Enhancement in exports requires wide structural reforms, says BMP

LAHORE: The Federation of Pakistan Chambers of Commerce & Industry’s Businessmen Panel stressing the need for putting the economy on a sustainable growth trajectory by providing incentives to the industry, lamented that the economy is facing multiple challenges of falling exports, high inflation, low growth and declining foreign reserves, with fiscal accounts under immense pressure on account of heavy interest payments.

FPCCI former president and Businessmen Panel (BMP) Chairman Mian Anjum Nisar said that the drop shows the government would find it difficult to achieve the industrial growth and export target, leading to more pressure on foreign exchange reserves of the country. He asked the government to address the underlying structural vulnerabilities through smooth energy supply at competitive rates, as country’s overall export proceeds continued to shrink for the fifth consecutive month in a row.

Quoting the data, he pointed out 1.7 billion dollars decline in remittances during the first half of the current year compared to the same period the year before (a decline of 11.1 percent), exports declined by 6.6 billion dollars (6.8 percent decline), foreign direct investment dipped by 654 million dollars (58 percent decline), portfolio investment plummeted from negative 45.5 to negative 1032 million dollars, Public Sector Development Program decreased by 122 billion rupees (48.4 percent) and credit to private sector from 1043.1 to 703.6 million rupees which contributed to a decline in Nov 2021 Large Scale Manufacturing Sector growth of 6 percent to negative 5.50 percent in the comparable period this year.

Consumer Price Index rose from 12.3 in 2021-22 to 24.5 2022-23, while PSX index declined by 2.8 percent, market capitalization in rupees by 8.8 percent and in dollars by a whopping 28.8 percent.

Rising prices of wheat are the key factors responsible for affecting the general price level. International commodity prices are showing downward trend on a YoY basis and its impact will ultimately be transmitted into domestic prices with some lags after adjusting the currency devaluation. While the government kept the administered prices at their current level to stabilize the overall prices but post floods persistent shortfall of essential crops is preventing inflation to settle down.

He observed that the drop in textile and clothing exports is gaining momentum over the past five months owing to multiple factors including high energy costs, stuck-up refunds and a slump in global demands despite the massive depreciation of the rupee. He believes that one of the main reasons behind falling exports was the exchange rate instability. The discontinuation of duty drawbacks on local taxes and levies by the government has also created liquidity issues for the export sector.

Mian Anjum Nisar said that the government has increased the gas and electricity tariffs and, at the same time, also the subsidy has been phased out, which will further increase the cost of production.

Month on month increases in consumer prices may be countered by a further mean reverting international commodity prices and some exchange rate stability due to decreased pace of depreciation. The overall money supply growth remains compatible with a return to low and stable inflation.

But the outlook of M2 is broadly dependent on fiscal accounts which are under immense pressure on account of heavy interest payments and rehabilitation spending. Nonetheless, the first five months of CFY have ended with some developments; containing fiscal deficit and surplus in primary balance due to effective fiscal management. The State Bank of Pakistan is also enacting a contractionary monetary policy to contain inflationary pressure. However, a larger portion of volatility in the current price level is explained by supply-side factors.

As imports fell more than the decline in exports, the trade balance of goods and services improved. Exports are constrained by domestic production issues related to the slowdown of demand in the main export markets and high domestic production costs. Imports are currently constrained by sluggish domestic demand and administrative measures to protect the official foreign reserves level.

Since no immediate reversal of these developments is envisaged, the trade balance may further stabilize or further improve somewhat in the upcoming months.

The textile exports remained weak mainly due to the demand and supply challenges being faced by the sector. Global recession, which reduced the purchasing power in key export markets, also resulted in lower bookings of orders, he added. Inventory piled up at large global retailers, while gas shortages and increased costs of working capital in the country also played a role in the decline, he said.

He stated that a major enhancement in exports requires huge and wide structural reforms, urging the government to take business community on board, who are the real stakeholders in preparing policies to enhance exports, which is prerequisite for economic growth. As part of the agreement with the IMF, the government has announced discontinuing subsidies on energy for the export sector. The piling of containers at ports is also contributing to the decline in exports.

Copyright Business Recorder, 2023