products would benefit from it. Holding back refunds of exports by the government led to a liquidity constraint to exporters. The government should expedite the process of disbursing refunds and drawbacks to exporters to improve their cash flows.
Dr. Talat Anwar further added that government needs to promote the growth of competitive and internationally recognized laboratory testing, certification and accreditation services, as well as, supporting facilities. By formalizing the Dairy Sector, country can generate more exportable surplus. Government need to take measures to remove the tariff and regulatory duty on the import of basic raw-materials in order to reduce production costs. There is a need for revamping SMEDA with a focus on operational management skills, financial assistance, innovation, and technological up-gradation. Finally, the government needs to build the capacity of institutions like TEVTA along with extending the collaboration between industry and academia/universities.
The participants also raised a number of questions and gave their comments relating to CPEC as opportunity or as threat and future exports situation. These included: Ms Mehwish Qayyum, Dr. Muhammad Shakeel Ahmad and Dr. Ghulam Shabbir, CPS, CIIT.
In the end, Ambassador Fauzia Nasreen, Head CPS while giving vote of thanks said that due to number of domestic constraints including energy shortages, production capacities of exporting firms have gone down even after getting concession like GSP plus. It is, therefore, important to address these constraints. Finally, Ambassador Fauzia Nasreen thanked also the speakers and organizers and distributed the souvenirs to the speakers.
Newspaper of The News "Experts suggest improving exporters’ competitiveness"
Newspaper of Urdu News Daily Jang Rawalpindi March 4, 2017
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