The Commerce Minister announced the Trade Policy for the fiscal 2006-07 (FY-07) on the 17th July,2006. The saddening feature of the previous fiscal's (FY-06) performance in the international trade was an unprecedented wide gap of $11.532 billion between imports ($28 billion) and exports ($10.468 billion).
The FY-06 export target of $17 billion could not be achieved even though expectations during the year were that the exports would reach $18 billion.
The projected position for the current fiscal FY-07 is also not promising as the export target fixed for the year is $18.6 billion while the imports are likely to reach $28 billion leaving the trade deficit of $9.4 billion.
While a part of this deficit will be met through workers' remittances [slightly over $4 billion annually]but for the balance we may have to look towards sale proceeds of the national assets to be "internationalised" during the year, external borrowing or draw down on the reserves. How long this situation can be sustained is a big question mark as in FY-08 and onwards, we shall not be having the national silver for sale to the foreigners while demand for remittance of the profits on the assets already sold to the foreigners will aggravate the imbalance in the external sector further.
However, the economic managers seem to be complacent in the short term and have no plans for the immediate future.
The largest portion of our exports (60 percent) comprise textiles. The textile sector had submitted to the government a [pre-budget] package envisaging concessions of Rs 50 billion to the sector envisaging cut in the interest rates which had risen sharply during the last 18 months or so increasing their financial cost substantially, and cash compensatory rebate on the export of certain items like ready-made garments. The demand for reduction in the interest rates covered both-long term loans for machinery purchases as well as short-term loans like "export finance" on which the interest had reached 9 percent p.a., including the banks' margin of 1.5 percent p.a.
The issue remained under the consideration of the government / State Bank of Pakistan (SBP). In the post-budget interview with the television channel "Aaj, transcript whereof was published by the Business Recorder on the 14th and 15th June, 2006, the SBP Governor had categorically stated that she will not reduce the "export finance rate".
In the interview, the Governor compared the export finance rates in Pakistan with those prevailing in India. According to her, export finance in India is based on the prime lending rates viz 10.25- 10.40 percent and the banks are required to lend at 2 percent below the prime rate and thus there was a difference of less than one percent between the export finance rates prevailing in India and Pakistan. She also advised the exporters not to look into "nominal" rates but at the "real" [inflation adjusted] rates.
The government had also declined to provide other concessions on the plea of resource constraints.
Not much time had elapsed that the textile lobby succeeded in getting the export finance rate reduced by 1.5 percent out of which 1 percent cut is to be borne by the SBP while 0.5 percent is to be absorbed by the lending banks.
The Business Recorder's editorial dated the 20th July,2006 confirms that the government has also agreed to provide other concessions demanded by the textile sector.
The cost of package given to the sector is Rs 50 billion, half of which comprises cut in the interest rates-both on long-term loans as well as short-term one -export finance and the remaining half of the package will go towards cash compensatory rebate on knit-wear and ready made garments.
HERE, WE HAVE TO ANSWER THE FOLLOWING FUNDAMENTAL QUESTIONS: (1) whether the cut in the interest rates will help increase the exports or will the exporters soon come forward with the next demand for further cut in the interest rate and the devaluation of rupee for which some mild voices are already being raised in the press, (2) whether the banks will absorb this 0.5 percent cut in the export finance rates from out of their profits or will pass on the impact to the poor depositors by further cutting down the already meager deposit rates, (3) since the concessionary package was not made a part of FY-07 budget what will be the impact of this post-budgetary outlay-which may simply be termed as "mini-budget", (4) whether this concessionary package was imminent notwithstanding the fact that our exporters were already enjoying more than 33 percent edge over the Indian exporters in the matter of exchange rate.
The growth in exports cannot be co-related solely with the interest rates as it is only a small part of the cost of doing business in the country.
OTHER FACTORS ARE: gas/petrol prices, unplanned load-shedding by the KESC and WAPDA, strikes on the calls from politicians [and now mullahs appear to be coming on the fore-front although the strikes do not present solution to their problems], corruption in the government Departments- the manufacturers have to encounter over half a dozen government agencies and meet their demands for illegal gratifications.
Apart from the above, the tax burden is more while our entrepreneurs want to have their profit margin at a rate which is one of the highest in the world. Will the government pay attention to find solution to these issues? Apparently, there seems to be no prompt solution to the "electric" issue as the planners of the government have not been able to add even a single megawatt in the power generation during the last 7 years.
The mere rhetoric that corruption has been eliminated from the high level is not likely to serve the purpose as this claim has since been negated by the Supreme Court's judgement in Pakistan Steel Mills case.
With the recent reduction in the export finance rate, it (export finance) has now become cheaper when compared to that in India. When we compare every aspect of our economy with that of India, why do we ignore the exchange rate? The Indian Rupee's parity with $ is I.Rs 45-46= $1 whereas $1 buys over 60 Pakistani rupees. This gives Pakistani exporters an edge of more than 33 percent over the Indian exporters. Why then the Pakistani exporters are not in a position to compete with the neighbours?
There is thus hardly any case for considering devaluation of Pakistan rupee. The devaluation of Pakistan rupee since 1982 failed to bring equilibrium in the external trade by reducing imports and substantially increasing exports. The question of co-relation between imports/exports and the devaluation was examined in depth in my article published in the Business Recorder on the 3rd April,2006. Pakistan operated fixed exchange rate regime during 1972-73 and 1981-82 [first half of the fiscal].
The exports rose by 202.74 percent in 9 year period from $766 million in 1972-73 to $2319 million which gives yearly average growth of $22.52 percent. Under the floating exchange rate regime, exports rose by 488.11 percent in 20 year period from $2.457 billion in 1984-85 to $14.4 billion in 2004-05 [source Balance of Payments statements published in SBP annual reports] giving yearly average growth of 24.4 percent despite rupee devaluation of 83.32 percent [from $1=Rs 9.9 to $1= Rs 59.3576 ]during this period.
The SBP's report for the second quarter of the fiscal FY-06 admits that the imports in the past had been inelastic to the devaluation. Therefore, any devaluation would only add to the miseries of the common man in the shape of imported inflation instead of helping the country's export sector.
To achieve substantial growth in exports, the real need is to diversify the exports- both commodity-wise as well as destination-wise which the business community and the economic managers have failed to achieve during the last 7 years.
Their mainstay, as before, is on the textiles and rice etc. India today is earning billions of dollars through export of computer soft-wares. Immediately after October,1999 take-over, a prominent scientist was inducted in the federal cabinet and there were lot of promises about building I.T parks in the big cities of the country and creation of institutions of the world class for production of the human resource base of high calibre.
Alas! All these promises have vanished like a dream. If the government wanted to really do something in this sector, 7 years period was not a short time by any standard.
The Commerce Minister, while presenting the current fiscal's trade policy, inter-alia- mentioned that the frequent overseas trips of the President and the Prime Minister helped in increasing the exports. It is not easy to digest this assertion.There are several methods of presenting the economic data; first is to give the absolute amounts and second to express the data as percentage of GDP. Our economic managers have been using one method for certain economic data while other method in respect of other data as may suit their claim of achieving progress.
For instance, public debt figures are given as percentage of the GDP as under that method, the debt burden can be depicted to have reduced sharply although it has increased sharply in the absolute terms.
Similarly, the tax recoveries are given in absolute terms as under that method, substantial increase can be depicted to show progress even though the tax recoveries have not increased in proportion to the growth in the economy and as a consequence tax-GDP ratio has come down during the last 7 years.
An article appearing in an English daily written by a prominent writer in its issue of 17th July,2006 says that export GDP ratio has fallen from 14 percent in 1998-99 to 13 percent in 2005-06.
The export related data appearing on page 4 of the Statistical Table-economic indicators- Economic Survey issued in June,2006, presents still worse position as it indicates that the export -GDP ratio in 1999-00 was 11.2 percent which has since come down to 9.4 percent in 2005-06.
Then what is the contribution of the President's/ Prime Minister's overseas visits- with the plane load of cronies- in the promotion of the exports? These trips seem to have hardly achieved any thing tangible in the export sector. They have proved to be merely an avoidable costly burden on the poor tax payers.
Let us now examine whether the banks will absorb 0.5 per cent in the export finance rate from out of their profits.
Only time will tell. However, after privatisation of the banks and implementation of the first generation reforms, the banking sector does not think beyond maximisation of the profits. The advice of the SBP Governor to the banking sector to share their profits with the depositors by appropriately raising the deposit rates as the lending/deposit spread has exceeded 7.5 per cent has fallen on their deaf ears.
There are thus more chances of the banks' passing on this burden too to the depositors by further cutting the deposit rates [or not justifiably increasing the same].
As the concessionary package has come after formulation of the budget, this extra burden of Rs 50 billion will naturally push up the fiscal deficit beyond the projected ceiling of 4.2 per cent of the GDP for the fiscal FY-07 by at least 0.6 per cent and consequently government borrowing will also overshoot from Rs 130-140 billion to Rs 180-190 billion which will be enhancing the inflation rate precluding the government/SBP from remaining within the target of 6.5 per cent fixed for the fiscal.
The cash compensatory rebate on the exports allowed by the government in the past was widely misused by the exporters. It is not unlikely that history may repeat itself this time.
If that happens, the exporters will purchase dollars from the open market to show inward remittances against the fake exports or alternatively surrender the export proceeds against such exports from their foreign currency accounts while such accounts could be fed from the purchases of dollars from free market as 6 per cent cash compensatory rebate now allowed provides sufficient temptation for making fake exports.
The impact of this can be on the workers' remittances some portion whereof shall be diverted to the kerb market lowering the volume of remittances through official channels thereby raising the open market rate of foreign currencies.
The affectees of the above measures will undoubtedly be the people from the lower strata of the society while the pockets of the richer persons will be poured with still more money.
If one studies the impact of the government policies in the past benefiting the affluent sections of the society, it had always been at the cost of the poor section of the populace.
As for the 4th question raised above, this scribe is of the opinion that more than 33 per cent edge available to the Pakistani exporters viz-a-viz their Indian counterparts in the matter of exchange rate should have enabled the Pakistani exporters to compete with India without any additional concessions and that the decisions initially taken by the government / SBP were correct.
Assuming that textile sector exports during FY-07 will reach $11 billion (=Rs 660 billion), the concessionary package of Rs 50 billion works out to 7.5 per cent of the exports.
This means that Pakistani exporters need a cushion of almost 40 per cent [33 per cent through devalued Pakistani rupee + 7.5 per cent special package now given by the government] over the Indian exporters to compete with them in the international market.
The present situation envisaging total rejection of the package initially and accepting the same a month later is reflective of bad governance in the Ministry of Commerce and the SBP.
The Trade Policy also contains some cosmetic changes like conversion of the Export Promotion Bureau [EPB] in Trade Development Authority of Pakistan. This is not likely to bring any significant change in the performance. The EPB is already in the hands of an individual from the private sector since 1997. Has the private management brought any significant change in the EPB's performance? So will be its renaming/ reconstitution.