The Commerce Minister of Bangladesh (BD) has set his country’s export target for 2022-2025 at $ 80 billion. BD has already crossed the figure of $ 60 billion in the past.
The optimistic estimate for exports from Pakistan is around half of BD’s total exports sum. We were one country prior to 1971 and at that time our economic fundamentals were the same with a slightly better level of industrialization process in the West Pakistan (now Pakistan). It is, therefore, necessary to have an independent analysis of the reasons for our backwardness that have emerged in the past fifty (50) years.
Many analysts consider that this difference has arisen on account of the political systems that prevailed during the last century in these countries. Many others, however, disagree with this assertion. Perhaps a plausible answer lies in flawed economic policies which the western side adopted that stagnated economic growth. We are now in a vicious circle of scarcity of foreign exchange. The only solution to our predicament lies in export growth.
It is, in the author’s view, worthwhile to identify the reasons why Bangladesh is the second largest exporter of textiles despite the fact that not a single bale of cotton is grown there. As against that, Pakistan produces over 10 million bales of cotton every year. This analysis requires an empirical breakdown of the total sale proceeds of exports. The resultant elements are:
Cost of raw materials, supplies and other overheads;
Cost of labour;
Cost of power;
Depreciation on plant and machinery;
Cost of internal transport;
Profit margin of the exporter.
In principle, the cost of raw materials should be lower in Pakistan. However, even if it is assumed that local cotton is not used for making exportable products there cannot be much difference in the cost of raw materials. Similar is the case with depreciation of plant and machinery and other overheads.
The first major difference is the cost of power. As per a rough estimate, the average cost of power to industries in Bangladesh is 0.105 cents per kwh whereas the same is available in Pakistan at 0.155 cents. There can be a long discussion about the reasons for this expensive power which is the result of our flawed economic policies. However, whilst it would have to be taken into consideration but in no case can the cost of power be more than 10 to 15 % of the total sale proceeds. Bangladesh does not pay 17 percent guaranteed return on equity to power plants and that too in US dollars.
The other cost which is expensive in Pakistan is labour. However, the recent trends in Bangladesh reveal that such costs are nearing those in Pakistan. The major difference in relation to Bangladesh is the labour efficiency and output.
The cost which is effectively not there in Bangladesh is the cost of internal transport which at least 50% of Pakistan’s exports bear. These exports are manufactured in the industrial cluster of Lahore-Faisalabad-Sialkot due to their location around 1000 kilometres from the seaport. This effectively adds around 5 percent to 7 percent of the value of sale proceeds. The aforesaid analysis therefore reveals that comparative higher costs are not more than 20- 25 percent of the sale proceeds. It is almost certain that with present PKR and BD Taka exchange rates such differences have adequately been compensated.
After comparing all these costs it is quite clear that there is no reason why Bangladesh can sell more products than us. This means that there are some other reasons. The reasons are: first, the profit margins the Bangladeshi exporters are making on their sales; and second, the products they are selling and the value thereof. It is the author’s analysis that despite all odds there are substantial margins available with our exporters in Pakistan and consequently they have no real appetite to significantly change their business model as sufficient money is being made with the present paradigm that suits them. They are only interested in government support in the form of subsidies or to rely on exchange rate benefits that arise without any effort. The other factor which is totally ignored is that unlike us the products Bangladesh is selling are predominantly made-ups or value-added such as apparels and garments. Bangladesh is the second largest exporter of garments in the world after China. To conclude, debates regarding costs of exports and competitiveness are effectively not relevant now as this aspect has adequately been compensated by the severe devaluation of PKR. If the exports do not substantially grow with this kind of margin then it means that there are some structural defects. The following are structural defects:
Non-verifiable profit margins of exporters due to presumptive tax regime instead of zero-rating;
High internal transport costs; and
Lack of value-added products in the export mix.
There cannot be any short-term solution to bridge the gap which has only widened due to our flawed economic policies. It will take around a decade of concerted efforts to bring about the required change, if there is a desire to attain a respectable level of exports. There is no sign of such concerted long-term efforts. The only answer lies in establishing a value added textile cluster in southern areas of the country near the coast with a transparent accounting system for exporters so that any rebate or government support if required to be given reaches the right people. Present export policies do not cater for these focused approaches and are required to be completely redrawn. If Bangladesh and Vietnam can do this then why we cannot do it. It is, therefore, about time we stopped making a hue and cry about higher costs of power and labour and defects in the political system. In Pakistan, it is the economy that has failed, not politics.
Copyright Business Recorder, 2022
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