Pakistan is likely to face mounting pressures on its external side at the end of ongoing Fiscal Year 2017 where exports are totalling at mere US $18 billion even after the passage of 10 months with imports at alarmingly high trajectory of US $43 billion. In this scenario, it can be easily projected that future increase in oil price and enhanced CPEC related machinery imports would make the largest import bill to hit US $52 billion while exports would hardly make it to US $20 billion making the country to post a massive trade gap of around US $32 billion.
This was stated in a Karachi Chamber of Commerce and Industry (KCCI) Research & Development Cell report on sliding exports concerns prevail unless averted. Report noted that the prevailing situation did not arise abruptly but Fiscal Year 2016 was its precursor when the country actually posted historically largest trade gap of US $24 billion after witnessing 8% rise from US $22 billion a year ago.
Although global petroleum and commodity prices remained at lower side during FY16, yet imports dropped by just 2% to US $44.77 billion compared to US $45.83 billion in FY15 while exports declined 12% to US $20.80 billion against US $23.67 billion in FY15. On the international level, regional competitors China, India, Bangladesh and Vietnam have grabbed good chunk of Pakistan's market share in various export categories in the past few years. Bangladesh and Vietnam experienced continuous rise in global exports share even when the international commodity prices were at their lows; as they occupied 0.20% and 0.98% shares respectively during 2015.
Similarly; China, India and Thailand comparatively larger economies also remained resilient. While, Pakistan's share was least among all the countries and its percentage in total world's export rather declined to 0.13% in 2015 from earlier 0.14% in 2011.
The history's largest trade gap weighed down heavily on the current account which declined by 20% to US $3.26 billion during FY16. However this current account deficit was easily financed through FDI inflows, remittances and government borrowings combined with cheap oil prices that partially compensated for declining exports and provided cover for creating foreign reserves.
Resultantly, the size of export sector in overall economy shrunk to paltry 5.8% of GDP during FY16 in contrast to 13% at the start of 2000s. The unabated fall in country's export volume combined with mounted non-oil imports exacerbated the situation. This undesirable economic situation is linked with persistent decline in exports which is multidimensional in its nature. Contraction in the world markets and reduction in the global commodity index remained major exogenous factors that affected Pakistan exports. There were many items where Pakistan exported greater volume but overall exports value still declined due to low prices. Like in case of knitwear segments, exports volume increased by 15% but its unit prices declined by 15% owing to which their overall exports value declined during FY16.
Contrary to this, some export items experienced increase in their unit prices but the volumetric decline was more pronounced. These export items included tanned leather, leather gloves, pharmaceuticals, plastic materials, carpets and electric fans. It is an alarming situation for the export sector.
The export growth is achieved either through expansion of existing industries, achieving economies of scale or through new export-oriented industries. While product diversification is more an outcome of technology transfers, innovations and Greenfield projects. Once there is capacity to attain exportable surplus, the second phase is of finding the buyer where cost competitiveness, quality controls, marketing, reaching new destinations and channel efficiencies come in play.
Unfortunately, Pakistan has not been successful in making noticeable headway in any of these areas despite several incoherent policies announced to incentivize investments and exports. The ineffectiveness of policies is evident from the waning exports. In the span of last two years (FY14- FY16), Pakistan's export has slackened off by more than 17%. Exports of Pakistan's largest sector ie textiles have dropped by 9% to US $12.46 billion in the last two years.
Pakistani exporters are facing the brunt of high cost of doing business; particularly the elevated utilities' prices and wages, due to which Pakistan has lost its export competitiveness to a large extent. Consequently, number of local industrial units has moved to Bangladesh where cost of doing business is comparatively much lower than all the other regional countries in South Asia.
The minimum monthly wage rates of US $66 combined with low electricity and gas prices and low corporate tax rates have kept Bangladesh's exports sector resilient even at the times when low commodity index was prevailing in the world last year. On the other hand, Pakistan can prove to be an attractive investment destination for China as minimum wage rate of US $134 a month in Pakistan is still nominal in comparison to China and India. However, since the electricity prices in Pakistan are much higher than China, it has made power sector of Pakistan more lucrative for investment.
It is for this reason that Chinese investment is more directed in the power sector rather than export oriented sectors despite availability of cheap labor in Pakistan. Therefore, it is important to understand that low electricity prices would not only strengthen Pakistan's position as an attractive investment destination but would also ensure this investment in exports led sector.
Pakistan's exports are suffering from low export diversification for the long period in terms of both markets and products. More than half of what Pakistan's manufactures is sent to just few markets. Among export markets, major chunk is covered by two regions ie European Union (EU) and US which absorbs almost
31% and 17% of the goods exported by Pakistan, respectively. Similarly, Pakistan's export products are narrow based which mainly covers textile and clothing items, cotton, surgical instruments, sports goods as well as leather products. Among these goods, textile items grab largest share (60%).
The reason being, Pakistan export its raw material "Cotton" to its textile competitors Bangladesh, China and Vietnam, which then after adding value to it, exports to the world markets. The performance of Pakistan's export industry is evident through its dwindling sectoral progress wherein almost every sector negative export growth has been recorded in the past few years.
Facing government's negligence despite earning 60% of the export revenues and generating 40% employment, Pakistan's largest sector "textiles and clothing" has experienced 9% exports decline in the last two years. Its share in the world exports has also shrunk to mere 1.8% from earlier 2.2%. In an effort to develop this crucial sector, Textile Policy 2014-19 was designed where tax and duty incentives were extended to the textile exporters in the form of Drawback on local Taxes and Levies (DLTL). However availing these benefits has remained an uphill task for the textile exporters which made these incentives unattractive.