Subsidies such as those relating to power tariffs have been the lifelines of our export industry, notably the textile sector. Both of these lifelines are now more or less cut off and the exporters are much on their own to survive in the highly competitive world market.
International Monetary Fund (IMF) has imposed strict conditions against subsidies but, some selective target-oriented subsidies are still manoeuvred in favour of exporters. This too is drying out due to the country’s weak fiscal situation and its inability to carve out some concessions for the industry.
The challenge for the textile sector, which is the country’s prime sector of export, has been further enhanced due to colossal damage to the cotton crop on account of unprecedented torrential rains and floods in the cotton growing areas.
The Ministry of Finance is reported to be struggling to locate the required resources to fund the Rs 19.99 per unit electricity tariff subsidy for the five export-oriented sectors, as announced by Finance Minister Ishaq Dar on 6 October, as well as to clear the backlog subsidy amounting to a total of 144 billion rupees.
It is unlikely that relief would be available to the earmarked five export sectors. Pakistan’s exports have always been struggling to make their mark on the global share while competing with late starters in the region such as Bangladesh and Vietnam.
The reasons for this setback are multiple and a major one is lack of government strategy and enabling environment for exports to flourish. Government strategy never went beyond the policy of appeasement of exporters through grant of subsidies which in the long run proved to be counterproductive as the export industry never evolved itself to be truly innovative in technology and global marketing in expanding the portfolio of exports and business diplomacy.
The gap between exports and imports over the years is staggering and scary.
Pakistan Imports-Historical Data
Year Billions of US $ % of GDP
2021 $69.04B 19.93%
2020 $52.33B 17.42%
2019 $62.62B 19.51%
Year Billions of US $ % of
2021 $34.57B 9.98%
2020 S27.94B 9.30%
2019 $30.14B 9.39%
2018 $30.14B 8.58%
It is unlikely that in the current financial year the exports will reach the figure of $ 30 billion. What is also unlikely is that the imports will be curtailed to the requisite extent, posing a serious threat to the country’s foreign reserves and ability to retire the mountainous foreign loans and liabilities.
Evaluating the country’s fiscal vulnerability, Moody’s, recently downgraded Pakistan’s credit rating to Caa1 from B3, which was challenged by the finance minister who stated that “they [Moody’s officials] have to meet me.
I told them if you don’t [reverse] this I will give you a befitting response in our next meeting.” This challenge is unlikely to have any effect on Moody’s and the country downgraded rating is there to stay - alerting the lenders and investors. On 21 October, Fitch, too, downgraded Pakistan’s rating from B- to CCC+. So far it remains unchallenged by the finance minister and his ministry. This too is there to stay.
Apparently, the decisions of Moody’s and Fitch were driven by plummeting reserves of less than one month and a half of imports at 7.87 billion dollars, lack of foreign inflows from friendly countries raising concerns about the capacity to meet external debt servicing costs though the World Bank announced reallocation of existing pledges for flood relief and this week past Asian Development Bank approved a 1.5 billion-dollar loan for Pakistan.
Growing political uncertainty, fiscal tightening, higher interest rates and measures to limit energy consumption and imports and reduced exports are other factors behind lenders’ concerns.
Higher exports may have salvaged the position to a great extent but the enabling environment is not in favour of exporters. The country’s financial managers are facing a formidable great challenge at this point in time. Denial or failure to stand up to deal with the challenge through a realistic strategy, boldness and honesty is not an option in these circumstances.
Copyright Business Recorder, 2022