Mohammad Younus Dagha is a career civil servant serving in BPS 22. Since April 2017, he has been handling the portfolio of the Secretary of the Commerce Division. Prior to that, Dagha served as Secretary for Water and Power for two and a half years. BR Research recently sat down in Islamabad with the prominent bureaucrat to discuss his new assignment in the context of Pakistan’s export challenges. Selected excerpts are produced below.
BR Research: Exports have been on a decline. What is it that the commerce ministry can do here?
Younus Dagha: Commerce Ministry is supposed to advise the government a trade policy that is conducive for both the international and domestic trades. Government is concerned about the lower international demand. It is a challenge to compete with rivals who vie for the same business that we have, especially in terms of our major exports that are in textiles, rice, leather, and food products. The Ministry is working hard to regain the trade figures in these sectors as well as to diversify both in terms of new product lines and export destinations.
Various measures are being taken to address the situation. The latest being the Prime Minister’s Initiative for the Enhancement of Exports. This Rs180 billion scheme provides a duty drawback incentive for exporters. This year the incentive was given on all the exports, regardless of quantum. In the coming year, the scheme will incentivize those exporters who will bring greater number of orders.
BRR: Such fiscal measures have been taken before as well. Are the results different this time?
YD: We are already experiencing improved results because of this initiative. In March, there was a three percent increase in exports, followed by a five percent growth in April. These are FBR PRAL figures. The good thing is the improvements are across the board. Major impact has come from the EU market, where Pakistan’s exports enjoy GSP+ market access. We feel encouraged by the response that has come in increased exports.
The other thing that has come into play is zero electricity load-shedding for industries in the last two years. The uninterrupted power supplies, since November 2014, have contributed towards industrial growth and higher GDP, and will have its positive impact on exports also, when reliable production plans can be made by exporting industrial units. There is concern about higher tariffs, but the PM announced Rs3 per unit concession in 2016, which has also impacted a lot in the cost of production.
These things are helping the industries gain back their price competitiveness, which is being mitigated these days through duty drawback initiative. Having said that, the challenges are monumental. To gain competitiveness, we have to work with the industry to improve efficiency in terms of labour productivity, and to encourage more investments in R&D for innovation. Simple, low-value exports won’t get us in the league of high-value exporting countries.
BRR: So what kind of focus is required?
YD: We recognize that our exports have never been 100 percent on high value. We have been exporting primary as well as intermediate goods. Our focus should be, and is, value-added sectors. The differential that the PM’s package allows is three percent for higher value addition.
BRR: If value addition is the focus, why do we have a regulatory duty on yarn imports?
YD: Duty-free cotton import is allowed until July. We have to see it that our local cotton production doesn’t collapse entirely and lose its acreage to sugarcane. Cotton producers feel they are not in a good position to compete with imported raw material. Remember, our competitive advantage in textiles is due to local cotton cultivation. We must provide room for imported fiber and yarn, but it has been seen that most of that imported material is used for local market instead of exports. As for exports, the material can be imported under other FBR schemes, which provide for ring-fenced imports of raw material for export products.
BRR: What kind of incentives are you looking at to promote value addition?
YD: We feel that all the new varieties of fiber required by industry and not produced locally should be levied least amount of duty. At the same time, we must allow for investments in productive sectors, when sectors like stock market, real estate, and the power sector are taking away much of the investments. This is one area of challenge for exports as well. Exporters should look inwards, but they are investing in real estate, and in power sector, whereas we want them to come back to their own industries.
BRR: Whichever industry those industrialists are looking, it is linked to domestic economy. Be it cement, steel, real estate, power, malls, retailing, etc. But the problem is to generate foreign exchange for increasing consumer demand that has to be partly filled by imports.
YD: The current phase of export slowdown is a temporary gap. I am quite optimistic in the sense that this gap between meeting domestic demand and making capacity expansion for exportable surplus will be filled.
BRR: What makes you optimistic?
YD: In the next couple of years, I see cheaper sources of energy, greater economies of scale, and through CPEC and other projects more foreign investment coming into export-oriented sectors.
BRR: Which exporting sectors do you see benefiting more from that scenario?
YD: For example, China has been producing for all the big brands in China, especially in textiles. Why can’t China relocate their industries here if we incentivise it? It’s a great export opportunity
BRR: Close to Rs200 billion of refunds remain stuck. It hurts working capital of exporters. How do you see that situation?
YD: The amount of refunds varies, but I think it is around Rs100 billion or so. We have taken up this matter with the Ministry of Finance and the FBR. We hope that this issue will be handled in the future much better than in the past.
BRR: Alright. But beyond offering fiscal incentives, can the government really do anything to help focus industries towards exports?
YD: There are a couple of things that the government is looking at. One is to bring down the cost of production to make exporters competitive internationally. This involves cost of utilities, such as electricity and gas services. It also involves cost of raw materials – so our tariff structures have to be rationalized accordingly towards export-oriented sectors. Second, the government has a big role in providing market access, such as through bilateral and regional agreements, free-trade agreements, etc.
BRR: Pakistan seems really weak in its trade diplomacy. Are you going to look at this aspect of trade promotion?
YD: I agree that trade diplomacy has been a weak area. What we are doing now is focus on performance of our trade officers abroad. They will be given performance targets. We are developing their KPIs and they will be held accountable for delivering on targets. Similarly, we are trying to reorganize and reorient TDAP towards a business-friendly, export-facilitation organization. We are also trying to bring in a policy and legal framework to help the Intellectual Property Organization perform as per international standards.
BRR: Are you looking at any new areas for exports?
YD: We are looking keenly at agro-processing. We have historically focused on cotton, rice and sugarcane, so we have been processing nothing apart from that. We are wasting 30 to 40 percent of crops due to non-processing and non-preservation of our produce. We have a lot of opportunity there. We can expand our trade locally and externally in this area.
On the dairy side, we are only processing 7 to 9 percent of our raw material, milk. We need to go into high value-added products. Our meat sector is highly under-utilized, especially the poultry sector. We are sitting next to Middle East, which are importing all the way from distant countries like Brazil, Argentina and Australia.
BRR: Since agriculture is a provincial subject, how much role does federal government have in pushing agro-processing sector?
YD: It doesn’t matter how many government tiers are involved. If the entrepreneur is willing to take risks, the government will provide incentives both on the side of investment and trading. Under the Strategic Trade Policy Framework (STPF), which we are reviewing, we are offering the agro-processing industry some form of concession or rebate on their financial costs on things like the import of machinery. We are also looking to revitalize Pakistan Horticulture Development Board. Unfortunately our banks and investors are not taking interest in agro-processing commensurate to its huge potential.
BRR: The USAID-funded PRIA project had been arranging consultative sessions for the revision of trade policy but they stopped half way and since then there have been no revisions. What’s the latest on that?
YD: We have restarted the process with the first ever pre-budget seminar in Islamabad which was well attended by all the stakeholders. We had meetings in Karachi and Lahore with many stakeholders, exporters associations and other trade bodies. We will keep this series going till the end of June, when we will make improvements in STPF and other related documents.
BRR: There is a case for import substitution, especially in localization of electronics and gadgets. What are your thoughts on that?
YD: We need to incentivise that. We will soon become surplus in power, so the new investment should go into such industries that give us advantage in exports. Also there are opportunities in sectors, like downstream segments of petrochemicals, and as I said earlier, in agro-processing. But I will stress that we need to provide level-playing field to real investment by properly taxing investments in stock market and real estate.
BRR: Lastly, do you think PKR is overvalued and it is hurting our trade balance?
YD: There are two views about it. One is that we are discouraging exports with the level the currency has been at. The other argument is that a strong currency is good for investors. I would say that keeping the currency stable serves many other economic imperatives. For instance, it contains the debt burden. Also, keep in mind that 40 to 60 percent of the value of our exported goods is imported component, like fuel and other raw materials.
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