Big export decline

Data placed before the National Assembly during a question-hour revealed that the trade deficit has risen to $ 11.75 billion during the ongoing financial year and export of value-added products have declined by a whopping 15.9 percent during the tenure of the Sharif administration. The State Bank of Pakistan website with updated data till 3rd February notes a further decline in the trade deficit to $ 11.856 billion or in other words, the declining trend is clearly gathering momentum. The Federal Finance Minister, Ishaq Dar, has repeatedly placed responsibility for this decline squarely on external factors notably the ongoing recession in the West - major import countries of Pakistani consumer products - yet a number of decisions taken by his ministry are, no doubt, equally, if not more, responsible for the decline - a view that is shared by independent economists as well as exporters. The delay in refund payments, a policy that the incumbent as well as former finance ministers tacitly support with the objective of showing a budget deficit lower than is in fact the case, has negative implications on exports as it leads to liquidity issues compelling exporters to borrow from the banking sector thereby raising their costs of production which, in turn, negatively impact on the attractiveness of their products vis-a-vis their international competitors. Refund delays continue to be a source of serious concern for Pakistani exporters in spite of repeated government assurances that they will be cleared within a stipulated short period of time.
Secondly and equally importantly, the government's heavy reliance on external borrowing, particularly from the commercial banking sector that charges a high rate of return with a very short amortization period, may partly account for the widening of the gap between the real effective exchange rate and the prevalent rate. This widening gap is having serious repercussions on our exports as our products are rendered more expensive relative to competing sellers on the international market.
There is no doubt that the GSP plus status extended by the European Union to Pakistan did account for a sizeable increase in our exports - to the tune of 37 percent or 1.7 billion euros per annum. However, in November 2015, the European Union Ambassador to Pakistan warned that unless Pakistan complies with the 27 conventions, including those relating to human rights the GSP plus status maybe suspended. He cited Sri Lanka's example as its preferential trade facility was suspended due to human rights violations several years ago. To date, while the country has ratified the conventions yet implementation remains extremely slow.
Successive governments have always rhetorically supported an increase in value-added exports but have never actually announced and implemented policies targeted towards the achievement of this objective. This has been more evident during the current PML-N tenure than ever before - a claim that is substantiated by a steady decline in exports and a woeful rise in the trade deficit.
Be that as it may, the recent export incentive package announced by the Prime Minister was hailed by exporters. Insiders, however, claim that Dar had fiercely resisted the package and argued that the 100 billion rupee revenue loss must be linked to a rise in exports - a view reminiscent of the chicken and egg example. Ishaq Dar, however, was reportedly overruled by the Prime Minister who plausibly argued that exports are unlikely to rise without incentives. Unfortunately, though the package, effective 16th January 2017, had ambiguities between exporters of different products as duty drawbacks were allowed on garments, home textiles, processed fabric, grey fabric and yarn manufacturers-cum-exporters but not for surgical and sports goods, leather and carpets which may well account for the worsening trade deficit. Clearly, the export package is not sufficient to reverse the trend of declining exports and rising trade deficit and one can only hope that appropriate measures like clearing refunds and allowing the market to determine the rupee value are promptly taken.