|Shahid Sattar and Eman Ahmed
The World Bank in its recent report states that Pakistan’s potential annual exports are $88.1 billion, about four times the current level. The opportunity cost of these missing exports is estimated at “893,000 jobs and $ 1.74 billion in foregone taxes alone, of which 152,000 jobs could have been created in the agriculture export sector, and 741,000 jobs could have been created in the manufacturing export sector.”
However, neglecting this potential by seeking short-term economic fixes, raising the cost of doing business, and making procedures unnecessarily bureaucratic has retarded any progress in the economy.
The present government took cognizance of the essential nature of regionally competitive energy tariffs to allow exports to even continue at the present level or increase marginally. However, there remains a large gap between actual and potential exports, or “missing exports,” placing Pakistan among the top quartile of the distribution of missing export countries.
Pakistan’s exports would need to grow at the same rate as Vietnam’s for 10 years, or Bangladesh’s for 13 years, to match its potential. This is quite achievable given the growth achieved in the past by China, Vietnam, and Bangladesh, but will require focused dedicated long-term policies, and a level playing field on energy rates in particular.
There is an urgent need for transparency and rationalization in Pakistan’s tariff policymaking. Import tariffs on industry inputs ultimately serve as a tax on exports thereby hampering the profitability of the very sector that is positioned to enable economic growth for Pakistan.
Pakistan’s ineffective trade policies
Pakistan has unfortunately become a more inward-oriented economy in recent years. In 1990, Pakistani firms served 0.19 percent of the world’s imports. By 2019, they dropped to 0.12 percent, signaling a nearly 40pc decline in market share.
The high protectionism in Pakistan results in a high opportunity cost in terms of lost jobs and lost productivity, while most modern-day production networks are far more efficient with components of final goods being able to move with ease through multiple countries.
Tariffs and other duties on imports ultimately serve as a tax on exports, up to four times higher as they are applied on intermediate inputs. Furthermore, “average tariffs on final goods in Pakistan are 50 percent higher than the average for South Asia, and almost three times as high as the average for East Asia”. (World Bank)
Research has shown that periods of high tariffs within Pakistan led to an export reduction, while low import taxes promote exports. In this context, a reduction in taxes can be observed from the following data: “the first decade of the 2000s, the government reduced trade taxes from 23.1% in 1999-2000 to 8.9% in 2014. This had led to gains in exports by 173%. However, this reduction was not consistent and until 2019, the tariffs increased to 11.6%, declining exports to 9.1%.” (PIDE)
The Man-Made Fibre (MMF) tariff regime is one such irrational tariff policy that prevents Pakistan from keeping pace with the evolving world market. More than 60% of the world’s textile trade is now in MMF materials, the demand for which has grown exponentially owing to the convenience it affords. However, the duty protection on out-of-date plants in Pakistan is denying the industry any chance to compete in this market.
As a result, our textiles sector has primarily been based on short-staple fiber raw cotton while the world enhances focus on synthetic fibers. Polyester staple fiber, a raw material of the industry upon which it would be unreasonable to apply any duties, currently has a 7% customs duty which is unsustainable.
This racks up the total import duties, which subsequently fall in the range of 20% including antidumping duty. These duties have been singularly responsible for Pakistan’s beyond dismal performance. In this instance, the NTC has been unhelpful.
There are several schemes for exporters to obtain imported inputs at world prices, but these are largely ineffective. Only about 2 percent of textile and apparel exporters in Pakistan access duty suspension schemes such as the Duty and Tax Remission for Exports scheme (DTRE) and Manufacturing Under Bond (MUB) for their imported intermediates, compared to 90 percent in competitor countries such as Bangladesh.
Any protection to domestic polyester plants should be given directly by the government and not at the cost of our country’s economic future. Pakistan’s DTRE programme is also highly inefficient, as it can take two to four months to import, leading to delays and uncertainties in production that are not acceptable to global buyers.
Zero-rating inputs to the textile industry are the most feasible solution. Meanwhile, through the highly beneficial State Bank scheme of TERF, $2.5 billion is in the pipeline, but it is all at risk due to the government’s indecisiveness on energy and long-term policy.
Advanced machinery and technological adaptation increase the productivity of labor and thus enable them to produce better quality goods in more quantity and less time. However, our engineering sector does not produce sufficiently advanced machinery that could help industries in automating production. We are left dependent upon imported machines, which brings us back to the conundrum of high protectionism.
As a result, companies often opt to continue with outdated and inefficient technology, which ultimately hurts labor productivity and gives way to uncompetitive product pricing.
Suggested policy changes
Research has shown that productivity in Pakistan has been stagnant and aggregate gains have been mostly driven by more productive firms gaining market shares. This situation is likely to persist if timely efforts are not made to ease import conditions, rationalize tariffs, value competition, and markets and modernize education in the country.
High-potential Asian destinations must be targeted as export destinations, rather than low potential African, Latin American, or Pacific Island ones.
Furthermore, the Pakistan government needs to negotiate market access with high potential destinations. “Central Asian republics are a high potential for Pakistan, because of high missing exports to those countries, and because of their import dynamism. Preferential trade agreements with Uzbekistan or Kazakhstan should be priorities, along with the negotiation of agreements on transit trade with Afghanistan to facilitate physical access to those markets.”
It is about time the government, academia, and industry linkages were strengthened to stimulate R&D and innovation, thereby paving the way for enhanced productivity. Policies should target and facilitate young innovative companies to build them up and help to modernize Pakistan’s business environment.
Furthermore, the focus should be shifted towards taxing profitability, as taxing before giving the chance to be productive would be akin to jumping the gun, and would stifle many potential startups. Tariffs on intermediate inputs hamper productivity downstream, creating burdensome import conditions. This phenomenon serves to increase the cost of production, hampers profitability, and results in price escalation. Products are thus rendered uncompetitive in the international market.
Therefore, the high protectionism must be reevaluated, for the manufacturing sector to grow sustainably, create employment, and earn foreign exchange by increasing and diversifying exports. Furthermore, the government must remain firm on energy and long-term policies to realize the potential of our missing exports and to ensure a sustainable economic future for Pakistan.
Mr Shahid Sattar, now Executive Director & Secretary General of All Pakistan Textile Mills
Association (APTMA), has previously served as Member Planning Commission of Pakistan and an advisor to the Ministry of Finance, Ministry of Petroleum, Ministry of Water & Power. Eman Ahmed is a Research Analyst at APTMA. The views expressed by the writers do not necessarily represent Global Village Space’s editorial policy.