Primal flaws

Pakistan’s economy’s fundamental structural flaws have been consistently widening the trade gap owing to our inability to boost exports and reduce reliance on imports over the last two-three decades, irrespective of political or dictatorial regimes. The Pakistan Tehreek-e-Insaf- (PTI) led regime has been envisaging exports target of over $37 billion over 5 years period with the hope the exports might cross $25 billion mark during the ongoing financial year ending June 30, 2019. The current account deficit that peaked to 6 percent of GDP has been envisaged to be slashed down to 3.3 percent of GDP in the terminal year of 12th Five Year Plan, under consideration at the highest level. The question is how the government will arrange financing equivalent to 3.3 percent of GDP by end of the plan year.The current account deficit shrank 16.79 percent to $8.424 billion during the first seven months of the current fiscal year of 2018/19 indicating the trade deficit also narrowed down during this period. Trade deficit in goods and services narrowed 5.3 percent year-on-year to $19.704 billion during the first seven months of the current fiscal year of 2018/19 against $20.7 billion in the same period of the last fiscal. This gap, despite a large inflow of workers’ remittances, has been the primary source of balance of payment fragilities and macroeconomic instability. In recent years, the problem has become even more acute because of a surge in imports and a fall in exports. Research suggests that in Pakistan only 5 percent of economic growth is consistent with balance of payments equilibrium. This is below the long-run rate of GDP growth of 7-8 percent per annum to provide quality jobs to the rapidly growing labour force. Attempts to accelerate economic growth beyond 5 percent per annum are thwarted by an emergence of a balance of payment crisis. This is mainly because of the composition of country’s imports and exports. As three-fourth of country’s imports comprise energy, industrial raw material, fertiliser and chemical and machinery, even a moderate increase in economic growth leads to a sharp escalation in imports. Despite the overvaluation, exports have failed to make a transition from low technology to high technology products as about 70 percent of country’s export continues to be low technology products. The resulting loss of competitiveness is striking. Exports continue to be dominated by low quality textiles, the country has failed to diversify its export commodities or export markets. Textiles and clothing sector, which contributes about 5 percent to world trade, dominates the country’s exports, accounting for around 58 percent of total exports in 2017–18, while more than 50 percent of exports rely on only four markets - USA, EU, China, and Afghanistan. The country has been losing competitiveness in international markets and finds it harder to sell even its traditional exports within its traditional markets. The overall export to GDP ratio is virtually stagnant.Loss of export competitiveness reflects poor underlying total factor productivity growth. Several factors have contributed to this. The persistently overvalued exchange rate has already been mentioned. It reflects a focus on the fiscal cost of exchange rate adjustment, ignoring the impact on trade and balance of payment.Another factor is the tariff structure that has a significant anti-exports bias. Within the tariff policy space, a large number of statutory regulatory orders (SROs) distort the trade regime by modifying the notified import duties selectively without any economic justification. No importer is ever quite sure what taxes/duties apply to the item being imported. The problem is compounded by Federal Board of Revenue’s (FBR) power to issue SROs at any time without parliamentary or independent scrutiny/approval – this together with Section 31A of the Customs Act increases uncertainty for importers by allowing FBR to change applicable tariff for goods between opening of letter of credit (L/C) and landing at the port. The resulting low import content restricts products to a narrow range of low value-added exports.Other contributing factors to loss of competitiveness and poor productivity growth are the high cost of energy, an unfavorable regulatory environment and poorly educated and low-skilled workforce.On energy, in addition to promoting use of indigenous fuel, the government intends to make a big push for renewable energy. This along with increased hydroelectricity production will lower the cost of electricity which will lower electricity subsidy, reduce circular debt, and increase competitiveness of Pakistani exports. The Prime Minister’s Task Force on Energy is preparing a comprehensive plan for the energy sector that will help lower the cost of energy and will thus strengthen competitiveness of exports. The high profile Economic Advisory Council (EAC) has made recommendations to move for more competitive, productivity-led export growth.Measures to promote exports in the short term are: • Ensure competitive exchange rates by eliminating the remaining overvaluation of the currency and ensure that a competitive exchange rate is maintained in the future.• Provide reliable access to power and gas supply at competitive prices to export industries. Convert the present short-term measures by institutionalised in a long-term plan.• Rationalise tariffs, reform the SRO regime and increase transparency of the trade regime.• Trade policy decisions should not be driven by short-term fiscal considerations and they should not be made by FBR but by an independent Policy Board or the Ministry of Commerce and should aim to reduce anti-export bias.• To reduce the cost of production, reduce tariffs on imported raw materials and intermediate goods.• Eliminate the distinction between industrial and commercial importers• Reform the SRO regime to present bias in favour of larger firms. An independent Fiscal and Trade Policy Board (FTPB), which as part of its mandate should review and approve all SROs (and changes in tariffs) before they are put up to the Parliament for approval. Over the next three years, review, rationalize, and consolidate all SROs.• Facilitate access of exporters to intermediate goods and raw materials at world prices.• Simplify Duty & Tax Remission for Exporters (DTRE) and establish an online system for ‘permission to import’ inputs as per notified list of ratios of export value (by product) and annual allocations (based on previous years exports) for eligible exporters• Facilitate establishment of central bonded raw materials and intermediate goods warehouse facility by small and medium enterprises (SME) exporters• Streamline custom and border management procedures to improve competitiveness and facilitate trade.• Establish a Trade Facilitation Unit at FBR.• Expedite National Single Window (NSW).• Set up a model business-friendly custom clearance unit – While it may be difficult to immediately transform custom procedures across the country, the government may establish, as a pilot, a model business-friendly, trade facilitating custom clearance unit in one location in the country (say Sialkot). If successful, similar units could be established in other cities. To do this:• Designate it as an elite unit, with staff selected from customs and other relevant departments on merit and being given extra benefits and perks• Ensuring it is fully staffed – past experience has shown that understaffing is the key reason for delays in export/custom clearance• Ensuring that the Anti-Narcotics Force (ANF) staff posted at the unit are provided training in business-friendly physical inspection methods, as well as incentivised to apply the business-friendly procedures and practices• Installing scanners for containers so that the need for physical inspection arises only rarely• Implementing a system of performance-based promotions and perks with client satisfaction as an important component of the evaluation criteria• Immediately pay pending sales tax refunds and duty drawbacks and eliminate future delays.• Professionalisation/alignment with international good practices of TDAP. At the macro level this implies efforts in re-branding Pakistan, at the micro, provision of support to new exporters through effective export intelligence servicesThe medium term plan for strengthening exports envisages enhancing productivity. Enhancing productivity is essential for increasing competitiveness and for Pakistan's industry to move up the technology ladder. Increasing competition in domestic markets, liberalising product markets (particularly services) will do a lot to improve competition and productivity.When firms compete, they innovate and deploy factors of production most productively. Measures already proposed for reducing the complexity and increasing the transparency of the trade regime will enhance competition in the domestic market and this should lead to increase in productivity. In addition, it is well documented that export-oriented firms are not only more productive but also have higher productivity growth. However, to supplement this, following interventions are suggested:• Develop and implement (within this fiscal year) a program for measuring and monitoring productivity growth by industry/sector – using latest data for the baseline.• Develop a Productivity Enhancement Plan within this fiscal year – if necessary, technical expert(s) should be hired from outside and funded from the Export Development Fund.• Gradually and predictably reduce tariffs on final goods so that Pakistani firms can compete domestically and go global• Establish a Technology Up-gradation Fund• Operational design, implementation and impact evaluation of the fund should be undertaken in collaboration with researchers in the field.• Priority sectors should be identified and a sector-wise technology “need assessment” should be undertaken for the priority sectors• The operating principle of the Fund should be that “funds for technology up-gradation would only be provided on a matching grant basis”• Establish as pilot a Garment City with provision of requisite infrastructureThe writer is a staff member

from The News International - Money Matters https://ift.tt/2GM2AHA