OUR external account is our Achilles’ heel. Its importance cannot be overemphasised because of the need to finance our imports and service our debt-related obligations. A sustainable improvement in the balance on this account will have to come largely through enhancement in exports.
The design of trade policy is a complex affair. It requires grappling with a large array of overlapping policy objectives in a system where policymaking is highly fragmented. The responsibilities and key instruments for achieving a significant jump in exports are distributed between several agencies at the federal and provincial levels. These include: a) the exchange rate; b) rates of income tax; c) import tariff structure; d) treatment and refunds of GST, duty drawbacks and other taxes charged on inputs by the Federal Board of Revenue and provincial governments; e) access to energy and its tariff; f) interest rates on the Export Finance Schemes (EFS); g) issues related to health, safety, environment and labour standards; g) the nature and quality of infrastructure; h) the skill mix and quality of human resource; i) the quality of the commercial judicial system; etc.
Greater involvement of the IMF in the formulation of policies since the 1990s has resulted in all major initiatives being lead and dominated by the Ministry of Finance, diminishing the role of all other agencies and associated instruments in their arsenal.
In this writer’s opinion, a structural and sustainable shift to a higher growth path for exports will require a fundamental change in mindsets, outlooks and culture of governance — admittedly easier said than done. As should be obvious from the above, this will require “a whole of government approach”. Only the Prime Minister’s Office has the clout to set export enhancement as a high priority. An official pronouncement can send a clear signal to the administrative and political machinery on the leadership’s focus on an exponential growth in exports, to be followed by the prime minister holding monthly meetings to adopt the necessary measures and monitor progress rigorously, making weak performers accountable. Nothing short of this will work.
There is a need to change the way we think about trade and traditional export destinations.
As an integral part of this effort, we also need to undertake a review of our export strategy, considering how dynamic regional demographics of younger consumers in Eastern markets are opening up new markets for our products. While Asia has emerged as the new engine of growth, we have been experiencing a declining Global Competitive ranking — from 83 in 2007 to 129 in 2014. Our future economic growth faces potential slowdown as demand declines in our traditional export markets of ageing populations. Therefore, there is a growing need to change the way we think about trade and our traditional export destinations.
To put itself on a path of higher and sustainable economic growth, Pakistan needs to exploit opportunities offered by those geographically closest to it. This will require reformulation of economic and trade policies and a shift in attitudes and the country’s ways of doing business.
Since our exports disproportionately comprise a few commodities, participation in regional and global production networks and benefiting from the dynamic complementarities linked with these intra-industry value chains (for example of textiles, leather and automotive products and services) provides the only realistic opportunity to increase exports and stimulate healthy rates of economic growth by becoming an integral part of global supply/value chains.
With South Asian countries at different stages of production in textiles, leather, etc these sectors can be the ideal choices for being part of associated chains through regional collaboration, allowing each country to draw on its own unique strength.
Again, with the fast-changing world of fragmented production across borders, improvements in e-commerce and communications technology has also brought new areas, like services (software production, consultancy, accountancy services, etc.) into the regional trade framework. Trade in services can now be exported via e-commerce and even stored electronically and used long after they have been produced. Services can now provide us with a comparative advantage.
As the industrial and service sectors of the more developed countries in the region shift to higher value-added and skill intensive sub-sectors, space is opening up for the kinds of services we can offer — improved rates of literacy and a large supply of young labour with decent levels of proficiency in English and the ability of a significant segment of human capital with the capability to adapt to new technologies and absorb skills and be available for work at relatively lower wages.
Therefore, Pakistan can become a part of the regional value chain of goods and services, initially providing low-end products and services, which will suit the present skill composition of the country’s labour force. Once returns on investment in education and a skilled labour force kick in, Pakistan will be well-positioned to move up the value chain.
Whilst the bigger exporters in the country have the resources to participate in these regional chains and replace say the Chinese suppliers as they move up the value chain, the SME sector, which provides jobs to 80pc of the non-agricultural labour force, will need government support for benefiting from such opportunities. Some suggestions follow:
a) More than 70pc of the credit lines under the EFS are appropriated by the 100 largest exporters, although they have access to financing from the formal banking system. Therefore, EFS and LTTF financing should essentially be dedicated for SMEs; b) since energy is a key issue, the government can help SMEs by conducting and subsidising their energy audits to make their processes more energy efficient; c) internationally accredited testing laboratories should be established in collaboration with globally recognised labs for ensuring compliance of quality standards demanded by foreign buyers; and d) existing vocational and technical training centres for sub-sectors in which we have a comparative advantage should be transferred to a foreign partner to produce internationally certified skilled workers.
For components c) and d) bilateral donors could be persuaded to divert their funding for setting up state-of-the-art institutions and become partners in financing technical assistance and managing such centres, because their present grants tend to be relatively small and thinly spread across different agencies and programmes, with limited societal and economic impact.
The writer is a former governor of the State Bank of Pakistan.
Making Trade a Priority | Shahid Kardar
Published in Dawn, July 21st, 2015