Trade policy: remove the blinders!

In the last budget, Dar and company announced a number of measures for “export promotion” which among some vague measures like setting up technology funds; gave incentives that reduced the mark-up rate from 9.5 percent to 3 percent for Export Refinancing Facility (ERF), offered zero rates for all exporting sectors on sales tax, and said the refunds that had been pending would be released within 2 months of the budget announcement.

Later in January, the government launched Rs180 billion worth of an export package. So much “promotion”, nothing to show for it. You couldn’t tell nearly a year has passed since that speech and nearly six months since the package. Exports have only shrunk and refunds are stuck causing liquidity crunch to exporters but the more troubling aspect is, that there is no profound turnaround expected in exports with the existing non-policy that is in place.

The Pakistan Economic Survey announced yesterday says exports to OECD countries have declined after UK’s exit from the European Union after the British Pound witnessed a sharp drop—Pakistan’s exports fell by 5 percent during the period July-Dec 2016, it said. The survey gives various reasons for the decline of various export products, and in the short term they make sense. In the long-term, not so much.

Intuitively, the survey accurately identified the problem: “Pakistan’s exports are hamstrung due to disconnect between domestic competitiveness and international trade competitiveness. The Ministry of Commerce is working to improve regulatory and policy frameworks of different federal and provincial organizations impacting the business environment in Pakistan”.

In light of that statement, let’s give some pointers to the Ministry that should drive a national trade policy which could actually work toward “promoting” exports. Apart from correcting the overvalued currency, the trade policy should: a) give strategic and targeted incentives to exporters based on what they are producing, what they are innovating and what value they are adding to their product. One way to do that is to incentivize value-added exports so that incentives are based on how much value you add.

In direct relation to that, b) bring down duties and tariffs for all machinery and technology based material, and when we are talking about imports, c) reevaluate the existing or any upcoming trade deals in light of the concept of backward and forward linkages i.e. using imports to boost your exports that countries all over the world are doing; and creating linkages with industries where market access is granted to manufacture intermediary products.

Another major issue and deterrent to export growth is the lack of proper financing. Sure, the ERF rate today is low, but it hasn’t yielded any positive results. Part of the reason is that many exporters, in far off towns, do know about this facility. Banks are not very big on imparting this knowledge onto them, and even if the ERF was utilized, it is simply not enough, so d) exporters should be given facilities and incentives to expand and revitalize poor technology.

These incentives can come in the form of interest-free and/or uncollateralized loans equal to a share of their revenues or profits. The greater the profits, higher the loans. Doing the math and doing market research on which incentives will yield what outcome will have to go into designing this policy.

Lastly, e) there is no way a national export industry will become competitive without provincial industrial policies in place that identify sector- specific, and geography-specific capabilities, competitive edge and costs and work with them. Working with provincials and local communities—since most of the private sector in Pakistan is SME-based all with their unique set of challenges and risks, is essential.

The question is: why go through the exercise of designing a trade policy when subsequent governments have made-do with the non-policies that have trudged exports along on a merry path of a flat line. All the while blaming commodity prices and other external factors instead of focusing on the structural issues, why indeed? But today is another budget, and another day.