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Self-isolated reflections: export prospects

Several years ago a zealous head of Export Promotion Bureau (EPB) decided to emblazon all EPB ads with the logo “Export or perish”. His boss, the Commerce Secretary, thought that was going over the top and the logo was withdrawn.

How prescient would the logo be today?

First, a bit of perspective. Everyone wanted the interest rates slashed – quickly and significantly. Governor State Bank was the lone fighter. Ultimately, he had to yield to pressure and we got a cumulative rate cut of 2.25%. The exchange rate responded quickly, shooting to 167, perhaps more than what the Governor feared.

Some would argue the exchange rate spiraled not because of the cut in policy rate but the flight of ‘hot money’ – a little over $2 billion of it. Certainly, there is something to it but with limited foreign exchange reserves the inverse relationship between interest rate and exchange rate is almost inviolable.

In other words, it is a simple interest rate-exchange tradeoff if your hard currency outflows don’t match the inflows.

We have issues with all inflow/outflow balancing instruments: FDI, loans, remittances, and exports.

No one is in a hurry to inundate us with Foreign Direct Investment; FX loans have a cap as long as we are in the IMF programme, and the last we heard hot money had no known address.

Remittances have been the balm on our current account sores but not the broad-spectrum antibiotics our external sector needs. Besides, they have a limited growth potential, do not create jobs, and are short on externalities and multipliers.

That leaves Exports. Everyone roots for it but our policy response has tokenism written all over it. Everyone lauds the exporting prowess of Vietnam or Bangladesh or that new kid on the block Cambodia, but few want to give what it takes to be an exporting tiger.

It might surprise many, and few might even contest it, but Exports has never been a policy priority for us. Of course, goodies (of a rentier nature) were occasionally thrown – jute export permits during the Korean war, the bonus voucher scheme, textile quotas – but it was never the major goddess in the policy pantheon.

Even the exchange rate policy was never really geared to give exports a heft. Mostly it was driven by non-export considerations: FX reserves and fiscal imperatives.

The so called ‘market access’ mantra, that our recent export strategies have loudly proclaimed, has in fact been a perverse incentive. By enabling duty-free access to few export destinations you accentuate the market concentration risk, encourage trade diversion (not trade creation), and more worryingly, take the eye off the competitiveness ball.

Arguably, the only time export policy assumed salience was that brief period during Razak Dawood’s first incarnation, when even the Corps Commanders wanted to be briefed on export challenges. As a consequence, exports catapulted more than three-fold, before succumbing to creeping policy disownment.

Why can’t we do today what we did then? Priorities have changed? Matter of stewardship? Q-block likes to keep all the pieces to the jigsaw-puzzle to itself?

Delineating the fundamental parameters of a sound export matrix is quite elementary: you produce what the markets want (not necessarily where you have a ‘natural advantage’) and continuously realign your product mix to evolving demand patterns.

More fundamentally, you have to be a source that enjoys that elusive ‘country image’ factor – the assurance to the buyer that it can build long-term relationships structured around policy consistency; the confidence that the government sees buyer interest comfortably co-habiting the national export strategy. In essence, the regime has to be as shock-free as possible.

And you have to be competitive.

We have had an erratic approach to making our exports competitive. We have stumbled from grant of subsidies to imposition of penalties. The problem with the former is that they improve exporting (profit) margins without stimulating a greater value of total exports. You sell more for less, as the hawk-eyed buyer is quick to stake a claim to the subsidies. It is money transferred to the foreign consumer.

Subsidies are also prone to sudden reversals if the fiscal position deteriorates. But by this time your price level has been established at a lower threshold and the buyer is not accommodating. You now take a volume hit as well!

Subsidies are best employed for infrastructural improvements – logistics and trade facilitation, for instance – and not when they are used as ‘handouts’.

Export penalties come essentially in two forms. Taxing exports and providing inputs at above international prices. We tax exports both directly – export development surcharge (EDS) the obvious example – and indirectly through high tariffs that have a cascading effect and escalate costs of production. It covets the unintended but inescapable dictum: ‘tax on imports is a tax on exports’!

But perhaps the unkindest cut of all is delayed and unpaid exporters’ dues. It is their money that the government usurps to finance its other expenditures, like it does with the EDS. It is the most invidious tax of all. All systems, and promises, having failed there is only one way out: revert to the zero-rating regime. An element of misuse cannot be ruled out but rather that than letting exports suffer.

To demonstrate its seriousness government will have to do all of the above, including competitive pricing of energy inputs.

But we would still not be competitive – until exporters and government combine to attend to the two most neglected areas: total factor productivity and innovation. This is the heart and soul of competitiveness. Unfortunately, in both we witness a declining trend.

Exporters will have to make Productivity & Innovation mission-critical, with government providing the leadership. Government should set up productivity and innovation funds to spur a serious effort in this regard, and reward those who produce results.

We have thought in terms of these initiatives in the past but the schemes were so badly designed that they were dead upon arrival. We should do a more professional job this time around, restricting the scheme to only those exporting units that opt to ‘compete’ for these funds.

It would require a lot of handholding; setting up of benchmarks, providing extensive training, promoting B2B partnerships, and transparent evaluation.

TDAP, struggling to justify its existence, can be transformed into a Productivity & Innovation promotional body. It will finally have something to do!

Shabir Ahmed, "Self-isolated reflections: export prospects," Shabir Ahmed. 2020-04-09.
Keywords: Health sciences , Export prospects , Interest rates , Exchange rate , Policy rate , IMF programme , Korean war , Export policy , Export strategy , FX , IMF

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