During an active pandemic, Pakistan’s exports remain sticky around $2 billion per month level during 9MFY21. That will do for now, as long as remittances are raining comfort. Still, not much is known about the issues facing exporters in these unprecedented times; deeper knowledge is required on that count to prepare for what can reasonably qualify as healthy export growth in post-pandemic era. There are keywords aplenty in the media when it comes to recent statements by Pakistani exporters, ranging from exchange rate competitiveness to raw material shortages, from falling productivity to static market access. Meanwhile, a thorough assessment of pandemic’s impact on exporting entities has been absent.
Now a latest study, conducted by the Sustainable Development Policy Institute (SDPI) and commissioned by the Foreign, Commonwealth and Development Office (UK Aid), offers some food for thought on the situation facing exporters in such challenging times. The report, entitled ‘Supporting Export Competitiveness Amid COVID-19 in Pakistan,’ includes a survey of over 300 exporters in textiles, leather, agro and food processing sectors, as well as the digital sector. Some key findings are discussed below, which can help government better design next intervention.
Size matters! The research showed that larger and experienced exporters were able to navigate the uncertainty better than their smaller counterparts. This finding is consistent with other recent surveys that have placed the SMEs among the most-affected in terms of revenue losses, cash flow shortages and temporary business shutdowns over the past year. As larger firms are better-connected and well-resourced, they are more likely to access new information and avail government relief during a crisis. The government must address this inequality of opportunity that seems to befall mostly smaller firms.
Another key insight is that only about a half of entities had taken up at least one “facility offered under the government’s package for exporters (including facilitation offered by the central bank)” during the pandemic. There are sharp disparities in take up. For instance, while 98 percent of exporters in Punjab had availed relief, only 27 percent of exporters in Sindh had been able to do so. More than half of exporters in textiles and leather sectors had opted to receive support, but only 13 percent of agro-based exporters could do so. While about half of medium and large-sized exporters used such facilities, only 17 percent micro enterprises availed the same. It is unclear whether these differences are accounted for mainly by information asymmetry, systemic biases, or perceived value of accessing relief against costs.
In terms of effectiveness of government support, a large majority of exporters felt that measures like reduced interest rate, refinancing schemes, relief package and tax-related facilitation at federal and provincial levels had “no impact” on their business. This runs contrary to statements made by doyens at SBP and FinMin on how their respective relief lines have rescued businesses. Rather, the areas of support which exporters found somewhat effective were non-monetary in nature, including continuity of financial system, public information/education during pandemic, and digital payment facilitation. Relatively more satisfaction with such measures suggests that exporters value facilitation more than financial relief.
When asked how the government could improve the design of current modes of facilitation, the top-five areas were concentrated mostly around facilitation in taxation-related matters. To be specific, exporters mostly want facilitation on direct taxes, GST on goods, electricity bills, customs duties, and tax compliance costs. The survey shows that larger firms are more vocal about demanding an improvement in facilitation measures than smaller firms. Perhaps the government can better segment and target its crisis intervention next time.
Pivoting to the impact of the pandemic on exporters, the SDPI study makes it clear that there has been a rise in trade costs for exporters. The impact is mostly in areas pertaining to logistical inefficiencies, additional quality standards and certifications, demand for hygienic/safe cargo supplies, export controls in certain essential products, and shifting travel protocols. About two-fifth of the exporters reported a productivity loss (in terms of output per labor hour). Overseas buyers have also been engaging in more trade-related due-diligence relating to input usage, production methods, labor relations and safety.
About a fifth of exporting firms had to lay off some of their staff during the first and second waves. Above-average layoffs were reported among firms based in Khyber Pakhtunkhwa, firms that are small-sized, and firms that operate in in textile and agro-based sectors. Exporters have been managing the HR challenge via measures like putting in place flexible working hours, finding new ways to train workers, and upgrading worker skills to make them more productive. Take note, SMEDA and TEVTAs!
Another interesting part of the study relates to the state of digital firms amid Covid-19. The digital firms in the SDPI survey acquired more foreign clients but shed local customers during the pandemic. This is in line with anecdotal evidence where some IT companies were able to acquire new foreign customers as Pakistan made an exception for its IT-based industry to continue working during first wave, at a time when competitors in India and The Philippines remained offline for a few months. However, this didn’t necessarily result in a windfall, for nearly two-thirds of digital firms reported lower revenues. This could be explained by loss of local business and discounted service offerings during unsettling times.
The crisis-era challenges faced by digital firms include finding new clients, adjusting to new working patterns, dealing with rise in anxiety, making do with limited ICT infrastructure, and sending and receiving foreign payments. These business suggest that enhancing internet connectivity, providing seamless e-invoicing and online banking channels, and enacting laws on cyber-security and data protection will help their business environment. Still, most of the digital firms studied in the survey seem like an optimist bunch, as they hope to capitalize on new business opportunities and hire more people despite Covid-19.
Be that as it may, the digital firms seem to have missed out on the government relief package by a wide margin. Only 8 percent of the 50 digital firms in the sample surveyed by SDPI had applied for some form of government support. The remaining 92 percent cited onerous documentation, loan processing delays, and insufficient nature of government support as the main limiting factors. This is not surprising – background discussions indicate that for all its promise, the digital sector has yet to garner a proportionate eminence in policymaking circles. Considering the savior that the digital economy has been in various forms over the past year (and counting), this should change soon.