STPF targets: PBC sends recommendations to Ministry of Commerce

Pakistan Business Council (PBC) has put forward a set of recommendations to the Ministry of Commerce to achieve desirable targets under the Strategic Trade Policy Framework 2018-23. In a letter to Secretary Ministry of Commerce Mohammad Younus Dagha, the CEO of PBC, Ehsan A Malik said: "We are encouraged by your reported resolve to enhance exports by 2023 to $36-$61 billion, ie, to grow at a compound annual rate of between 10 to 25 percent, and we would like to reiterate that this desirable and ambitious target would require some key actions."
A holistic realignment of all government policies, especially the fiscal, trade, energy, labour and agriculture is required. The Prime Minster had agreed at the PBC's Pakistan Economic Forum held on January 17, 2018 to establish a council of all ministries to align policies. If Pakistan is to become a powerful exporting country, the STPF must be owned by all ministries and its implementation should be overseen by the Prime Minster himself. One of the factors contributing to the failure of past STPFs has been the absence of this buy-in, the fragmentation in, and often conflicts between government policies. Pakistan's population base of 207 million provides ample possibility to build scale and competitiveness in manufacturing, which can then be deployed to advantage in the global markets. However, most of the FDI coming into Pakistan in the recent years has targeted Pakistan's demographic dividend, without generating meaningful exports or import substitution. Factoring exports and import substitution into future FDI has been a successful strategy followed by countries such as China. This also led to better quality products for the domestic consumers.
The manufacturing industry has been undermined by poorly negotiated trade agreements, non-cascading import tariffs, rampant under-invoicing, complexity and difficulty to do business and uncompetitive energy and labour costs. Additionally, the inadequate supply of key agricultural inputs, especially cotton has also played a major role in the decline of value added exports. Pakistan's agricultural policy-as part of the STPF, needs to encourage growth of cotton, both in terms of acreage as well as yield.
The formal sector suffers from high taxation, with manufacturing, which represents 13.5percent of the GDP, carrying 58 percent of the tax burden. The fiscal policy fails to encourage corporatisation, capital formation, accumulation and investment. Shareholders of holding companies suffer an effective tax rate of 55 percent, about twice that of owners of unincorporated entities. Presumptive tax on heavily under-invoiced commercial imports creates an uneven playing field for the formal sector and needs to be withdrawn. Turnover-based minimum taxes thwart new investment. A 17 percent GST rate in a poorly documented economy impedes the formal sector. The fiscal policy making and tax administration are currently combined under the Ministry of Finance and the FBR. Industry therefore suffers from short-term knee-jerk measures such as imposition of super tax and cascading taxes on inter-corporate dividends. Tax policy therefore needs to be separated from tax administration and a mechanism put in place to ensure that export rebates are directly credited into the exporters accounts by the SBP.
Short-term export packages, such as the one currently in place, are merely of a transactional short-term value. Long term policies are the only way to transform industry and exports. If agriculture and labour are to be the basis of Pakistan's competitive advantage, in addition to incentives to grow more cotton, there is a need to professionalize diary, livestock, fruit and vegetable supply chains. A differentiated minimum wage, dependent on the level of development of different areas of Pakistan must form the basis of future policy. This will also lead to a more equitable distribution of the fruits of development.
As the STPF is a trade and not just an export policy, it is vital that it addresses imports. The two important aspects of this are: encouraging import substitution and promotion of import incorporation into value-added exports. The STPF needs to clearly identify Pakistan's industrial priorities for the next 25 - 30 years. This will ensure support is no longer available for industries which refuse to increase productivity and become world-class players. As a result of past mistakes, we have become import reliant on even the very basic needs, such as footwear. At the same time, domestic manufacturing has not been allowed to develop scale to become competitive in conversion and value-addition. Tariff rates and policies must not be seen as tools to raise revenue. They should instead direct investment into greater value-addition, resulting in reduced import reliance and enhanced exports.
Whilst export achievement has in the past been the only KPI by which the success of the STPF is judged, we urge you to use trade balance, net jobs created and aggregate impact on taxation revenues as additional KPIs in order to make the effort and outcome more holistic. The PBC would like the 2018 - 23 STPF to lay down the broad guidelines for Pakistan's trade strategy for the coming 25 - 30 years. Subsequent follow-ups should essentially fine-tune the upcoming framework.
CPEC and rising labour cost in China are valuable opportunities to correct the trade imbalance with China by attracting investors to manufacture more in Pakistan. In domestic appliances, this needs to move beyond mere assembly of imported components. In apparel there is opportunity to export to China as well as to other destinations within the supply chains of Chinese textile groups. The STPF should signal the need to establish a Naphtha Cracker to reduce reliance on imports for the plastics industry. Likewise, investment into man-made fibres would enable our exporters to address a gap within the largely cotton-based textiles.
Upgrading skills is crucial to promoting sophistication and quality of products. Public-private initiatives to up skill the labour force would be considerably enhanced if industry was allowed to retain and deploy the WWF and WPPF contributions into vocational training and improvement of living conditions of its employees instead of suffering them as taxes with no visible or direct benefits.
Diversification of export products and markets will undoubtedly be an objective of the STPF. In the latter context we would draw your attention to the country studies that the PBC has published on non-traditional markets: Colombia, Argentina, Ghana, Mozambique, The Russian Federation, Nigeria, Angola, Mexico, Brazil, Chile, Iran, Ethiopia, South Africa, Turkmenistan, Uzbekistan, Kyrgyz, Kazakhstan and Tajikistan.
We look forward to the draft STPF and to further opportunities to contribute to the development of employment, value-added exports and import substitution, the letter concluded.