The trade policy for the year 2007-2008, unveiled by Commerce Minister Humayun Akhtar Khan on 18th July, offers various kinds of incentives aimed at enhancing competitiveness, productivity and export capacity of the country. Export driven measures include "Long Term Financing for Export Oriented Projects (LTF-EOP)", equity fund, brand acquisition, encouragement of SPS compliance, sectoral investment incentives, export credit risk management, social, environmental and security compliance and skill development.
Assistance in meeting international standards, support for compliance certificates, assistance for opening exporters' offices abroad, support for marketing of branded products, retail sales outlets, overseas business support units and e-marketing, are also among the main features of the policy. Export Oriented Units (EOUs) will have the same incentives as are available to units in the EPZs, and the existing units exporting at least 80 percent of their production would also be eligible for registration with the FBR.
However, new units so registered would be required to export 100 percent of their production. The trade policy seems to clearly recognise the fact that the country would continue to face a huge trade imbalance in the near future. It was not long ago that Pakistan had a reasonably healthy position in its merchandise account.
For instance, during 2002-03, trade deficit was only slightly above $1 billion which was easily covered by other receipts and the country enjoyed a surplus in its current account. The trade gap widened to $2.9 billion in the FY04, $6.2 billion in FY05, $12.11 billion in FY06 and $13.5 billion in FY07.
The actual trade deficit during 2006-07 was, as usual, higher than the projected deficit by about 44 percent. Going by the trend during the previous years, the gap between exports and imports may also turn out to be higher than $12.8 billion projected for 2007-08.
The haemorrhage in trade account is presently being met by inflows from remittances, privatisation proceeds, direct foreign investment and issuance of bonds, but barring remittances, other sources of financing the trade gap are either unsustainable or undesirable in the sense that the country cannot afford to add to its foreign indebtedness for long.
Therefore, the only options available to the country are to expand exports and curtail imports. In the current era of globalisation, there are no short cuts to achieve these goals. We need to address all the issues related to export competitiveness.
The technology of manufacturing, services and agricultural sectors have to be upgraded while the cost of doing business has to be brought down to internationally competitive levels. There is a dire need to provide efficient utilities at cheaper rates and a dependable infrastructure. Skilled manpower has to be developed.
While other countries have made rapid strides in most of these areas, Pakistani exporters seem to be still struggling and demoralised and in most cases lack the necessary dynamisms and aggression for international marketing as seen in China, India and certain other countries.
The import bill, on the other hand, is swelling due to higher international prices of fuel oil and edible oil as well as increased demand for items like cars and other durable goods, thanks to the variety of loans offered by financial institutions.
Most of the local items have been rendered uncompetitive and Pakistani markets are now flooded with Chinese, Indian, Indonesian, Thai and Malaysian goods that mostly find their way into the country through misdeclaration or smuggling. There are, in our view, no practical measures recommended in the trade policy which would drastically change the situation and narrow the trade deficit over time.
The Commerce Minister asserted in his statement that a successful conclusion of WTO Doha Round is expected soon and will provide us an excellent opportunity to increase our exports. Only time will tell whether our exporters would be able to successfully take up the challenge or flounder when the opportunity comes.
Any fresh input to check the growing trade gap from the Commerce Ministry or the EPB now TDAP is not visible. TDAP appears to be taking umbrage at the view that it would require 18 months to become functional. Enhancing the role of the government in boosting exports is a negation of commitment to move towards a market based economy. It is more of copycat approach borrowed from our eastern neighbour.
Providing equity from the exchequer to export based industry, funding of opening of exporters offices abroad and footing the bill of three employees are contrary to Prime Minister Shaukat Aziz's previous assertions. We expected his government to have a system where private equity funds instead of the government undertake this.
Further, the policy aims to expand long term financing to industry on subsidised rates from SBP. In FY2007 the reserve money went up by over 20 percent on this score and diluted the impact of a tight monetary policy.
What is needed is a more enabling environment for export competitiveness, ie lowering of taxes on inputs of export industry such as POL, electricity and gas. And, a more educated and better skilled labour force is required to enhance productivity in export units.
While analysing the reasons for the growing trade deficit, one also needs to sympathise with the predicament of the Commerce Minister. He obviously faces the challenge of narrowing the deficit on merchandise account to sustainable levels but does not have more potent policy instruments at his command to achieve the desired goal.
For instance, adjustment in exchange rate which could effectively boost exports and contain imports, is decided largely by the State Bank and the Ministry of Finance. Cheap and adequate availability of export finance is exclusively within the domain of the State Bank. Unfortunately, the present high rate of inflation would not allow the State Bank to lower the interest rates and increase liquidity in the economy.
Development and maintenance of infrastructure is handled by a number of ministries and departments. Law and order situation is looked after by the interior ministry at the federal level and by provincial governments. Education and skill development is also being taken care of by a number of players, including the private sector.
In all these areas which have a crucial impact on the balance of trade of a country, the Ministry of Commerce could have an input but cannot dictate. Keeping in view the growing trade deficit, we would urge the government to move in a co-ordinated manner and positively to attend to this weak area of the economy on an urgent basis. Otherwise, a worsening trend in the external sector would also begin to cast its dark shadows on other sectors of the economy.
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