The Export Bonus Scheme: A Preliminary Report

The purpose of this paper is to present an interim report on a study of the Export Bonus Scheme now underway at the Institute. The Institute plans to publish in monograph form later this year a complete report of its findings on this subject. The objective in making this preliminary report available is to attract comments and criticisms of the approach employed and the data used from other people interested in and acquainted with the Export Bonus Scheme. The scheme was inaugurated in January 1959 (and is now scheduled to continue until 1965) for the announced purpose of increasing Pakistan’s earnings of foreign exchange. There was no excess saving problem in Pakistan at this time and any failure of the system to operate at full capacity was due to supply problems, especially imported raw materials and spare parts. Therefore, such an objective required that a larger proportion of the total domestic output of the products covered by the scheme be exported than was the case before the scheme was inaugurated. That such an objective be sought necessarily presumes that the existing exchange rate undervalues imports. To maintain this inconsistency between the official nominal value and real value of imports required a form of rationing of foreign exchange other than that effected by its cost. The State Bank is responsible for carrying out the government’s foreign exchange control policies. The bonus scheme is a form of altering the terms of sale of exports in such a fashion that exports become more attractive to producers at an unchanged official rate of exchange. On the import side the scheme creates a small sector within the economy in which some foreign exchange is sold on a virtual free market basis.