How to increase exports for Pakistan’s sustainable economic growth?

Pakistan’s economic growth of Pakistan is dependent on its exports by earning foreign income to finance imports, service debt, stabilize its currency and to overcome the persistent problem of the balance of payment deficit. In addition to being competitive, a country’s exports should be in line with market trends and quality, and be certified on internationally acceptable standards.

In Pakistan, the investments required to bolster Pakistan’s exports are short in supply. Pakistan’s non-conducive investment environment stems from uncertainty. Volatility of output growth is an indicator of the unpredictability of demand and volatility of inflation is an indicator of macroeconomic uncertainty. These indicators have been found to adversely impact investments, especially private investments. The Tax, Investment and Exports (T.I.E) nexus is essential for guaranteeing the desired level of growth in an economy. T.I.E. as a percentage of GDP has declined substantially in Pakistan in recent years and has thus negatively impacted growth.

Lack of investment is one of the core reasons why Pakistan’s growth in exports has been negative over a 10-year period. Other reasons include higher tariff structure, erratic growth trends, low penetration in global markets, lack of infrastructure and technological advancement. Furthermore, exports are also handicapped by government’s irrational policies and complex incentives offered to industry. Other competing Asian countries have managed growth by pursuing export led growth strategies with high savings and investment rates, specializing in areas of competitive advantage, and resulting in rapid industrialization. The questions is: how can Pakistan increase exports for sustainable economic growth?

Difficult times demand innovative thinking, and out-of-the-box solutions

Pakistan needs to capitalize on exportable services and products requiring minimal infrastructure and investments. For example, there is a growing global demand for software and IT solutions. It is easier to establish a software house than to set up a manufacturing unit. Analysts predict global Software Engineering Market to develop at an 11.72% CAGR between 2016 – 2022. We accredit the vigorous growth of the software market to the growing demand for automation from different industries to enhance their program manufacturing processes and design quality.

Pakistan’s IT exports increased by 44% to USD 379 million during the first quarter of the fiscal year 2020-21, and there is a lot of potential to grow more and explore avenues to enhance software export. India’s information technology and back-office sector will grow by 7.7% in fiscal 2020 to USD 191 billion, with exports touching USD 147 billion. There is no shortage of talent in Pakistan. With minimal efforts and support from the government, Pakistan’s IT sector can expand to contribute USD 1 billion annually. The Trade Development Authority of Pakistan (TDAP) should note this fast-changing reality and leverage artificial intelligence and big data to help exporters harness the potential of online marketing platforms (World Bank).

Improving export competitiveness in the global market essential for increasing Pakistan’s exports

Exports are a victim of protectionist tendencies which incentivize production for the domestic market rather than global markets. A paradigm shift to provide incentives to industries to move their production from low value to high value products is needed. For instance, global ratio for MMF to Cotton is 70:30, whereas, Pakistan’s composition ratio is 30:70 owing to lack of prioritization or incentivization by the government. Reforms to address this issue will exponentially enhance export potential. Moreover, one key measure to make exports competitive is to ease import restrictions. For instance, anti-dumping duty on Polyester Staple Fiber (PSF) will hurt the industry by increasing cost of raw materials, rendering exports uncompetitive.

Empowering SMEs

The Pakistani economy comprises almost 3.3 million Small and Medium Enterprises. These may comprise (amongst many other variants) service providers, manufacturing units and startups. SMEs make up over 30% of Pakistan’s GDP and approximately 25% of generating exports. We need policies that empower SMEs and allow them to reach their true potential. Offering access to finance, easily available subsidized credit, lower interest rates on loans, LTFF for purchase/import of machinery and skills training/development programmes can be a reasonable starting point to unleash SME’s potential. Public procurement can potentially achieve outstanding economic and social benefits by ensuring government supply chains include SMEs. Benefits range from creation of skilled jobs, increased domestic tax revenue, to more robust domestic economic growth. Well-designed public procurement policies also have the potential to catalyze technical development, increasing trade margins, and overall productivity.

Improving the Duty Drawback Schemes

We can improve standard duty drawback schemes by: (a) making them accessible also to indirect exporters and extending them to imported inputs used in production of exported final products; (b) eliminating duty pre-payment for exporting firms in order to reduce credit requirements.

Simplifying Regulations

The government should simplify regulation related to exports; cumbersome bureaucratic procedures negatively affect new exporters. At the same time, governments should improve information collection and dissemination about foreign markets and requirements for exporting.

Entrepreneurship and Workforce Development

Improve the productivity and technological content of domestic goods, and provide incentives to nurturing innovation, making Pakistani products globally competitive. For that to happen, we need comprehensive focus on nurturing entrepreneurship. A UNDP National Human Development Report has highlighted skilled unemployment level of 20% (college graduates) in Pakistan. Unemployment levels remain high, with the ‘educated’ constituting a large proportion of the unemployed population. With this state of employment, Pakistan cannot reap the economic returns required for economic growth. The ease of doing business in Pakistan must be prioritized to encourage innovation for better quality diverse products and services. Entrepreneurship creates a virtuous cycle of prosperity as the people not only get employed themselves and create value for the society and the economy, but also promote employment opportunities.

Establish a cell in Ministry of Commerce Cell Focusing on Export-Related Issues of Services

Experts on trade needs to be hired for policy formulation. A public-private partnership can be mutually beneficial in developing reforms/policy/frameworks that can holistically focus on exports; diversity of products, prioritizing services sector, implementation of simple, easy to comprehend, schemes and incentives. Moreover, the Cell organizes structured trade missions to specific markets which allow businesses to meet with buyers and attend relevant events.

Performance Linked and Time Bound Export Subsidies

Export subsidies, where given, must be linked to the performance of the recipient firms and be automatically withdrawn when thresholds are crossed. This requires advancement is technology to develop and deploy frameworks and systems to fully mechanize transactions improving the overall efficacy. The systems will be efficient and transparent and most importantly, simple, concise and clear.

Withdraw custom duty/sale tax

Withdraw custom duty/sale tax on the import of raw materials (i.e cotton & polyester) short in supply for industry consumption.

Liquidation of Refunds

Liquidate all Textile Industry refunds of sale tax, income tax, policy & package initiatives.

LTFF to enhance Exports

Allow LTFF to indirect exports & building of infrastructure for garment plants.

Extended Duty Drawback Scheme

Extend duty drawback scheme for 5 years to exports using indigenously produced materials & restore previous duty drawback scheme for gradual increase in drawback for garments & made ups.

Fast Tracked Textile Parks

Fast Track establishment of Integrated Textile & Apparel Parks enabling plug & play facilities for local and foreign investors.

Market Driven Exchange Rate Policy

To Maintain market driven exchange rate policy.

Enablers for Doubling Textile Exports

Revival of Closed Capacities

A discounted financing scheme amounting to $300 million for the acquisition of non- operational/sick units, closed owing to pandemic and cash flow issues, by larger and reputable textile companies. With minor modification and upgradation, these “low-hanging fruits”, under new and seasoned management, can be put back on track for production and keep on contributing $1.0 billion exports per year to the economy.

Issues and Probable Solutions