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Friday, March 15, 2024

Pakistani Exports – Bright Future Ahead yet Figures could be Worrisome!

Pakistan's economic future looks bright as Pakistan has shown several signs of growth in the sector. Pakistan has started competing countries in the region which Pakistan didn't even come close to in terms of a strong economy.

Opinion |

I had a very interesting sitting with our Commerce Minister a couple of weeks back where it was heartening to note that he was very positive on the economic situation going forward. Now generally one would have discarded his upbeat talk as nothing but the usual rhetoric by yet another senior government functionary, but one would like to consider his arguments seriously for mainly two reasons:

First, because I have known him for quite some time now and have always found him to be a candid and upright person and more importantly the Second, that he was backing up his arguments with some very solid statistics. His optimism was based on four important developments, which he opined will form the very basis of economic growth going forward:

a) Pakistan recently posted a 28 notch upward swing in the ease of doing business index, which by the way was not only the second-highest surge by any country measured in the index, but also it came about in a backdrop where our next-door neighbor India, in fact, lost ground. Needless to say that apart from boosting the confidence of the domestic investor this will be an important factor that can help bring about the much needed foreign direct investment in the country;

Devaluation, as we know, invariably carries a heavy burden as it increases the solvent external risk of a country while compromising on other very valuable drivers of the economy

b) He informed that his ministry along with the allied ministries has now taken all the necessary steps to ensure that the incentives available to exporters in Pakistan now stand at par with those available to exporters in Bangladesh, Vietnam, and Cambodia. All the three being the recent success stories in emerging economies and ones that bear more relevance to the Pakistani economy than India – Must say very clever indeed, as one has been saying all along, for quite some time now, that Indian business environment & dynamics are quite different to ours and blindly aping India in policymaking often tends to be foolhardy;

c) A new one for me, as he explained that the government has analyzed the data for the last 15 years and this is the first time in this period of Pakistan’s economic history that exports have gone up while imports have come down – previously for some odd reason the correlation between imports and exports was complimentary – every time imports came down, exports also came down; and

d) That the devaluation and the facilitation by the government had already started paying dividends in shape of dollar-based exports growth of nearly 6%, October 2019 on October 2018, which in effect means nearly 30% in quantum or Rupee terms after accounting for the recent devaluation wave. Well, while all four represent some very heartening trends in their own right and it is good to know that at least we have a thinking minister who is sincerely putting in his efforts to make things work, the reality is that the picture may not be as rosy as it seems.

Read more: Narendra Modi’s performance on the Indian economy – five key policies assessed

Devaluations do tend to have a one-time booster effect on export sales, but never represent a sustainable competitiveness solution unless accompanied by a host of measures to keep in check the natural resultant increases in the cost of doing business. Rather, it will not be out of place here to highlight that quite contrary to the short-term positives on exports of a devaluation exercise, in import driven economies, such as Pakistan, if the resultant inflationary trends are not quickly brought in check the accruing effects on the cost-of-doing-business do not only nullify the devaluation advantage, but in fact turn out to be significantly negative in their bearings. Devaluation, as we know, invariably carries a heavy burden as it increases the solvent external risk of a country while compromising on other very valuable drivers of the economy.

Therefore, in a post-devaluation environment, it is imperative for a government to ensure that the gains from devaluation always outweigh the losses in other sectors. Unfortunately, this is precisely where this government seems to be going wrong. On one hand, it aims to pursue future growth through an export-led strategy while on the other hand its policies ironically aim at stifling the potential of the national exporting sectors by adding to their cost of doing business and by choking their liquidity.

Almost as if there is either a lack of agreement on the future export-led growth strategy of the country or there exists a complete lack of cohesion between the different platforms of economic decision-making: the finance ministry, the FBR, the Central Bank, and the Ministry of Commerce & Industry, all working in a disconnect, following their own agendas instead of following a common vision.

Pakistan’s exports on average entail 40% of imported components and based on an effective 12% inflation rate, this means an additional cost of between 8 to 12%, depending upon the product and category

So then what exactly are the issues facing the Pakistani export industry today? Foremost: A Liquidity Crunch. The government recently in a surprise move abolished zero-rating on all the key national exporting sectors and instead levied a 17% GST, meaning that for a product that is ultimately exported the successive incremental cost of 17% tax throughout the supply chain will ultimately accumulate with the exporter, till such time that he gets a refund of the accumulated amount from the revenue authorities.

In essence, if the average refund duration says 5 months, the working capital requirements for the exporter doubles and here, if history is anything to go by, the average refund period in the previous sales tax regime was between 10 to 12 months, i.e. depending on the sector and the collector ate! And this additional cash deployment requirement notwithstanding the fact that the working capital requirements per se, already stand increased owing to a nearly 30% devaluation since March 2019.

With no real refund mechanism in sight and the announced promissory notes scheme still awaiting clarity, export businesses are now finding themselves short of funds to operate. Also, the incremental costs are becoming prohibitive while rapidly eating into the initial competitive advantage gained through devaluation:

Read more: The worst is over for Pakistan’s economy: AKD Securities CEO Muhammad Farid Alam

* A discount rate of 13.25% meaning an effective minimum borrowing rate of 17%, is adding cost by nearly 8.50%, based on a double fund deployment and an assumption that the stuck-up refunds will be paid in six months, something that seems unlikely for now.

* Capping refunds to 5% of turnover for commercial exporters means an added cost of around 7-8% for them, since say for example in textiles, the mere yarn component tends to be 60% or more of the total export price.

* Pakistan’s exports on average entail 40% of imported components and based on an effective 12% inflation rate, this means an additional cost of between 8 to 12%, depending upon the product and category.

* In case, the promised notification of the power tariff is not extended (currently the relief is due to a stay on the quarterly adjustment rate) and the GIDC issue is not resolved, this will mean a further increase in production costs, since in the low valued categories like yarn, the power input can be as high as 12 to 18% of the total cost.

Unless something is done quickly to address these serious issues, Pakistan’s December 2019 export figures could turn out to be quite worrisome!

* Failure of crops this year, in general, especially cotton and rice, means enhanced raw material’s supply and price pressures coupled with increased challenges on quality. For example, the cotton crop in 2019 (over 2018) lost grounds of about 17.50% in production and 6.10% in yield; Rice around 3.30% in production and 0.20% in yield, Sugarcane 19.40% in production and 1.80% in yield; and Wheat 3.20% in production and 2.90% in yield. Also, a precursor on the mismanagement and shoddy performance of the Punjab Government!

And lastly, the Minister’s claim of bringing facilitation for exporters at par with Bangladesh, Cambodia, and Vietnam is either, at best debatable or still remains a pipe dream. A cursory look at the below comparisons and one will notice that the parity is still much to be desired for:

Bangladesh: The GST rate is 15%, but to implement this a host of previous levies on the exporting industry were either replaced or waived off by the Bangladeshi Government to ensure that the new net effective GST rate on the exporting industry comes to only around 5%. Further, the refund mechanism benefits from a single counter facility ensuring that the Bangladeshi exporters get their due refunds within 48 hours from receipt of respective export payments. In addition, in the SEZs, for 100% export oriented units, zero-rating registration is still available.

Vietnam: The GST rate is only 10% and zero-rating to exporters is still available.

Cambodia: Again, the GST rate is only 10% and zero-rating to exporters is still available.

Read more: Economy: Light at End of Tunnel?

The reality is that while these costs mount and liquidity dries up, the exporters and exports are increasingly coming under pressure like never before – Just as a yardstick, going by the October industry figures, inventory replenishing has dropped by more than 50%. This effectively points to an imminent slowdown and a lack of available funds with businesses. I hate to spoil the Minister’s party, but it seems like the writing is already there on the wall: Unless something is done quickly to address these serious issues, Pakistan’s December 2019 export figures could turn out to be quite worrisome!

Dr. Kamal Monnoo is a political analyst. He is an honorary consul general of the Czech Republic in Punjab, Pakistan, and a member Board of Governors of Islamabad Policy Research Institute. He is the author of two books ‘A Study of WTO’, and ‘Economic Management in Pakistan.’ He can be reached at: kamal.monnoo@gmail.com. The article originally appeared in The Nation and has been republished with author’s permission. The views expressed in this article are the author’s own and do not necessarily reflect the editorial policy of Global Village Space.