Trade: Lose-lose scenario

A lot is going well for the economy right now, but as this column has said earlier—and at expense of being repetitive—the absence of a coherent policy on trade is deeply troubling. None of the new policies—whether it has been to boost exports, or it has been to curb imports, seem to have worked any charms on reducing the pressure on the trade deficit. In fact, trade deficit is growing unabated. In latest numbers, it has expanded by nearly 40 percent in 9MFY17, as exports shrunk and machinery imports mounted further.

In an attempt to discourage imports of consumer and luxury items, including vehicles (much to chagrin of the complaining OEMs), the central bank introduced a 100 percent cash margin policy which was supposed to hedge against the increase in capital goods. That strategy clearly hasn’t worked, or hasn’t started to show the desired results. In any case, it’s a discriminatory measure that can only serve a stop-gap purpose. The real problem lies with the dwindling exports and lack of any profound recovery in the manufacturing sector.

The State Bank’s quarterly report opines that the export package that was introduced would give “much needed support” to export industries, especially textile but there is no reprieve in sight for that sector. Margins are thinning in value-added products as well. Knitwear exports have slowed down. SMEs exporting carpets, sport goods, footwear, surgical goods, leather products and auto parts are not finding market access, evident in falling export quantity numbers.

Though the export package of Rs180 billion launched in January was meant to provide relief to exports, the outcome is sobering. And even if the package helped in providing cheaper inputs, or financing, or give better rebates, there are too many barriers to exporters to develop, introduce technology, and become competitive in foreign markets.

Margins for most exporters, even the value-added exporters are significantly low, as cost of business is still high. Many SME exporters don’t have access to adequate financing to expand and much of the funds are used toward working capital. Banks are wary of introducing unique products for exporters and many small ones do not even know about the export refinance or long term financing schemes. This environment is not conducive to growth and innovation, least of all trade in a growing competitive marketplace.

Without an understanding on both sides—on the side of the government in introducing policy and on the side of exporters’ mindsets, there is no moving beyond the $20-25 billion mark on exports. Export packages will come and go; and non-tariff measures will merely limit imports to an extent, helping virtually no one.