EDITORIAL: In an interview to a foreign news agency Razak Dawood, Advisor to the Prime Minister on Commerce, stated that he is pushing the government to bet big on the export industry — a bet envisaging billions of dollars of support that the government can ill afford — as that alone is the best way to tackle Pakistan’s long-standing woes and achieve sustained growth. He added: “people in this country don’t understand what the importance of export-led growth strategy is?” There is little doubt that Dawood’s role model is Japan and some island countries particularly Singapore that achieved export-led very high growth rates.
Dr Hafeez Sheikh during a meeting last year reportedly stated that there is a need to undertake a study to determine the impact of significant incentives on export growth — a study that remains pending to this day. Shaukat Tarin in the first week of December 2021 pledged that the “government will take all possible measures to facilitate businesses and provide them with a level-playing field as it believes in investment and export-led growth” but this pledge reinforces the need for a study to evaluate the benefits of incentives that the country cannot afford given its current state of the economy.
Thus, in Pakistan’s case, the questions are: What is the range of these incentives? And what is the impact of these incentives, if any, on exports? The State Bank of Pakistan extends special refinance scheme for exporters at rates well below the discount rate. The federal government not only provides fiscal incentives to exporters in terms of tax concessions but also subsidises utilities, including electricity, a major input for most exports, with the objective of enabling exporters to compete with their counterparts in the region — an incentive that requires the poorly performing energy sector (with a circular debt of more than 2.3 trillion rupees today) to either raise tariffs on other consumer groups (politically challenging policy) and/or to seek ever rising subsidy from the government which may be difficult to provide with an unsustainable budget deficit for the past three years and, perhaps more pertinently, as the country is on an International Monetary Fund (IMF) programme that in turn requires support for all measures relating to the energy sector from the World Bank, the lead agency, which is insisting on full cost recovery.
Thus the range of the incentives is very wide, though not quantified, and needless to add mollycoddling the large-scale manufacturing sector, with overwhelming ownership and management by families that gets fragmented from one generation to the next, is a hurdle in the way of export houses achieving the necessary heft that would lead to attaining ‘economies of scale’ in the export sector. This has been the hallmark of most family-held businesses in the country but is critical to the export sector. The benefits of a rise in exports have to-date been very limited due to two elements. First, historical data suggests that a rise in exports is accompanied by a rise in imports that is considerably more than the rise in exports leading to a widening trade deficit that then compels the government to go on an IMF programme (Pakistan is currently on its 23rd programme).
In this context, it is relevant to note that Dawood has disclaimed responsibility of the Commerce Ministry for more than 50 percent of the country’s imports given that there is no flexibility to reduce the quantum of imports of petroleum and products (linked to their international price), cooking oil, and the recent rise in import of wheat and sugar imports due to prevailing market imperfections.
He has also referred to the recent rise in international import prices due to Covid-19 as beyond the scope of his ministry; however, he not only ignored the benefit of higher prices due to Covid-19 on our exports (as the volume of our exports has not risen significantly in the year past) but as a key member of the kitchen cabinet he has conveniently ignored the collective responsibility for the exchange rate policy, the farm policy and failure to support a non-traditional export sector, including the structure of firms.
And second, while exports are a major source of desirable foreign exchange earnings they were outpaced last year by remittance inflows of 29.6 billion dollars and hence this inordinate focus by Dawood needs a revisit. The World Bank recently undertook a study wherein it proposed some policy measures to help improve Pakistan’s export competitiveness, including consolidating effective market intelligence services by supporting new exporters and evaluating the impact of current interventions to increase their effectiveness and designing and implementing a long-term strategy to upgrade productivity of firms that fosters competition, innovation and maximizes export potential. And gradually reduce rates of protection through long-term tariff rationalisation strategy to encourage exports.
Copyright Business Recorder, 2022