Exports declined from 16 percent of GDP in 2005 to 12 percent in 2014: IMF

Pakistan's exports declined from 16 percent of GDP in 2005 to 12 percent in 2014 and are reflective both of structural impediments and competitiveness losses stemming from the Real Effective Exchange Rate (REER) appreciation, maintains "Selected Issues paper on Pakistan" released by the International Monetary Fund (IMF).
Pakistan's real exchange rate has proved to be somewhat rigid downwards. Since 2011, it has appreciated by more than 17 percent, more than currencies in most of its regional peers. Specifying the level of any currency misalignment is subject to model specifications and significant general uncertainty, with existing models used within the Fund estimating overvaluation of the rupee of between 5 and 20 percent.
Cross-country studies confirm an empirical relationship between the REER and exports. For instance, cross-country empirical relationships estimated by Fund economists suggest that a 10 percent real appreciation has a negative effect on exports of about 7 percent and a positive effect on imports (ie, displacing domestic production) of about 9 percent, which would accrue over time. For Pakistan, this would translate into a loss in the trade balance of $61/2 billion and a negative impact on GDP of about 21/4 percent (accruing over time) from exports lost to competitors and from imports replacing domestic production.
China and Sri Lanka have seen sizeable declines in exports to GDP ratios, yet they remain above 20 percent. In India, Bangladesh and Turkey the exports-to GDP ratios have been rising. The growth rates of Pakistan's real exports have mostly been among the three lowest over the last decade, on average constituting just above 4 percent, compared to 12 percent in Bangladesh and 10 percent in India. In terms of dollar values, Pakistan's exports fall behind the growth rate of global exports on average by one percentage point a year.
These patterns may be reflective of quality and diversity of Pakistan's exports, the Selective Issues Paper notes and argues that "Pakistan mainly exports goods that fall into three groups of products by SITC, revision 1 classification: Food and live animals (0.17 percent), manufactured goods (6.41 percent, dominated by exports of textile yarn and fabrics at more than 30 percent), and miscellaneous manufactured articles (8.28 percent, dominated by exports of clothing items at more than 20 percent)."
Lack of diversification is driven by a limited number of exported products and by their heavy concentration. Looking at quality indicators, one observes that in groups of products that constitute bulk of Pakistan's exports, regional peers have over time improved quality of their exports surpassing Pakistan.
Structural impediments-poor business environment, lagging quality and diversification of exportable products-will need to be tackled continuously and will take time to show results. In parallel, the marked appreciation of the real effective exchange rate over the last two years points to a need for continued structural reforms and supportive monetary, fiscal, and financial sector policies to maintain a competitive real effective exchange rate, supporting exports and import-competing industries and thereby growth, maintained the Issues Paper.