April Issue 2016
Mastering the Trade
Despite a hefty fall in world oil prices recently, Pakistan continues to suffer from an expanding trade deficit because its export earnings continue to go south. After having remained stagnant at $24-25 billion for the last few years, Pakistan’s exports have started declining. In 2013, Pakistan exported goods worth a little over $25 billion while in the following year they fell by nearly five per cent to a little over $23 billion. And during the first half of the current fiscal year, export earnings were $10 billion against $12 billion in the same period last year.
In its recent report under the ninth review of Pakistan’s economy, the IMF has raised concerns about the further loss of Pakistan’s export competitiveness, stating that exports and growth would be adversely affected further if “Pakistan falls behind competitors in securing favourable treatment in major markets.”
According to the IMF, exports declined in the first quarter owing to falling cotton prices and real exchange rate appreciation. In the IMF’s estimation, Pakistan’s export competitiveness also suffered from structural factors, such as security concerns, power outages and an unfavourable business climate.
According to a UN study covering a 30-year period (1980-2011), India’s share of world exports improved from 0.43 per cent to 1.7 per cent; Bangladesh’s from 0.04 per cent to 0.14 per cent; Malaysia’s from 0.74 per cent to 1.34 per cent and Thailand’s from 0.37 per cent to 1.35 per cent. Pakistan’s share, however, remained stagnant at 0.15 per cent.
In 2013, the European Union granted GSP Plus status to Pakistan till 2017, which enabled us to export 20 per cent of our goods at zero tariff and 70 per cent at preferential rates to the EU market. As a result, Pakistan’s exports to Europe spiked by 21 per cent, but this happened at the cost of other markets.
Our official economic managers seem to be refusing to see the writing on the walls of the oil-importing countries. Due to their reduced incomes because of low oil prices, Pakistan will soon start experiencing a sustained reduction in remittances from overseas Pakistanis, since most of these remittances come from oil-rich Saudi Arabia and the UAE. But, as of now, our officials do not seem to have developed a Plan B to meet the reversal on this front that is expected to further expand our current account deficit and thereby impact more adversely on our balance of payments position.
The textile industry which accounts for 57 per cent of total exports, 46 per cent of manufacturing, 40 per cent of employment and 8.5 per cent of GDP is experiencing one of its worst phases.
Pakistan is the fourth largest cotton producer in the world and its spinning capacity is the third largest in Asia. But just compare our textiles and clothing export performance with India and Bangladesh: between 2009 and 2014, our textile exports increased by 40 per cent (from $9.9b to $13.9b) whereas in the same period, India’s increased by 140 per cent (from $22b to $47b) and Bangladesh’s by 104 per cent (from $12.5b to $25.5b) while the international conditions were the same for all three countries.
Meanwhile, let us take a closer look at a new competition that is emerging on the global textile market in the shape of the Trans-Pacific Partnership signed early this year among the Pacific Rim countries which include the USA, Japan, Australia, New Zealand, Canada, Mexico, Malaysia, Vietnam, Singapore, Chile, Brunei and Peru. This agreement, on the face of it, seems to effectively shut out non-member countries from textile imports by allowing duty-free import of goods from member countries. The condition is that yarn and fabric must originate from member countries.
Pakistan’s textile exports to the Trans-Pacific Partnership countries in 2014-15, in dollar terms, were nine per cent of Pakistan’s total textile exports. Vietnam, as a member of the TPP, is expected to increase its exports tremendously to the TPP countries, taking away the market share of countries like Pakistan. Similarly, textile and apparel exports to the USA in 2014 from Mexico, was $5.9 billion, and from Canada $1.4 billion. Both are TPP members. With the signing of TPP agreement their exports to the USA are expected to grow substantially. Pakistan’s share of 2.76 per cent in USA textiles and clothing imports will consequently reduce, unless we take corrective action at the earliest.
To counter this new challenge, the textile industry on its own, without seeking official crutches, could diversify the product portfolio by producing high value-added textile and apparel; explore new markets such as Africa and Russia, which have tremendous opportunities for our exporters; invest in the latest technology to produce high-quality products demanded by the international customers, develop brands and engage in intensive marketing to establish a strong market position.
The textile industry, whose own performance over the years on value addition and investment in marketing and exploring new markets has been far from desirable, believes it would be able to improve its export performance if the FBR were to release all the held-up sales tax and other refunds and rebates to the textile and garment exporters as well as also ensure availability of 3/5/10-year loans at reduced rates to the textile and garment industry, for modernisation. This has been committed by the government, but funds are said to be not yet available.
Of course, the massive shortage of power is also affecting the performance of the overall economy, which to a great extent includes the export sector. Hopefully, the electricity shortage would, to a great extent, be overcome with gas availability assured following the signing of a gas import agreement with Qatar.
The problem of exchange rate appreciation has also been highlighted by former finance minister and renowned economist, Dr. Hafeez Pasha, who opined that it was not possible to compete in the European market when your currency is 16 per cent stronger than those of the competitors. According to Dr. Pasha, depreciation of the Pakistani rupee was important to increase exports to the leading markets of the world.
Pakistan’s export base and markets are extremely narrow. Its exports continue to be dominated by cotton textiles and apparel; imports include petroleum and petroleum products, edible oil, chemicals, fertiliser, capital goods, industrial raw materials and consumer products. Over 55 per cent of its export earnings are contributed by the cotton group alone. Relatively low value-added products like leather, synthetic made-ups and rice contribute about 14 per cent of total exports.
Pakistan’s top export destinations are the US, China, Afghanistan, the UAE and Germany. Around 50 per cent of Pakistan’s imports originate from just a few countries like China, Kuwait, Saudi Arabia, the UAE, India and Indonesia.
The list of Pakistan’s export items, as well as its market destinations, have remained the same over the last 50 years. This needs to be drastically overhauled through product innovation and creative market exploration.
Now that we are back on talking terms with India and have resumed cordial relations with Afghanistan, let us explore in our own self-interest, both economy-wise as well as security-wise, the possibilities of establishing normal trade links with our eastern and western neighbours.
The External Affairs Minister of India, Sushma Swaraj and Afghan President Ashraf Ghani, in their respective addresses at the fifth Heart of Asia conference held in Islamabad in December last year, had asked Pakistan to let the two trade with each other overland through Pakistan. With China’s world trade passing overland via three routes through Pakistan, from south to north and north to south, and at the same time Indian and Afghan trade crossing these routes on their way from east to west and west to east, going all the way to Myanmar in the east and to Central Asia and the Middle East in the west, Pakistan would virtually become the hub of trade routes extending to all four corners of the world.
And with China very much involved in the overland routes in Pakistan and fully trained Pakistani and Chinese troops safeguarding them, only a mad adventurer would even think of casting an evil eye on these trading activities. With there being vested economic interest in keeping the overland trade route to Afghanistan and Central Asia secure for all times to come, India perhaps would itself be averse to seeing any destabilisation of the region.
The hefty amounts that would accrue to Pakistan by way of toll tax for the use of our roads and overland passage of goods to all four corners of the world would itself be more than enough for us to stop burdening our future generations with costly loans to fund Pakistan’s development needs. This would be in addition to the warehousing and trans-shipment charges.
At the same time, we will also be making economic profits from the TAPI gas pipeline, the CASA-1000 electricity transmission and the Iran-Pakistan gas pipeline, which has the potential to pass through to India once things normalise between Islamabad and New Delhi.
With so much economic activity going on in the country, international banks, including India and Iran-based financial institutions, would like to set up their branches in Pakistan. And Pakistan can set up its banks in India and Iran on a reciprocal basis.
Iran being one of our closest neighbours would soon find it more economical to import our textile and apparel as it would be saving a lot on freight charges. Even machinery, air conditioners, refrigerators, electric cables, surgical instruments, confectionery, processed food, meat, sports goods, stationery, paper, chipboard etc. would perhaps find a ready market in Iran again because it would entail highly economical transport charges.
Stronger two-way economic relations between Pakistan and Iran would more than balance the seeming tilt of Islamabad towards Saudi Arabia following our joining the 34-nation military alliance sponsored by Riyadh.
Of course, in the limited context of India-Pakistan trading activity, the eastern neighbor would certainly have an upper hand in the short run. Still, the fear of cheaper Indian consumer goods flooding our markets is misplaced. In the first place, the supposed subsidy component in the prices of these goods would be more than neutralised by the exchange rate differential between the currencies of India and Pakistan. Secondly, it would not be possible for the cheaper Indian goods of lower quality to capture the upscale and even the middle-scale markets in Pakistan even in the longer run because of entrenched consumption habits.
The fear that Pakistan’s exports to India would face formidable non-tariff barriers and very high standardisation barricades is real. Also, exports from Bangladesh and Sri Lanka enjoy special concessions in the Indian markets. But this problem can easily be overcome by using the instrument of trade-offs as well as taking advantage of relatively freer movement across the border to invite Indian expertise to help our exporters surmount the non-tariff and standardisation barriers.
Gwadar in Pakistani Balochistan and Chahbahar in Iranian Balochistan are located almost at the mouth of the Gulf of Hormuz through which pass 35 per cent of the world’s seaborne oil shipments and 20 per cent of oil traded worldwide. More than 85 per cent of these crude oil exports go to Asian markets, with Japan, India, South Korea and China being the largest destinations. The two ports are separated by less than 200km. It is, therefore, necessary that Pakistani geopolitical strategists monitor closely the progress on the Chahbahar project so as to ensure that Islamabad’s geo-economic interests are not compromised in any way when the Iranian port becomes operational.
Had Pakistan extended overland transit trade permission to India, perhaps India may not have been as interested in building up Chahbahar. India knows that if it is serious about acquiring stakes in Central Asian gas fields, it needs to find a direct way to access the region. The only direct way is through Pakistan. The Chahbahar way is too indirect and relatively costlier.
The setting up of the China-Pakistan Economic Corridor and the creation of a new ‘Silk Road,’ linking Beijing to its markets, will not only dramatically increase regional productivity and trade, it is expected to stand as an enduring, very tangible expression of China’s material centrality in Asia and beyond.
As opposed to the depreciation of their respective currencies by India (six per cent), Indonesia (15 per cent), Thailand (nine per cent), Turkey (30 per cent), China (four per cent) and Vietnam (three per cent), we are holding on to an exchange rate which according to various estimates is overvalued by at least 20 per cent.
An artificially held cheaper dollar encourages unnecessary imports. In fact, an artificially appreciated currency ends up subsidising imports and serves as an effective disincentive against foreign direct investment as well as exports.
Pakistan is a market of around 200 million people. And it is largely an import dependent country. There is a possibility, maybe a remote one at the moment, that just because many imports are subsidised by Islamabad by keeping the rupee exchange rate at an artificially high level, those who export a lot of goods to Pakistan would perhaps find it more economical to set up fabrication plants for the same goods in the country if the subsidy component is removed from the exchange rate.
One could get a good idea about our export potential by taking a quick glance at the list of our main exports: cotton and knitwear (28 per cent of total exports); bed wear, carpets and rugs (eight per cent) and rice (eight per cent). Others include leather, fish, sports goods and fruits and vegetables. Main export partners are: the United States (15 per cent of total exports), the United Arab Emirates (10 per cent), Afghanistan (9.5 per cent), China (nine per cent), the United Kingdom (three per cent) and Germany (two per cent). And here is a list of our main imports: machinery, petroleum and petroleum products, chemicals, transport equipment, edible oil, iron and steel, fertiliser and tea. These imports account for over 70 per cent of total imports. Among these categories, machinery, petroleum/petroleum products and chemicals account for over 50 per cent of total imports.
Both lists are depressing. So, what do we do now? Continue living with such a depressing foreign trade regime and suffer the imminent consequences or try looking for ways to break the shackles of this regime?
Let us take a look at our comparative advantages: 1) We are an agricultural country; 2) We are a market of about 200 million people; 3) Pakistan is located at the crossings of trade routes from Casablanca in Africa to Kashgar in West China’s Xinjiang Uyghur autonomous region and from Thailand in Southeast Asia to Turkey beyond the Middle East; 4) China and Pakistan are all set to build a 2,000-kilometre economic corridor connecting Kashgar in China to the southwestern Pakistani port of Gwadar with road and rail. And one cannot also rule out the possibility — in a couple of years — of overland transit trade route through Pakistan linking India with Afghanistan and beyond. These advantages can be exploited to the maximum if we become a warehouse/trans-shipment economy rather than continue to hanker for an industrial economy, which we have been trying all these 66 years to achieve but without any success.
This would require a well-thought-out trade policy that would allow almost free-of-duty entry of raw materials, intermediaries and equipment in knock-down condition to be warehoused in Pakistan and then forwarded to final destinations after the required value addition. Such a regime would also require letting the rupee appreciate/depreciate on its own without any artificial crutches.
Such a policy would also attract foreign direct investment in avenues in which it would be more economical for the investors to fabricate items inside Pakistan for local consumption and also to re-export them. This will also facilitate the transfer of technology and training of skilled manpower. Transfer of appropriate technologies would also open the way for Pakistan to transform from being an agricultural country to becoming a leading high quality processed-food exporter.
This article was originally published in Newsline’s April 2016 issue.