Stifling Exports

Muhammad Ashraf

The economic indicators, during the last two years, have improved – economy has grown by
4.04% and 4.71% annually, revenue collection has annually increased by 20%, Pak Rupee
has remained strong, inflation is at its decade-low and workers’ remittances have scaled a
new peak.
The export trend is reverse – 8.2% decline during the first two months of 2016-17,
compounding the slide of 12.1% in 2015-16 and 4.9% in 2014-15. The recent decline in
exports can be partly attributed to the exogenous factors e.g. 15% contraction of global
market in 2015 and 25% decline in global commodity index. The export sector, however, has
been debilitating for a decade – Pakistan’s share in global market has eroded whereas
regional peers i.e. India and Bangladesh have doubled theirs; Exports-to-GDP ratio has
decreased from 13% to 8.9%.
The inverse trend between economic growth and exports connotes that exports are not
participating in the economic growth. Are the exports declining in spite or because of the
economic growth model? A dispassionate review of the policy ecosystem designed to
improve the economic indicators reveals that exports are facing a threefold policy challenge
i.e. policy conflict, policy disconnect, and policy vacuum.
Firstly, the objectives of the vital policies driving the economic growth model conflict with
exports. A 3-year IMF programme has recently concluded with accolades at “the prudent
monetary policy” for achieving the conflicting goals of containing inflation and spurring
growth, but concerns at the real exchange rate appreciation contributing to the “erosion of
export competitiveness”. The external borrowing (coupled with remittance bonanza) has
afflicted the ‘Dutch Disease’ of artificially appreciating the currency; the increased size of
external debt (currently US$ 73 billion) makes it imperative to prop the currency as
appreciation of one Rupee against dollar eases the debt burden by Rs. 73 billion. Appreciated
currency has a cost – it makes exports expensive and imports cheaper. In order to steal the
share from competitors in a sluggish international market, the countries are engaged in a kind
of “currency war” of competitive devaluations – since November 2013, Indian Rupee has
depreciated by 7%, Chinese Yuan by 8%, South Korean Won 10%, Thai Baht 11%, Sri
Lankan Rupee 12%, Euro 20% and Brazilian Real 51%; swimming against the tide, PKR has
appreciated.
The tariff policy has been sapping exports. Around 40% of the duty-free tariff lines, mainly
essential raw materials and machinery, have been subjected to duties since 2014. The
collection from Customs Duties has increased by 36% during the last two years; Regulatory
Duties are new weapon in the armory. The tariff policy, abetted by the deficient trade
facilitation at the border, is by far the biggest impediment to Pakistan’s integration into global
value chains (GVCs). The cascading tariffs, celebrated for incentivizing value addition, have
erected a snug comfort zone for value added products in the indigenous market vis-à-vis the
highly competitive export market. While exports are declining, the brands and retail chains
by the leading textile houses are thriving in the domestic market.

Secondly, there is a disconnect of investment policy with export-led growth. The market
access acquired through preferential trading arrangements and unilateral concessions (e.g.
GSP Plus) does not translate into inflow of investment into production for these markets. The
import substitution, forsaken in theory, remains the mainstay of investment strategy in
practice. Tariff protection in the domestic market, rather than competitive production
environment, is the most persuasive incentive offered to the foreign investors. The FDI is
predominantly in production of consumer goods, engineering and pharmaceutical products
for the domestic market rather than export driven. The engineering sector which has the
potential to steer exports out of the current low-value trap, is stubbornly domestic-focused –
the auto manufacturers even after decades of outrageously high protection invest their entire
advocacy capital on seeking protection against 30-40 thousand imported used cars and turn
aside on the suggestion to produce for export market.

Thirdly, the industrial and agriculture policies are conspicuous by absence, rendering the
production random rather than planned. In a policy vacuum, the production is supply driven –
pushing in the global market what we can produce rather than producing what sells. The
export sector depends on policy direction for transforming production from factor-driven to
innovation-based, enhancing competitiveness of the efficient, rehabilitating the sick and
phasing out the incorrigibly uncompetitive subsectors. In the absence of national or
regional/provincial agricultural and industrial policies, sectoral biases and distortions have
sneaked into the production paradigm. The production base finds itself unviable in an
intensely competitive global market and is to be kept afloat through inefficient tariff
protection, untargeted subsidies, camouflaged handouts and distortive policy interventions.

To conclude, the economic policy environment in which exports operate has its role in
smothering exports and eroding share in global market. The regaining of our lost share vitally
depends on getting the policy mix right. The economic growth model requires a realignment
to make exports partner in growth specifically through (a) adjusting exchange rate to restore
export competitiveness, (b) rationalizing tariffs to remove anti-export bias, (c) calibrating
investment policy for promoting export-led FDI, and (d) developing the agricultural and
industrial policies to steer an organized rather than organic growth.

The author is Joint Secretary (Exim), Ministry of Commerce