National Tariff Commission (NTC), an arm of Commerce Ministry, ruled out the impact of variation in exchange rate on Pakistan''s exports and instead highlighted other factors like security situation, energy and interest rates negatively impacting on exports This was the conclusion of a study undertaken by the NTC on the instructions of Commerce Minister, Engineer Khurram Dastgir.
A detailed presentation was given to the Commerce Minister on the enhanced functions of NTC under new NTC Act, 2-15 and reforms in the NTC along with an update on its working on June 4, 2015. Commerce Minister observed that there is a general perception that appreciation of exchange rate has a negative effect Pakistan''s export (by way of change in relative price of exports) and noted that Finance Ministry was of the view that appreciation of Pak rupee was necessary so as to decrease the amount of foreign debts, encourage imports and assist in reducing inflation.
Commerce Minister proposed a study by the NTC to analyse the impact of the current phenomena of appreciated exchange rate on exports and to ascertain whether there is correlation between the depreciation of rupee and increase in exports and vice a versa?
NTC has accordingly carried out the study to explicitly analyse the impact of only the appreciation or depreciation of exchange rate on exports and particularly recent phenomena of appreciated exchange rate on exports.
According to new theory, trade cost is a key impediment to entry into trade. Others argue that the quality of a country''s political and economic institutions can be a key source of comparative advantage.
There are a number of factors other than exchange rate that affect exports of a country , which include: (i) comparative/competitive advantage in production of product; (ii) rich in endowments (labour, capital and natural resources); (iii) technological advancement and research; (iv) education and skills; (v) high factor productivity; (vi) compliance of quality and standards as per the provisions of agreements on SPS and TBT; (vii) economies of scale; (viii) political stability; (ix) law and order/security situation; (x) intra-industry trade; (xi) infrastructure and transportation costs; (xii) integration with the world economy through production chains; (xi) trade to GDP ratio; (xii) cost of doing business; (xiii) market access; (xiv) foreign direct investment;(xv) high economic growth rate (GDP);(xvi) interest rate ;(xvii) inflation ;(xviii) saving rate; (xix) rate of investment; and (xx) average applied tariff.
During the period 1980-2004, Pakistan''s exports increased substantially and made a major contribution to Pakistan''s balance of trade account. Total exports in 1980 were around $2.79 billion which increased to $14.40 billion by 2004-05. The composition of exports in 1980-81 was as follows: 44 per cent primary commodities, 11 per cent semi manufactured and 45 per cent manufactured goods. Since then, Pakistan''s exports have increased enormously and reached $25.35 billion in 2010-11. The composition of exports also changed over time and in 2013-14, the share of primary commodities in total exports consisted of 16 per cent, 14 per cent semi manufactured goods and 70 per cent manufactured goods. Pakistan''s exports, however, have not exceeded $25.35 billion - achieved in 2010-11 - and since then exports remained in the range of $24.70 billion to $25.15 billion.
Pakistan''s exports base is quite narrow, highly concentrated in a few items namely, cotton and cotton manufactures/ textile, leather, rice, chemicals, pharma products and sports goods. These six categories of exports accounted for about 70 per cent of total exports during 2013-14 with cotton manufacturers alone contributing 53.49 per cent. Pakistan has not made much progress in increasing the number of its export products. Pakistan is also yet to enter hi-tech exports. In short, Pakistan is lagging in product diversification, value addition, diversification, sophisticated products, hi-tech industries to face the fierce global competition. Therefore, factors like exchange rate fluctuation have little impact on export performance.
In terms of directions of Pakistan''s exports, most have been highly concentrated within a few major trading partners. The EU-27 remained the top destination for Pakistan''s exports, and its share is 24 per cent in 2013-14. USA, the second largest market during this period, had a share of 15 per cent in 2013-14. Pakistan''s exports to China increased sharply from $305 million to $2.42 billion over a period from 2000-10 to 2013-14 as a result of the FTA that was signed between the two countries in 2005-06. China''s share in total exports has gradually picked up from 4 per cent in 2008-09 to 10 per cent during current market conditions, which provide more favourable market access to Pakistani products in those partner countries and increase Pakistan''s exports.
NTC has analysed trade data and exchange rate of different periods by using different mythologies to reach a conclusion.
Trade data for last five years shows that Pakistan''s exports are stagnant at around $25 billion. The econometric regression analysis of monthly data of exchange rates, exports, imports and trade balance shows that there is no significant impact of variation in exchange rates from October 2002 to July 2015 (thirteen years) on exports, imports and trade balance. There are other factors (other than exchange rate) which largely affect the exports.
Pakistani authorities recently informed the IMF that the country''s competitiveness has eroded in past due to pronounced movement in global foreign exchange rate market.
While the recent turbulence in international financial market could somewhat affect near-term capital inflows, IMF in the eighth review recently uploaded on its website notes that staff and the authorities agreed that further accumulation of reserves is desirable as the balance of payments position remains vulnerable and reserves are still significantly below adequacy norms. Staff noted that further accumulation could also help arrest the recent trend of Real Effective Exchange Rate (PEER) appreciation which is inconsistent with fundamentals, although IMF staff agreed with authorities that a range of other issues, including electricity shortages, security issues and business environment, also needs to be addressed to strengthen competitiveness.