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Towards revitalizing exports

Pakistan economy is doomed to dig deep into the unenviable economic black hole of stagflation unless government manages to revitalize exports immediately through the proper homework to develop targeted policy action plans. One of them is on how Pakistan can materialize the unfulfilled gains from the concessions granted under various trade facilities and identify new opportunities from the changing global trade dynamics.

This stagflation is the direct outcome of government’s stabilization polices aimed at curbing the aggregate demand to arrest the inherited twin deficits problem. Given the dynamics of Pakistan’s economy with consumption accounting for about 93% to the GDP, which is largely supported by imports, the costly but necessary exchange rate depreciation, significant increase in domestic household gas, electricity and oil prices, a further increase in regulatory duties on imports are predominantly resulting in cost push inflation to increase the doing business cost, to make Pakistan less competitive in the domestic and global economies. Consequently, lower output and higher prices are coexisting and feeding on each other. This is also the key reason as to why 17% exchange rate devaluation, over the current fiscal year to March, has resulting in negative 1.3% export growth compared with the same period last year.

Unfortunately, despite immense potential stemming from strategic geo-political location, prodigious demographic dividend and existence of various free and preferential trade agreements, Pakistan has not been able to extract optimum dividends from globalization and has consistently been experiencing negative trade balances, resulting in frequent balance of payments challenges. The main roots of Pakistan’s poor export performance are insufficient infrastructure and energy, limited domestic public resources, and the high cost of doing business that all result in a low level of domestic competitiveness and productivity, and disconnections to GPNs and GVCs. This is also due to institutional turf wars ensuing to government wide coordination failures for implementation of policies, for effectively utilize the concessions provided under numerous free trade agreements (FTAs) and preferential trade agreements (PTAs) and for unnecessary lobbying by powerful special interest groups, leading to high corruption and misallocation of scarce resources towards unproductive economic activities. Consequently, Pakistan’s export basket is narrow-based, focusing only on a few products with a limited market. Therefore, Pakistan is still trapped in less sophisticated and low value-added products, causing country to lose, on average, 1.45% annually in the global market share over the last decade. Resultantly, exports’ contribution to GDP has shrunk by almost 3 percentage points, over the last five years, to become only 7.9% of GDP in FY2018 that leads to significant balance of payments challenges. This exports share to GDP is nearly four times lower than the emerging markets’ share.

Whilst improving competitiveness and productivity remains a medium to long term issue, the need of the hour is to revitalize exports by maximizing existing trade arrangements and tap into the new opportunities of the changing global trade dynamics while also sowing the seeds of homegrown industrial reforms to enhance competitiveness and productivity in the medium to long term.

Firstly, Pakistan must more effectively utilize existing trade facilities to materialize the unfulfilled gains from the concessions granted under the FTAs, PTAs, GSP plus status for export enhancement and greater market integration. The analysis of China-Pakistan FTA reveal that Pakistan has only been able to attain 0.24% of $334 billion worth of Chinese imports market, in the zero rated tariff lines. Through better homework and negotiations, Pakistan can raise its share to at least 5%, which can enhance exports income by $17 billion per year. Under the Malaysia-Pakistan PTA, Pakistani exporters have utilised less than 12% of the concessionary tariff lines, resulting in a meagre 0.3% share in Malaysia’s $35 billion global import market under zero-rated concessions. Again through more robust homework, Pakistan’s share could easily be increased to at least 5% immediately, resulting in additional exports of $ 1.7 billion.

Secondly, Pakistan must tap into the opportunities arising from the trade redirection as a result of changing global market dynamics, stemming from trade war between China and the US. An ADB analysis shows that the tariff hikes of US on Chinese products, between January 2018 and September 2018, have affected about $250 billion worth of Chinese exports. Over the same period, China has also retaliated with its own tariffs, impacting $110billion of US exports. Attainment of merely 0.5% additional share could enhance Pakistan’s exports by $1.8 billion annually.

Finally, gain market share especially in the US and the European markets, particularly due to the graduation of India and Turkey from the GSP plus status granted by US, potentially estimated at around $8 billion. Given, the US is Pakistan’s largest export market and similarities with Indian goods such as textiles, etc., gaining achievable 10% additional market share, left by Turkey and India, could raise exports incrementally by $0.8 billion annually.

Moving forward, Pakistan must undertake a detailed analysis to answer these key questions, including (i) why existing trade facilities such as GSP plus, FTAs and PTAs have been unfavourable to Pakistan?; (ii) where did Pakistan lose in the global market in terms of country and commodity?; (iii) how big is the potential export opportunity for Pakistan due to the changing world trade dynamics, resulting from the ongoing tariff war between China and US and how Pakistan can tap this potential?; (iv) how large is the potential prospects for gaining European and US markets share and beyond, especially as a result of India and Turkey’s graduation from the GSP plus status?; and (v) what and how prioritized products and markets for Pakistan can be promoted to yield optimum returns for immediate export revitalization? All this will help in avoiding the stagflation and overcome the twin deficits problem to restore the macroeconomic resilience for higher, more sustainable and inclusive growth to create 2 million additional jobs annually.

Dewan Anas Mushtaq, "Towards revitalizing exports," Business Recorder. 2019-05-03.
Keywords: Economics , Global trade , Exchange rate , Global economies , Export market , Pakistan , GSP+ , GDP

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