Pakistan’s economy has remained predominantly import based all through the past seven decades. However, since the country’s ability to mobilize hard currencies needed to finance these imports has consistently remained limited because exports have remained too narrow. The overall national economic activity, therefore, has remained largely stagnant. This state of affairs in the economy in turn has kept import growth rather depressed which in turn has kept the annual average rate of growth of Pakistan’s gross domestic product (GDP) correspondingly low.
Resultantly, the country had no other option but to survive on concessional and non-concessional multilateral and bilateral assistance plus borrowings at exorbitant rates of interest from commercial market adding the extra burden of amortization to our limited ability to earn hard currencies which had consistently failed to cover even three-fourth of our import bill.
Nevertheless, increased imports of petroleum products, edible oil, wheat, sugar and cotton, among other things – at prices which have been highest in recent years – are causing the import bill to go through the roof.
Exports have consistently refused to pick up because of lack of diversification in export goods. The following list of export items has remained largely unchanged over the last several decades: Rice, Sugar, Fish & Fish Products, Fruits, Vegetables, Wheat, Spices, Oil Seeds, Nuts & Kernels, Meat & Meat Preparations, Raw Cotton, Cotton Yarn, Cotton Cloth, Knitwear, Bed wear, Towels, Readymade Garments, Made-up, Petroleum Products, Naphtha, Carpets, Rugs & Mats, Sports Goods, Leather Tanned, Leather Manufactures, Surgical Goods & Medical Instruments, Chemical & Pharmaceutical products, Engineering Goods, Jewelry, Cement, Guar & Guar products.
The trend of Pakistan’s exports of major items has remained more or less the same with concentration on three items: cotton manufactures, leather and rice. These three categories accounted for 70.5 percent of total exports during July-March FY2021. Within these three items, cotton manufactures remain the major contributor with 58.8 percent in total exports.
In the meantime, as imports surged – having been valued at $6.05 billion in June 2021, an all-time high, and $5.4 billion in July 2021 – importers needed more dollars than they can find in the market. The State Bank of Pakistan could have improved the dollar supply by using its reserves, but it has to rightly spend those reserves on external debt and liability payments. Resultantly, the rupee’s value has slipped from 152 to a dollar to 164 to a dollar in the last two months.
But the rupee’s ongoing depreciation is making imports costlier in local markets which is highly likely to push up inflation. It could, simultaneously, also result in the dollarization of the economy – a state in which people want to turn their assets into dollars to stave off the effects of depreciation in local currency.
If this depreciation of rupee is unable to slow down the demand for imports and current account deficit crosses a certain threshold, then the SBP will have no other option but to increase interest rates to curb consumption and incentivize savings.
As the demand for certain imports such as fuel, edible oil, and certain other food items is inelastic curbing it will curb economic growth and cause food inflation. This means that the depreciation of the rupee will not have its desired impact on imports and exports and will, instead, increase the domestic sales price of imports.
Similarly, the SBP cannot easily increase interest rates, which it has kept at 7 percent for more than one year now, without the risk of hurting an already precarious economic growth overshadowed by Covid-19.
So, for all intents and purposes Pakistan needs to enhance its exports if we were to cover our rising import bill without having to borrow as we are doing now despite the fact that a good chunk of dollars is received annually by way of remittances from overseas Pakistanis.
But no matter how much of exports we make volume-wise of these items, mostly low-priced, we would not make enough. Therefore, what we need urgently is to expand the list of export items with knowledge-based items like IT, electronics, computers, smart phones, etc.
The good news is Pakistan has become exporter of 4G smartphones by sending last Friday first-ever shipment (5,500 mobile sets) tagged ‘Manufactured in Pakistan’ to the United Arab Emirates.
Inovi Telecom, the local manufacturers of mobile phone sets, was issued authorization for mobile device manufacturing in April and it has managed to fulfill its first export order within four months
Chief Executive Zeeshan Mian Noor has said that their main target was to penetrate low-end markets of the Middle East including Iraq, Iran and Afghanistan.
“We are manufacturing the Chinese brands and there are a large number of expat workers in the Gulf countries,” he said.
He said that the mass market of Gulf countries was their primary target, while the ordinary citizens of Iraq, Iran and Afghanistan too preferred mobile sets up to $100 each.
The overall exports of mobile phone sets by China is over $140 billion, but that was only due to low labour cost, which has now increased significantly. Therefore, the Chinese are moving towards high-tech items and shifting their mobile set manufacturing to countries like India, Vietnam, Indonesia and Bangladesh.
Labour cost is going up in Vietnam and Indonesia as well and Chinese businesses are not expanding in India anymore due to mounting political tensions between New Delhi and Beijing.
Now Pakistan is the only player left to compete with Bangladesh, but the government would need to provide same level of facilities to local manufacturers which have proved that investors can meet the targets.
Digital growth in Pakistan is going through a rapid evolution. The IT sector is one of the fastest growing sectors of Pakistan contributing about 1% of GDP of Pakistan at about $3.5 billion. It doubled in the past four years and experts expect it to grow further by 100% in the next two to four years to $7 billion.
We must, therefore, closely study how Bangladesh became an export power-house from being exporter of just one item—jute and jute made-ups. In the last few years, Bangladesh has experienced rapid growth in export earnings with total figure reaching US$ 35 billion. Though textile & apparel sector still remains the predominant contributor in the country’s export earnings, other sectors such as pharmaceuticals, ceramic tableware, plastic and ceramic articles, leather products, agro-products, software & IT solutions, home appliances, electrical gadgets, ships & vessels, light engineering products are emerging progressively.
The example of Vietnam is even more instructive. With its rising costs, China is no longer the go-to destination for many businesses, and Vietnam has arisen as a serious competitor. Recent trends show that the number of orders shifting from China to Vietnam has seen a significant increase.
In the past few years, a growing number of businesses relocated their operations from China to Vietnam in an attempt to escape rising costs and an increasingly complex regulatory environment. Vietnam could do it because the country had over the years focused on enhancing the tech skills of its manpower.
Compared with other developing markets in the region, Vietnam is emerging as the clear leader in low-cost manufacturing and sourcing, with the country’s manufacturing sector accounting for 25 percent of Vietnam’s total GDP in 2015.
Currently, labour costs in Vietnam are 50 percent of those in China and around 40 percent of those reported in Thailand and the Philippines. With the country’s workforce growing annually, Vietnamese workers are inexpensive, young and, increasingly, highly skilled.
In terms of regulatory and financial incentives, Vietnam has become increasingly investor-friendly in recent years –the government has taken such actions as reforming its financial sector, streamlining business regulations, and improving the quality of its workforce.
Since the mid-2000s, the Vietnamese government has offered extremely competitive financial incentives to businesses seeking to set up operations in the country, in addition to a zero percent withholding tax on dividends remitted overseas and a low corporate income tax (CIT) rate of only 20 percent. These advantages have enabled Vietnam to become a premier “sourcing economy” in the eyes of many companies.
Interestingly, Vietnam is well on its way to becoming a key location for high-technology manufacturing, with companies like Samsung, LG Electronics, Nokia, and Intel making multi-billion dollar investments into the country. Other business areas include information and communications technology, automotive, and medical devices.
Exports of smartphones and computer parts now account for more in export earnings than oil and garments. Samsung has turned Vietnam into a global manufacturing base for its products, producing almost a third of the firm’s output. Samsung has invested over US$17 billion into the country.
Copyright Business Recorder, 2021
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