Pakistan still uses ad hoc trade policy instruments: WB

Pakistan still uses ad-hoc trade policy instruments despite its focus on promoting private sector investment and export led growth, undermining the predictability of its trade regime, says the World Bank (WB). WB in its latest report, "Distortions to Agricultural Incentives in Light of Trade Policy - A Study on Pakistan", states Pakistan needs to move toward a uniform and transparent tariff structure that will develop trust and encourage trading through formal channels, rather than informal trading channels that harm the well-operating formal trade regime.
It further states that despite various reforms introduced towards trade liberalization, Pakistan''''s economy still remains substantially insulated. The high degree of overall protection still favours import substitution that reduces efficient utilization of resources, export competitiveness, and diversification. Numerous exemptions and concessions extended through Special Regulatory Orders (SROs) decrease transparency through the discretionary power vested in the administration. This in turn can result in an anti-export bias in the trade regime. There is a need to expedite the tax reforms through consultative processes in order to bring forth a neutral and balanced trade regime.
The SRO phenomenon in Pakistan disconnects public policy from taxation creating room for distortions and disincentives. The use of ad hoc trade policy instruments under SROs continues to severely undermine the predictability of the trade regime; it also supports a culture of rent-seeking.
The report suggested that SROs be removed through a consultative process under which the impact of each SRO is studied in detail and that the positive SROs be streamlined legally into the tax structure. Tax reforms are already in process, however the progress is slow and all stakeholders are not on board.
In order to have a stable tax regime and remove biased policies that result through the influence of various lobbying groups, the government should fix tariffs preferably by law, moving away from the annual revision approach. This will make it difficult for large businesses to manipulate tax structure for short-term gains and will encourage small businesses to operate economically.
The report further states that lobby groups in Pakistan have, in some cases, the power to advocate policy. These groups are industry based and do not represent small farmers.
The Pakistan Sugar Mills Association and the All Pakistan Textile Mills Association attempt to push for certain trade policies depending on the international market. Trade policies should be developed based on national priorities and not a result of various lobbying groups. Succumbing to interest groups of this sort leads to weak structures, corruption, and uncompetitive markets.
The country could be naturally flourishing in other avenues rather than artificially maintaining industries that are dependent on ever-increasing subsidies and support from the government. The report further states that Pakistan should maintain the present low taxes on exports. For some commodities, like sugar that is an important food crop previously imported, the quota-based export restriction is in effect important to ensure national food security while finding an international market for the surplus crop. It is important to utilize the export development surcharge collected for actual expansion of infrastructure, research and development, and technological improvements. At present, the amount expended from this tariff is not transparently accounted for.
Further, there is a need to study what particular group in the value-chain is actually benefiting from government policies targeted to support the producers of agricultural commodities. About 76 percent of sugarcane growers in Punjab are small farmers; however, studies show that despite the announcement of support price by the government, farmers are forced to sell their produce at low prices due to the bargaining power of the large mill owners and the presence of middlemen who usually benefit from the delays in the transaction between these parties.
Other subsidies, like that on electricity, fertilizer, and canal water, also have greater real benefits for farmers with large holdings. An approach that targets small farmers, through improved availability of appropriate technology, better access to critical inputs, particularly quality seed, irrigation and credit, and attractive prices can raise overall growth rates while also reducing poverty.
Investment in physical and human capital is required for the growth of the economy. Skilled labour is one of the major factors in developing a nation, which makes human capital as important as physical.
Further, there is a dire need for the government to diversify the export industry. WTO has also pointed out that Pakistan''''s heavy dependence on particular export items such as cotton can make it vulnerable to external distortions and restrictions.
Pakistan''''s exports market is dependent on the European Union, the United States, and Japan. The WTO, on the export performance, commented that Pakistan has a very narrow export basket and exports continue to be heavily concentrated, with agriculture, textiles and clothing accounting for over three fourths of total exports in 2013. The situation has not improved since the last review of Pakistan in 2008.
Despite the competing interests of the producers, manufactures and consumers and the presence of various lobbying groups influence the agricultural setup of Pakistan. Over the years Pakistan has been able to move towards a trade liberalization regime through efforts of the government and donor agencies, and there has been a general reduction in government interventions and the extent of policy-induced agriculture price distortions.
The procurement policy was once applied to many agricultural commodities, including wheat, sugarcane, rice, paddy, cotton lint, seed cotton, onions, and potatoes. Today most of the agricultural commodities compete on a free market basis in domestic and international markets, except for wheat, which is strictly monitored by the government due to its importance as a staple crop for national food security.
The government does provide subsidies to ensure competitiveness in international markets; however, their impact is much lower than in other competing countries, as is the case of rice.
Overall, price distortions do not affect the growth and income of producers involved in minor crops as well as livestock (except milk); however, major crops show a high fluctuation in dispersions, which can be reduced through a uniform tariff policy.