Strategic Trade Policy Framework

According to a Business Recorder exclusive, the revised Strategic Trade Policy Framework (2012-15) submitted for the second time by the Ministry of Commerce for formal approval by an inter-ministerial committee has been opposed by Finance and Planning Commission. Accusations of Finance Minister Dr Hafeez Sheikh deliberately not attending and instead relying on the presence of Dr Nadeemul Haq to oppose the subsidy component of the trade policy were hurled by the officials of the Commerce Ministry subsequent to the meeting.
There is considerable evidence that the two men, Dr Sheikh and Dr Haq, are on the same page with respect to which macroeconomic policies must be based on a life-time work experience in multilateral agencies that typically oppose subsidies for being untargeted and a waste of scarce resources. Before dismissing their views as representative of multilaterals that support several flawed prescriptions it is necessary to realise that there is considerable research on the veracity of this basic premise namely that subsidies are generally untargeted and do not benefit the most vulnerable: subsidy on electricity tariff is a good example as its incidence on the poor and the middle-income is far greater than on the rich.
However subsidies that target the production sectors have the objective of providing an impetus that is targeted to enhance output with its consequent impact on the economy's growth rate, leading to not only an increase in employment opportunities but also an increase in export revenue. The government cannot ignore the relevance of these elements in today's Pakistan suffering from an ongoing acute energy shortage, serious law and order issues, as well as a poor business environment. These are cited as the main reasons for relocating of several of our industrial units to Bangladesh and other countries. If one adds the additional negative element of an eroding rupee vis-a-vis other currencies of the world, one is compelled to argue in favour of some equalising measure with subsidies the easiest to seek and administer. There is thus a school of thought in Pakistan that maintains that until and unless subsidies are extended to productive units output in this country would further decline with a consequent negative impact on all of our key macroeconomic indicators.
Dr Sheikh and Dr Haq's opposition to subsidies, however, is based on two factors. Firstly, they argue with a deal of veracity that the economy can no longer afford to give subsidies. As matters stand today the government's efforts in the budget to reduce subsidies has not succeeded; on the contrary subsidies exceeded what was budgeted by over 400 billion rupees last year (with power sector subsidies the main culprit) and if the current trend continues then the likelihood of an excess of the same magnitude is expected in the current year. Subsidy to the power sector alone is forecast to derail the budget deficit target this year again which, no doubt, would have implications on inflation, employment and output. And secondly, the two former staff members of multilaterals argue that Pakistan's export policies have always had a component of subsidy and it is time that this is stopped and industries must begin to compete in the international market. In this context, it is necessary to look at each industry separately to determine whether it merits some state support or not.
The question whether to extend subsidies or not is a complex one. The element of infrastructure inadequacy, an eroding rupee value due to flawed government policies notably the dramatic rise in domestic borrowing, and the lawlessness that prevails in cities as well as rural areas need to be dealt with but until and unless they are dealt with some form of subsidy would be necessary just to ensure that the wheels of productivity continue to move forward.