Exports have been stagnant over the last decade in Pakistan while competing economies have witnessed commendable growth rates in exports that have strengthened their economies considerably.
Pakistan’s inward-oriented trade policies have served as a substantial roadblock to the economy’s ability to keep pace with regional competitors. This is evidenced through research by the World Bank and APTMA and further outlined in the context of non-tariff measures, overall protection, and export competitiveness in a recent PIDE working paper.
As outlined by PIDE, Pakistan’s export stagnation has resulted from weak performance relative to competing economies. Exports of goods and services in value terms by Pakistan increased by 58 percent between 2005 and 2017, from US$ 17.7 billion to US$ 27.9 billion.
This compares with 165 percent growth in total exports by the South Asia Region, 136 percent by Thailand, and 519 percent by Vietnam 1 (Figure 2). Bangladesh’s exports, which were about the same as Pakistan in 2005, were US$ 47 bn in FY2018, 50 percent higher than Pakistan’s US$ 30.6 billion.
High tariffs and their consequences
While modern-day production networks rely on components of final goods being able to move with ease through multiple countries, protectionism has made this process inefficient and costly in Pakistan.
Tariffs and other duties on imports ultimately serve as a tax on exports, as on intermediate inputs, these can be up to four times higher than in East Asia. Furthermore, average tariffs on final goods in Pakistan are 50 percent higher than the average for South Asia and almost three times as high as the average for East Asia.
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Pakistan also has a high differential between tariffs on consumer goods and raw materials and between intermediate goods and raw materials relative to more open economies in the East Asia Region, which participate successfully in global value chains.
This creates the well-known cascading effect and, with it, high effective rates of protection in many of Pakistan’s manufacturing sectors. Periods of high tariffs within Pakistan led to an export reduction, while low import taxes promote exports. In this context, a reduction in taxes can be observed from the following data: In the first decade of the 2000s, the government reduced trade taxes from 23.1 percent in 1999-2000 to 8.9 percent in 2014.
This had led to gains in exports by 173 percent. However, this reduction was not consistent, and until 2019, the tariffs increased to 11.6 percent, declining exports to 9.1 percent (PIDE).
The PIDE Working paper confirms the price-raising effect of Non-Tariff Measures in Pakistan. NTMs are proven to raise the domestic price of affected products, on average, by a hefty
55 percent.
Therefore, streamlining non-tariff measures provides the best entry door to that process by reassessing their necessity and coverage, streamlining the regulatory process, and harmonizing it with trading partners.
This will help enhance export competitiveness, reduce the impact on domestic prices and help ease inflationary pressures, a significant concern of policymakers. The streamlining of NTMs is not only an effective mechanism to reduce trade costs but rather is an essential step in a wide-ranging regulatory improvement agenda for enhancing export performance.
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The table below shows the top 10 most applied non-tariff measures on imports in Pakistan in 2015, listed according to frequency index measured as a percentage: On the other hand, when it comes to irrational tariff policies, the MMF tariff regime effectively prevents Pakistan from aligning its products in tandem with the rest of the world.
More than 60 percent of the world textile trade is in MMF materials, the demand for which has grown exponentially owing to the convenience it affords. However, the duty protection given to obsolete plants in Pakistan is denying the industry any chance to compete in this booming market, internationally or domestically.
As a result, our textiles sector has primarily been producing short-staple fiber raw cotton while the world moves forward with a focus on synthetic fibers. This brings us to the issue of polyester staple fiber, a raw material of the industry upon which it would be unreasonable to apply any duties.
Alarmingly, at present, there is a 7 percent customs duty on the import of polyester staple fiber. This racks up the total import duties, which subsequently fall in the range of 20 percent, including anti-dumping duty. Surprisingly, anti-dumping duty is also imposed on import for export schemes which makes no sense at all.
This factor alone is responsible for the lack of diversification into new synthetic materials. Trade policy distortions in the form of tariffs on intermediate inputs affect productivity downstream through more arduous import conditions.
This phenomenon serves to increase the cost of production and thereby hampers profitability. This results in price escalation, which increases the burden on consumers and renders products uncompetitive at the international level.
Therefore, high protectionism serves as a hurdle to industrialization and needs to be addressed for the manufacturing sector to grow sustainably, create employment, and earn foreign exchange by increasing and diversifying exports.
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Increasing textile exports
Textile exports are all set to increase to $20 billion by 2021, but this will require $2.3 billion in additional working capital – another area where expansion is essential, but hindrances prevail.
The cycle for exports is 4 to 6 months from production.
Given the shipping time and L/C terms (3 months), 7-10 months’ funds will be blocked. Since the funds are revolving and will be in circulation, the working capital required amounts to $ 2.29 billion, without which the enhancement of exports will be derailed.
Some mechanisms to meet this requirement include releasing sales tax refunds in circulation with FBR, which are around $3.9 billion; if this rate is halved, $ 1.84 billion would be released to the industry.
Payment of arrears of sales tax, income tax, TUF, and DLTL of approximately Rs. Five hundred billion is also pending, and once released, will enable the industry to meet its working capital requirements.
The additional concessional working capital facility would also prove instrumental. Schemes have been put in place to allow exporters to obtain imported inputs at world prices, but these are largely ineffective.
Only about 2 percent of textile and apparel exporters in Pakistan access duty suspension schemes such as the Duty and Tax Remission for Exports scheme (DTRE) and Manufacturing Under Bond (MUB) for their imported intermediates, compared to 90 percent in competitor countries such as Bangladesh.
Any protection to domestic polyester plants should be given directly by the government and not at the cost of our country’s economic future. Pakistan’s DTRE program is also highly inefficient, as it can take two to four months to import synthetic fibers, leading to delays and uncertainties in production that are not acceptable to global buyers. This begs the question of why all inputs to textiles are not zero-rated.
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Addressing the labor productivity challenge
Advanced machinery and technological adaptation increase the productivity of labor and thus enable them to produce better quality goods in more quantity and less time. However, our engineering sector does not produce sufficiently advanced machinery that could help industries in automating production.
We are left dependent upon imported machines, which brings us back to the conundrum of high protectionism. As a result, companies often opt to continue with outdated and inefficient technology, which ultimately hurts labor productivity and gives way to uncompetitive product pricing.
Given the large share of the population that lacks access to quality education, there is a need to improve infrastructure and accessibility and revise the curriculum so that unemployment and low productivity in the labor force can be prevented. R&D support for academia, industry, and collaborative efforts to introduce industry-oriented solutions/innovations could take the economy a long way.
To sum up, investment in human capital is an essential ingredient for boosting productivity. As per the International Labor Organization (ILO) estimate for 2009- 2019, China’s output per person, which is a measure of labor productivity, increased by 388 percent, India’s by 177 percent, and Bangladesh’s by 109 percent, while ours increased by a mere 32 percent.
Research has shown that productivity in Pakistan has been stagnant, and aggregate gains have been driven mainly by more productive firms gaining market shares. This situation is likely to persist if timely efforts are not made to ease import conditions, rationalize tariffs, value competition, and markets and modernize education.
It is about time the government, academia, and industry linkages were strengthened to stimulate R&D and innovation, thereby paving the way for enhanced productivity. Policies should target and facilitate young innovative companies to build them up and help modernize Pakistan’s business environment.
Mr Shahid Sattar, is the Executive Director & Secretary General of All Pakistan Textile Mills Association (APTMA), largest exporting group in the country, has previously served as Member Planning Commission of Pakistan and an advisor to the Ministry of Finance, Ministry of Petroleum, Ministry of Water & Power. A slightly different version of this article appeared in the August issue (print) of Global Village Space Magazine under the title, “Barriers to Export Led Growth”