EDITORIAL: The Executive Committee of the National Export Development Board and the Federal Board of Revenue (FBR) have reportedly urged provinces to eliminate provincial export Cess, which is increasing the cost of Pakistani exports, thereby reducing their competitiveness.
This is a continuation of demands/requests by those focused on raising exports — government entities as well as the exporters themselves — which require reducing input costs that would enable exporters to remain competitive in the global market place or else face the prospect of a steady decline in their capacity to earn valuable foreign exchange for the country. This objective, salutary by all accounts, is facing multiple extremely complex lacunae.
There is overwhelming evidence to suggest that the appalling performance of the power sector, which accounts for existing tariffs being well above the average of our regional competitors, projected to rise even further with the aim of achieving full cost recovery, cannot be attributed to the productive sectors.
There has been decades long sustained government’s mishandling of the sector coupled with seriously flawed decisions that continue to this day (encouraging solar panels for the middle to upper income individuals that has reduced demand from the national grid by 20 percent thereby raising the capacity payments to the Independent Power Producers).
It is also no fault of the exporters that the government has begun to rely so heavily on petroleum levy as a source of revenue (it’s not a part of the divisible pool) budgeted at 1.28 trillion rupees – a whopping 10 percent of total FBR collections budgeted for the year and 26.4 percent of budgeted total non-tax revenue. This tax has raised the cost of delivery of raw materials as well as for transport of the finished export item to the port.
Finally, it is relevant to note that the government has pledged to the International Monetary Fund (IMF) to no longer provide concessional credit to exporters under the ongoing Extended Fund Facility programme; and while the discount rate is determined by the Monetary Policy Committee yet all monetary policy decisions are currently made under the watchful eye of the Fund.
It is significant that the staff-level report on the ongoing programme notes the following: “The first National Tariff Policy (2019-24) reduced the complexity of the tariff schedule and introduced duty-free access for many imported inputs. As consultations are ongoing on the next phase (2025–29), reforms to the tariff schedule should reduce complexity and avoid the use of tariffs to promote industrialization and protect sectors unable to compete of be self-reliant, as such policies weaken exports, hinder participation in global value chains, and incentivize rent-seeking.
Trade policies aimed at promoting specific domestic sectors, including export subsidies and local content requirements, should be discontinued as they are likely to promote resource misallocation and may violate international obligations. The authorities should remain focused on reducing trade-weighted average tariffs and simplifying import/export documentation processes.”
While exporters may legitimately point out that the substantial rise in their input costs, especially those relating to the governments administrative measures (tariff raises) and fiscal and monetary policies cannot be laid at their doorstep yet one cannot ignore the fact that exporters were a major component of the elite capture of our economy – a fact patently evident when the then finance minister Ishaq Dar announced a 110 billion rupee tariff subsidy during the first week of October in 2022 at a time when over 30 million Pakistanis were living under the open sky after the devastating floods. Another inexplicable example is that nearly all Pakistani administrations extended export subsidies to sugar exporters due to the political elite capture of the country’s 70 plus sugar mills.
Demand for concessions targeted to provide exporters a level playing field in the global market is, therefore, not going to be met, given the lack of fiscal space to extend such support without IMF approval, which is not expected to be forthcoming. But what the government can and must do is to provide guidance to the exporters not to rely on exporting their surplus but to produce to export or, in other words, there is a need to engage in the production of non-traditional high value-added items.
Copyright Business Recorder, 2024