‘Anti-export bias’ stifling growth

Pakistan’s trade imbalance is largely attributed to declining export competitiveness, a point which has been re-emphasized in last week’s Pakistan Development Update by the World Bank. This report has laid out the causes of Pakistan’s falling export share:

• high effective import tariff rates;

• limited export market access which discourages exports;

• inadequate supporting services for exporters, e.g., long-term financing of capacity expansions and market intelligence services to secure new export contracts; and

• low productivity of Pakistani firms hindering competition in global markets.

Furthermore, the inconsistency of policies and frequent policy changes create an unsuitable environment for investments in the export industry. Our economy is largely inward-oriented, with a declining share of exports in GDP. As a result, the country’s foreign exchange, employment levels and productivity have taken a hit. There is a lack of value-addition, sophistication and diversification in the export basket due to constrictive policies, leading to an anti-export bias and making the industry uncompetitive. As per the latest World Bank assessment, the export market share of Pakistani firms has declined since 2000 – particularly over the last decade. The share of textile and apparel, Pakistan’s flagship export sector, has shrunk from 2.3 percent in the early 2000s to 1.8 percent in 2020. Overall, Pakistan’s presence in global markets has shrunk substantially in the last two decades, while global trade almost tripled.

Energy security is perhaps the most critical component of industrial competitiveness – a case in point being the 27% growth in textile exports in the first four months of FY22 while consistent policy and regionally competitive energy was being provided by the government. Moreover, consistent policies over the past 3 years have enabled the industry to expand its capacity, attract investment and upgrade its technology leading to over 100 new textile units and creating millions of jobs.

The textile sector requires unwavering support to maintain this growth, so the sustained provision of a supportive energy package will have long-term benefits for the entire economy. The government’s plan to end the supply of competitively priced gas to exporters is illogical as it is a critical input that should ideally be priced at the regionally competitive rate. With overpriced energy, particularly gas, the output price will be uncompetitive as any downstream unit in the value chain will prefer imported inputs instead of expensive domestic inputs. In this situation, local units at the high end of the value chain are at risk of closing down, leading to the loss of countless jobs. There remains a dire need for a long-term energy security plan which meets the requirements of the industry.

The cross-country comparison in the cost of conversion in the table below shows that the textile units in Pakistan are incurring power and energy costs 2.4 percentage points more than India and 7.8 percentage points higher than Bangladesh. This demonstrates that the ideal, regionally competitive electricity tariff would be around 7.4 cents/kWh.

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Cross-Country Comparison of Conversion Cost
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                Pakistan                 India                  Bangladesh
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Power   Wages&   Depreci   Power &   Wages & Depreci   Power& Wages&  Depreci
& Fuel  Salaries   ation    Fuel     Salaries   Ation   Fuel   Salaries ation
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Average
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(2017-20)34.6    29.3    10.3    29.8    28.0    16.0    25.5    33.8    18.0
2017     36.1    29.9    10.0    26.9    26.6    16.5    26.9    33.0    17.5
2018     36.4    29.3    10.1    30.6    27.1    14.8    24.4    29.8    15.8
2019     33.6    29.4     9.6    31.2    30.8    16.4    26.0    35.8    18.4
2020     32.8    28.7    11.8    30.4    27.6    16.3    25.0    37.1    20.9
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Source: PIDE
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Pakistan cannot afford to have an uncompetitive export-oriented sector. The industry is presently demanding that the power tariff must revert from 9 cents/kWh to 7.5 cents/kWh, as anything higher renders exports uncompetitive. It is not possible for the industry in Punjab to remain competitive while getting 9 cents electricity and 9 dollars’ gas when other provinces are being provided gas at 4.5 dollars. The irony is that 70% of the industry is located in Punjab.

Further constrictive policies are in the form of substantial barriers to trade and to new firms that should be able to enter exporting. Our tariffs are among the highest in the world, and countless non-tariff measures (NTMs) create further hindrances. These need to be rationalized or completely done away with in order to enable sustained export growth. The weighted average tariff for Pakistan stands at 12.1%. In contrast, our regional trade competitors China, Indonesia, Malaysia and even Sri Lanka have far more reasonable weighted averages of 7.5%, 8.1%, 5.7% and 9.3%, respectively. If we take into account the additional customs duties and regulatory duties, Pakistan’s costs rise exponentially. Meanwhile, the National Tariff Policy has not been implemented in letter and spirit. NTP was formulated with an eye to reducing complexity in the entire tariff system, but due to poor management it has been counterproductive as the entire system has become even more intricate.

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Country                   Shares of Import Tariffs in Total
                                  Tax Revenues (%)
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Pakistan                                                 48
Malaysia                                                1.6
Turkey                                                  2.4
Indonesia                                               2.6
South Korea                                             3.2
Thailand                                                3.9
China                                                   3.9
India                                                  12.8
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Source: World Bank
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Furthermore, SBP is likely to raise the policy rate with time, thereby increasing the differential between the policy rate and the export refinance rate. Subsequently, every incremental dollar earned will cost more, creating issues for the exporting sectors. It will be very difficult to maintain export growth momentum if EFS enhancement is constrained.

Most textile economies in our region benefit from the duty-free input of machinery and raw materials, particularly for the production of export commodities. Additionally, subsidized utility rates are available in Bangladesh, Cambodia and Ethiopia. Bangladesh also benefits from an exemption from value-added tax on utility services related to the production of goods. These policies have substantially assisted these countries in achieving high export volumes and economic growth rates.

In Pakistan, while customs duty on raw material has been removed, duties on intermediate and final goods remain unchanged while additional customs duty and regulatory duties have been increased, thus rendering the overall effect negligible. The reasoning given for these irrational duties is that they provide protection for domestic industries from international competition and generate revenue to manage budgetary requirements. It is unfortunate that short-term revenue generation has taken precedence over long-term sustainability and industrial competitiveness, while industries’ efforts to become internationally competitive are undermined.

Numerous schemes have been made available over the years to streamline access to imported inputs at world prices, but these are largely ineffective. Only about 2% of textile and apparel exporters in Pakistan can access duty suspension schemes such as the Duty and Tax Remission for Exports Scheme (DTRE) and Manufacturing Under Bond (MUB) for their imported intermediates, in contrast to 90% in competitor countries such as Bangladesh, so their relative growth rate comes as no surprise. Furthermore, DTRE in Pakistan is highly inefficient, as it can take two to four months to import synthetic fibers, leading to delays and interruptions in production that are not acceptable to global buyers.

A reliable and supportive energy environment paired with a more efficient use of customs tariffs in Pakistan can largely improve industrial competitiveness and mitigate the very pressing risk of premature deindustrialization. If customs cannot be employed in an efficient manner, they should simply be removed altogether as they are stifling innovation, efficiency and export growth. The country must stop following an outdated import-substitution policy which relies on levying protectionist duties as it has contributed to stagnancy in technological innovation and an anti-export bias. Meanwhile, as TERF has come to a close and there are higher commodity prices, there is resultantly higher pressure on the working capital requirement of manufacturing sectors. Exporting sectors need increased support in this situation so that they can continue to bring in much needed foreign exchange and steer economic growth. Consistency and continuity of policy constitute the key to attaining export led growth and brings us a step closer to economic and political independence.

Copyright Business Recorder, 2021