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ISLAMABAD: Pakistan’s exchange rate is broadly in line with fundamentals, but due to a challenging external environment it is unlikely to have a very large impact on exports in the short run and the benefits accruing are likely to be less, says the International Monetary Fund (IMF).

The Fund in its latest report “2021 Article IV Consultation, Sixth Review under the extended arrangement under the extended fund facility, and requests for waivers of applicability and nonobservance of performance criteria and rephasing of access”, stated that historical experience in advanced and emerging and developing economies (EMDEs) suggested that exchange rate movements typically have sizable effects on export (and import) volumes. IMF found that a 10 percent real effective depreciation in an economy’s currency is associated with a rise in real net exports of 1.5 percent of GDP, on average, with much of the effect materializing in the first year.

However, the benefits accrue mainly when there is slack in the economy and the financial sector is operating normally. Yet, the benefits accruing to Pakistan are likely to be less, largely due to weak global demand and structural bottlenecks: (i) global trade remains weak, raising price competition, particularly for primary products and low-tech undifferentiated products; (ii) presently only a limited number of firms have export experience, with small and/or potential exporters unsure of how to access new markets; (iii) some input prices have risen as part of the government’s stabilization plan (e.g., energy prices); and (iv) many firms are also financially constrained and credit is scarce (limited trade credit), which makes it costly for firms to expand production or to begin exporting.

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Pakistan’s exports, which peaked at about 15 percent of GDP in 2003, have been on a declining trend since 2011 and currently stand at about 11 percent of GDP, which is much lower than peer countries. At the same time, export volume growth has stagnated since 2007 amid de-industrialization, resulting in a widening export volume growth gap compared to EMDEs. This has contributed to Pakistan’s share of global exports declining by almost 40 percent since the early-1990s to only 0.13 percent of world exports in 2020.

The report noted that Pakistan has relied heavily on import tariffs to boost tax revenue, undermining trade integration and further weakening export competitiveness. With limited revenue mobilization and weak tax administration capacity, the government has relied on import duties and related taxes to raise revenue. As a result, tax revenue collected at import stages stands at about ½ of total tax revenue. Although Pakistan has reduced tariffs during the last decade, its tariffs remain relatively high compared to most EMDEs. The high effective protection has resulted in long-protected “infant” industries preventing their development, reducing the incentive to compete with imports and need to export given their protected, privileged domestic market position.

The report recommended reducing red tape and improve the overall business environment. This is needed to reduce uncertainty, simplify the complicated tax and business environment, and support private sector investment. In particular, a disproportionate GST burden falls on exporting manufacturing industries compared to those in peer countries. The authorities should remain committed to phasing out existing exchange measures-when conditions permit-and eliminate them by the end of the current EFF (September 2022), it added.

Copyright Business Recorder, 2022


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b.lalani Feb 06, 2022 03:11pm
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