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The global trade pie is not growing much and that is making competitors work hard to retain their shares in respective industries’ exports. There are various ways to promote exports including fiscal, monetary and exchange rate incentives. Seemingly Pakistan is lagging behind owing to a host of reasons – limited fiscal space, flawed exchange rate polices, energy sector bottlenecks, low productivity and adverse security conditions.
Pakistan’s exports have stagnated in the last five years. The total exports ranged between $24-25 billion. But this stagnation is not solely due to the prevalent exchange rate. In FY04-08 when the PKR-USD parity was artificially kept at Rs60/USD; exports grew at a CAGR of 13 percent. On the other hand, despite sharp depreciation in phases over the next five years (FY08-12), overall exports growth shrunk to mere five percent. And there was no growth at all, in the next two years (FY12-14). This year, so far is even worse as in 9MFY15 exports are down by three percent year-on-year.
The situation becomes worse by incorporating imports data; in days when exports growth was robust (FY04-08), imports were growing even faster (CAGR: 27%). This means keeping currency at the same level in that period has an adverse impact on trade deficit which was increased from $1.2 billion to $14.8 billion in FY04-08. Since then, after the requisite correction in currency trade deficit has not really worsened any further. It peaked at $16.6 billion in FY14.
The bottom line is; currency parity does matter, as the trade deficit grew manifold in FY04-08 when the US-Dollar parity was kept unchanged and it improved in the next three years due to sharp depreciation of the local currency. It peaked in FY14 when the practice of keeping overvalued currency was resumed aggressively by Dar, following Shuakat Aziz’s prescription.
In FY15, the fall in international oil has somehow curtailed the growth in oil imports. But increase in non-oil imports and fall in exports has eroded the benefits; as annualized trade deficit (based on 9M) will cross $17 billion in FY15. The situation is crying for economic policies that promote exports and curb imports.
Economic sentiments are improving with falling inflation, rising foreign exchange reserves and likely metallization of Chinese projects in Pakistan. Aggregate demand is up, but infrastructure bottlenecks are not helping domestic production to rise. In turn that is transferring the onus of meeting economic demand on imports.
Pakistan must maintain its global market shares in traditional exports. Textile exports didn’t pick up this year despite GSP plus status for exporting to EU; as the fall in low-value added textile exports has eroded all the benefit. The slowdown in China is cited as the culprit for decline in cotton yarn exports. Yes, it’s partially true but the more alarming factor is that other economies are grabbing Pakistan’s share.
BR Research conducted an analysis on HS-5205 (cotton yarn) exports to China using UN Comtrade data. The reason for selecting HS-5205 is because it constitutes around 50 percent of Pakistan’s exports to China for past five years. In 2009, Pakistan’s share in the category was at 35 percent to China’s import and it remained there till 2012. The picture changed in the last two years (2013-14) as Pakistan’s share has dropped to 24 percent in 2014. In the meanwhile, India and Vietnam shares have risen from eight percent each in 2009, to 28 percent and 24 percent, respectively in 2014 (see table).
In the last two years, Indian exports of HS-5205 have surpassed Pakistan to become the leading exporter of cotton yarn to China. The China slowdown phenomenon has deteriorated our exports further, as overall China’s imports in HS-5205 have fallen by nine percent in 2014, while Pakistan’s exports are down by 13 percent.
Why is Pakistan losing share to India and Vietnam? What are the policies these countries are adopting that Pakistan is not? One way to look at it is the movement in exchange rates; Indian currency has depreciated by 16 percent against Chinese Yuan since the start of 2013. Over the same period, Pakistani Rupee fell by just five percent. The Vietnam Dong didn’t fall much – four percent against Renminbi.
India has boosted fiscal incentives to its textile sector since 2014, and again expanded them in 2015 budget. Dar should look at those incentives carefully and come up with a strong textile package in FY16, along with some adjustment in currency!


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Chinas import - HS 5205 (cotton yarn)
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USD (In mn) 2008 2009 2010 2011 2012 2013 2014
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World 1,680 2,127 2,919 2,988 4,491 6,315 5,764
India 141 177 390 517 1,001 2,020 1,625
% share in total 8% 8% 13% 17% 22% 32% 28%
Pakistan 506 751 884 1,024 1,574 1,736 1,386
% share in total 30% 35% 30% 34% 35% 27% 24%
Vietnam 70 171 317 398 547 826 1,174
% share in total 4% 8% 11% 13% 12% 13% 20%
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Source: UN Comtrade

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