The performance of exports in the first eight months of 2018-19 has been disappointing. According to the monthly trade statistics of the PBS the growth rate registered in dollar terms is only 2 percent in comparison with the level achieved in the corresponding period of last year. In particular, exports in the month of February 2019 have shown a significant decline of almost 8 percent in relation to January 2019.
The three major groups of exports, viz., food, textiles and other manufactures, have all demonstrated a lack of buoyancy. Food exports, with a share in exports of 19 percent, have grown by 1 percent. The dominant group in exports, textiles, with a share approaching 60 percent, has demonstrated growth of only 1 percent. The third group, other manufactures, consists mostly of exports by SMEs like carpets, sports goods, leather manufactures, etc., has also displayed no dynamism and remained stuck at, more or less, last year's level.
The basic question is why despite a depreciation between the two periods in the value of the rupee of 23 percent and a host of incentives and cost cutting measures, especially for exports of textiles, there has been such a limited response? Is this the consequence of some unanticipated behavior by exporters and/or a reflection of somewhat troubled conditions in world trade?
The basic objective of devaluation is to improve the price competitiveness of exports. However, this depends upon the extent it is passed on in the form of lower dollar price while ensuring that at the minimum the rupee price to the exporter remains unchanged.
How much of the benefit of 23 percent depreciation in the value of the rupee was actually passed on to foreign buyers in the form of lower dollar prices? Within textiles, the dollar price has actually risen by 1 percent in the case of cotton yarn and fallen by as much as 24 percent in the case of readymade garments. In other textile products like cotton cloth, knitwear and bed wear the fall in dollar price has ranged from 7 percent to 13 percent.
Therefore, the full benefit of the devaluation has not been passed on in most products. Generally, there has been a preference for increased profit margins in rupees by exporters. Consequently, the increase in quantity has been less than perhaps anticipated.
However, there are still a few examples of success. The first is in the case of knitwear. The average dollar export price has been brought down by 7 percent and yet the volume exported has increased by as much as 19 percent. This indicates a high price elasticity of demand internationally for Pakistani knitwear exports. Similarly, the volume of exports of readymade garments has gone up by over 26 percent.
Exporters are no doubt likely to argue that local prices of imported inputs have also gone up due to the devaluation. However, this has been largely offset by the generous export incentives provided including larger export rebates, withdrawal of import duties on inputs of raw materials and intermediate goods and, more recently, the issuance of promissory notes against refunds due along with subsidies on gas and electricity consumed.
There is another possible explanation for the lack of aggressive export pricing in the aftermath of currency devaluation. This is the constraint imposed by limited capacity for production in the short-run. Therefore, there may be a need for expansion of capacity before the full benefits of a big devaluation can be reaped. However, this may be constrained now by the hike in interest rates. Imports of textile machinery, for example, have declined by 12 percent since June 2018.
Turning to the export performance in other manufactures there are both negative and positive developments. The negative outcome is visible in the exports by SMEs. In the case of carpets, sports goods and leather garments there have been declines in the value of exports of 12 percent, 7 percent and 13 percent respectively. The exports of surgical instruments have remained unchanged. This highlights the fact that SMEs face more constraints compared to their large-scale counterparts. Issues like access to credit, pricing of utilities and availability of skills will have to be resolved if there is to be a stronger response from the small-scale manufacturing sector.
There are, however, some examples of the makings of success stories. A prime example is the initiative demonstrated by cement manufacturers. Faced with a big downturn in domestic sales they have moved aggressively into the export market. The export price has been brought down in dollar terms by 24 percent, implying a full transfer of the benefit of the rupee depreciation. Consequently, the quantity exported has gone up by as much 62 percent, leading thereby to increased dollar export earnings of 38 percent.
There are other products which have shown big increases in exports. Within the food group, the value of exports has gone up by 15 percent each in the case of basmati rice and fruits. Similarly, in the other manufactures group, an increase of 33 percent is observed in plastic materials. The improved performance of some emerging exports will help eventually in the diversification of the export base of the country.
There is need also to recognize that world trade is passing through a period of some turbulence and there is some slowing down in the growth rate of the global economy. In particular, the bilateral trade dispute between the US and China has enhanced uncertainty in trade flows. However, this ought to provide some opportunity for our exporters which should be fully exploited. There is need also to avail more from the GSP plus status given to Pakistan by the EU and from China on a quid pro quo basis as part of the FTA.
The recent withdrawal of trade concessions to India by the US should also provide some market space to Pakistani exporters. However, the levy of a prohibitive import duty by India on imports from Pakistan will lead to some loss of exports.
There has hitherto been a bias in the granting of concessions and incentives mostly to the large-scale end of exporters, especially to textiles. More products and industries need to be given the same special treatment if there is to be a broad-based upsurge in Pakistan's exports.
The Commerce Minister has indicated that exports would reach $27 billion by the end of 2018-19. This is now beyond the realm of possibilities, given the restricted performance in the first eight months. A growth rate of 42 percent will be required in the last four months which is clearly not feasible. However, the target for exports in 2019-20 should be set at a minimum level of $28 billion if the process of stabilization of the balance of payments is to proceed at a satisfactory pace and Pakistan is to also benefit from export-led growth.
(The writer is Professor Emeritus at BNU and former Federal Minister)