Jubilation at export growth is premature

The fact that exports this financial year, July 2020 onwards are much higher than they were in the same months the year before is a source of great joy and achievement to the official circles. However, such celebrations are not really justified as yet. No doubt our manufactured exports are growing, but the figures of 2018 for the same period are higher for most items! Let us achieve levels clearly better than 2018 before we celebrate.

There is no doubt that the pandemic caused great devastation in the spring of 2020. But we were quick to recover and had adapted ourselves to the changed environment by May. No doubt the assistance provided by the Government and particularly the State Bank of Pakistan’s (SBP’s) largesse in providing soft loans helped a great deal. The government-SBP approach to the crisis was vastly different from India’s and Bangladesh’s. Indians and Bangladeshis are our main competitors. The downturn in their exports is, therefore, much greater. More on their situation later.

If you compare the figures of the last six months with those of the last year, i.e., 2020 July/December with those of 2019, there is an increase of 10 percent or so. Yet if you compare them with the figures of 2018 then there is less cause to feel smug. We are barely achieving the export levels of 2018.

The exporting industry was not hit as badly by the pandemic as it was damaged by the imposition of the sales tax in July 2019, nine months before the outbreak of pandemic. This compounded with the inability of the Federal Board of Revenue (FBR) to release refunds as promised was an utter disaster. There would have been an adverse effect of the imposition of the tax alone, but when we lost all hope of getting refunds, the damage was acute. By December 2019, the exporters were in ruin. Many had shut down and all had curtailed their operations and gone into a “survival” mode. Entreaties to the government to release refunds, as promised, were met by a stony silence. Most of us just gave up hope. Only those survived who had some access to the “computer” or could set off their sales tax payments against refunds due from local sales. These were largely the composite mills and of course the spinning industry as both have large local sales Consider the following statistics issued by the government:

The real story is that exports were stagnant during the regime of Nawaz Sharif as the then finance minister, Ishaq Dar was determined to keep the dollar rupee parity at about Rs104 to the dollar. This they felt was a matter of national pride. While exports became uncompetitive, imports boomed. No doubt this promoted price stability as well. The moment the rupee was floated by the incumbent government in January 2018 exports obviously took a fillip. Exporters were happy that they could compete again with their neighbors. It took time for exporters to start building up their old base but by 2018/19 these were rising. Then came the sledgehammer of the 17% sales tax imposed on all inputs in July 2019. This was a bigger blow than any policymaker had imagined or was willing to admit. No doubt an across-the-board sales tax was imposed as per the IMF programme yet some consideration should have been made to allow for Pakistani conditions.

Even if the entire amount of the tax imposed is refunded as per the rules announced there is a gap of three months between the payment of the tax and its refund. This means that the manufacturer/exporter will have 17%x3 =51% of the value of his inputs tied up in sales tax refunds. The taxes paid in July become eligible for refund at the end of August if everyone pays bang on time. If the manufacturers of inputs do not pay in on the due date then the refunds of the exporter who has bought his inputs from them is also held up. To start with the computer would just reject the application. Moreover, the computer had to be fed the data. If this was delayed then the refunds are stuck again. So at best there is a delay of a month at least from the perfect date. If anyone gets their refunds within three months they consider themselves lucky. When the refunds are not paid as promised then the figure goes up by 17% a month until the exporter goes bust and ceases operations. Long before that he is forced to curtail his operations, and exports of the country suffer.

As newspaper readers can make out from the above table for most items export levels of 2020/21 may equal those of 2018/2019. Well, that is a creditable bounce-back from coronavirus, especially when we compare it with other countries of the subcontinent. Had we not mismanaged the sales tax so badly, exports would have been even higher. We have been suggesting to the government that if zero-rating the pure exporters is not possible then industry-wide sales tax refunds should be calculated and refunded through the SBP as soon as export paper work is complete. In this way the period for which an exporters sales tax will be tied up will come down to six weeks rather than three months. Moreover, the uncertainty of when and how much of the refund will be released by the FBR will be taken out. Certainty of getting refunds within a particular timeframe is very important for cash management of any industry.

It’s high time that sales tax rules are amended to make sure they are not a damper on our exports.

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EXPORTS OF SELECTED ITEMS
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ITEM                            17/18         18/19         19/20          Six months
                                                                                20/21
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C. Cloth: (Th Sq Yds)            2369          2827          2327          796x2=1592
Knitwear (Th Dozs)             105606        118000        105777      88385x2=176770
Bed wear (th tons)                377           414           405           139x2=278
Towels: (th tons)                 203           191           173           104x2=208
Garments (th dozs)                 40            56            50             18x2=36
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Copyright Business Recorder, 2021