Trade Reforms: a neglected area
Pakistan missed the export target for 2014-15 and could barely reach a figure of USD 24 billion. Putting this in comparison to peer economies; Bangladesh’s exports for the same year are USD 31 billion, and Vietnam’s exports stand at over USD 97 billion. The top export category for both these economies is textile and garments.
According to the actual Central Bank data, Pakistan could not even achieve its own export level of 2011. In comparison to fiscal year 2011, 2012 exports were down by 2.6 per cent; 2013 by -2.2 per cent, 2014 by -1.1 per cent and 2015 by -4.8 per cent. The Global Competitiveness Report 2014-15, ranked Pakistan at 141 out of 144 countries in terms of ‘exports as a percentage of national income’.
The institution responsible for formulation of trade policy, i.e. the Ministry of Commerce, is unfortunately not empowered enough to implement this policy or related trade reforms. To make matters even worse, the top leadership (in both civil and military regimes) only thinks in terms of ‘export packages’ and not ‘structural reforms’.
Data and evidence indicates that the biggest issues affecting our exports include energy shortages, low efficiency of trade-related infrastructure, inadequate levels of export-related lending, non-tariff barriers hurting import of export-oriented machinery and raw material, exchange rate misalignment, and slow processing of refunds by Federal Board of Revenue (FBR).
The ministry of finance (MoF) has no current assessment on how the fiscal policy, quantitatively impacts exports. The mini-budgets, through Statutory Regulatory Orders (SROs) continue to cause distortions in the production and export structure. Only in the first half of 2015, several new regulatory duties were imposed in a bid to salvage tax revenues. These duties, according to the private sector, increased the cost of doing business and, thereby, have hurt the overall export competitiveness.
The inability of the state to diversify its revenue base has also implied excessive burden on sectors already paying taxes (e.g. manufacturing sector). According to the Board of Investment, an average business person (in Pakistan) is made to pay higher number of taxes and levies in comparison to peer economies. This adds to the taxpayer’s transactions and compliance costs.
The rising of cost of doing business in Pakistan implies that small and medium enterprises (SMEs) will find it harder to graduate into becoming exporting entities. Recent research shows that key obstacles to SMEs participating in trade include: lack of trade finance; corruption in dealing with taxes, licenses and permits; technological barriers for SMEs; and Infrastructure hurdles (e.g. energy issues in industry). Even the small economies in the SAARC region are doing better in terms of cost of doing business indicators.
Trade is also affected by Pakistan’s security paradigm. A key example is how Pakistan is unable to promote trade with its neighbours due to security concerns with every neighbour. In the SAARC region, while our trade with India has not risen, it is also not encouraging with other SAARC member countries.
The free trade agreement (FTA) with China and Sri Lanka has not resulted into earlier anticipated gains for Pakistan. In the ECO region (where we do not have the kind of political stumbling blocks as observed in the SAARC) we are also facing low levels of trade. The history of international trade suggests that a country which remains unable to promote goods trade with neighbours cannot dream of becoming transit and energy hub for the region.
Let us also not wait for China to help our exports. The story of China-Pakistan Economic Corridor (CPEC) is not a new chapter in bilateral relations. This is a re-branding of China-centric, National Trade Corridor (NTC) Project (under Musharraf regime) which was housed in Planning Commission since the early 2000s.
The lack of public sector management reform, missing inter-ministry coordination, weak monitoring of schemes under public sector development programme and lack of financial transparency had caused the demise of NTC project. Even under CPEC our portfolio preparation is so weak that Chinese investors have already pulled out of the six energy projects on account of lack of pre-requisite infrastructure.
Moving forward, the trade reforms agenda should first address the anticipated coordination issues facing the forthcoming strategic trade policy framework. The repeated interventions of MoF and FBR in trade governance have weakened export incentives. Pakistan is standing with those few countries where the cost of importing is less than exporting the same merchandise. The World Bank’s data indicates that it takes on average 18 days to import the consignment compared with 21 days to export.
Second, the plethora of export and industrial promotion incentives should be consolidated. These have given rise to unfair business practices which strengthen monopolies. Several of these incentives hurt product sophistication of non-traditional exports and geographical diversification of Pakistani exports.
Third, let’s focus on improving Pakistan’s stagnant logistic performance. Pakistan’s score on logistics performance index has not improved since 2012. If one is to increase trade via land routes then better customs and border management is required at Wagah-Attari border on the eastern end and Torkhum and Chaman trade points on the west.
The ministry of commerce (MoC) in collaboration with FBR and NLC should update assessment on the missing trade facilities and non-tariff barriers at border points. The business community has long desired that more land-trading routes should be opened with Afghanistan, India and Iran. For example Sindh province is the only province which is not trading with its neighbour (country) via land route.
Fourth, let’s step up our trade diplomacy in the region. Pakistan will be the host for upcoming Heart of Asia meeting and SAARC Summit. The foreign office needs to bring together economic ministries and security officials to discuss how best Pakistan wants to position itself in transit and commercial trade across the region. More specifically, what concessions Pakistan is willing to give its neighbours in return for an entry into neighbouring markets?
Finally, the prime minister must put the MoF on a deadline for resolving key barriers to export competitiveness. The smaller list includes: reducing taxes on energy for exporting sectors, reducing multiplicity of taxes/licenses/permits across the board, protecting budget allocation for trade policy initiatives, credit guarantee support for exporting SMEs, reducing human interface in tax collection, and eliminating the role of MoF in exchange rate determination.
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The opinions expressed in this article are the author's own and do not necessarily reflect the viewpoint or stance of SDPI.