Interventions to control trade gap
Shahid Sattar
“Business Recorder”
September 19, 2018
Preparation and implementation of a well-thought and properly constituted strategy to effectively control the fast widening trade deficit to strengthen country’s macro-economic position is urgently required. Latest data released by state bank of Pakistan suggests that the trade deficit has reached USD 36.3 billion and current account deficit is over USD 18 billion as of fiscal year ended on June 2018.
This drastic increase in the trade deficit would have dire consequences on the economy of Pakistan; therefore, all future trade policy initiatives should take a comprehensive view of this problem. Economic realities show that the country cannot sustain a high and growing trade deficit; therefore, the trade should be enhanced through close coordination with both economy experts and private sector. The growing trade deficit, led by 13 percent increase in imports (102pc higher than exports), is posing a key challenge to the macro-economic stability of the country besides converting it into a consumer society.
The galloping imports propelled the outgoing government to take certain measures, including levying regulatory duties ranging from 4-60% on 731 products on October 2017, imposition of a 100pc cash margin requirement for cars and devaluing the local currency against US dollar to curb imports. Apparently, these measures could not achieve the desired targets (as shown in graph below).
Imposition of RD’s did not have any lasting impact on imports. Imports did fall but only for a very short period of time, i.e., for about a month and only by 2.6 percent. On contrary the exchange rate/devaluation seems to have a significant impact on the imports. As expected, the devaluation impact came with a lag of a month and is continuing to date. Despite high regulatory duties and currency devaluation, imports have increased by almost 13pc in fiscal year 2017-18 while exports improved by only 8 percent.
The failure of these measures basically lie in the inelastic nature of the imports. As many of our imports are inelastic and there are no substitutes available domestically. Infrastructure development has boosted the demand for machinery, steel, cement, and coal, which cannot be met with domestic production yet imports for these products, cannot be cut despite RDs and other duties on them. Similarly, high energy demand does not allow to reduce oil and petroleum imports despite high prices.
Considering inelastic nature of imports, imposition of duties, taxes and depreciation of currency will only contribute to increase in imports bills and will also violate the world trade organization’s treaties. Thus, imposition of regulatory duties is not a wise decision to discourage imports. Following the footsteps of other developed countries, government should utilize non-tariff barriers (NTBs) to achieve the desired results. NTBs can take the shape of
a) 100% cash margin for import L/C’s.
b) Quotas and outright bans on imports categories
c) Phytosanitary requirements made more stringent
d) Cumbersome customs and administrative Entry Procedures
A policy or measure cannot succeed to curb imports until and unless the inelasticity of imports is considered. There should be separately import policies for the two categories of imports i.e. essentials and unnecessary imports. Custom duties and other restrictions should be imposed on imports of luxury
items but subsidies and relaxation should be provided on essential items, especially on imports of raw material like cotton, polyester and machinery, etc., to promote local production and export industry.
Along with the imprudent import policies, government’s export unfriendly policies have also taken heavy toll on trade position of the country. Exports are highly sensitive to exchange rate and have increased significantly after currency devaluation in February 2018 (a 4% depreciation lead to 17% increase in exports). However the amendment in DLTL offset the positive impact of exchange rate and exports started to fall drastically. After the amendment in DLTL policy in June 2018, exports fell by 12%. (As shown in graph below).
The ground realities suggest that in order to encourage maximum exports, the government is required to maintain a market based exchange rate for both curtailing imports and increasing exports. The current government should also revise the DLTL changes made by outgoing government which have resulted in a precipitous fall of exports in July 2018.
In order to develop the domestic market all future DLTL schemes may only be applicable on the value added with Pakistan. Further in order to encourage the value added sector the DLTL rates may be designed to favor end products. We suggest a gradual shift in DLTL rates towards the value added sector given the duties, etc., in the cost of doing business the possible rates could be:
Apart from effective trade policies, government should also cut the cost of doing business in Pakistan and evolve a long-term strategy to make its products attractive in the global market to enhance its exports. If the PTI government adapts to analysis and information based import-export policies, the BOP crisis can certainly be controlled.
======================================================================= PROPOSED DUTY DRAWBACK SCHEME ======================================================================= Commodities 2018-19 2019-20 2020-21 2021-22 2022-23 ======================================================================= Cotton Yarn 4% 3% 2% 1% 0% Greige Fabric 4% 3% 2% 1% 0% Processed Fabric 5% 4% 3% 2% 1% Made ups 6% 7% 8% 9% 10% Garments 7% 8% 9% 10% 11% =======================================================================
(https://fp.brecorder.com/2018/09/20180919408976/)

Let Pakistan compete in synthetic textiles
Shahid Sattar and Hira Tanveer
“Business Recorder”
September 15, 2018
Polyester is now the most dominant man-made fabric across the globe. Its demand surpassed the demand of cotton in 2002, and it continued to grow ever since at a significantly faster rate than all other types of fabric. The recent unsustainable hike in prices of Polyester Staple Fibre (PSF) in Pakistan will only lead to further closing of the capacities of yarn manufacturers and adversely affect the entire textile export value chain. Pakistan has lagged far behind the global market players in the area of man-made textile products and failed to make inroads into synthetic market globally. This is because Pakistan has imposed heavy import duties on raw materials required for the production of synthetic fibres. The import duty on Polyester Staple Fibre (PSF) which is spun to make Man-made Fibre (MMF) yarns reaches up to 20 percent – 7 percent import duty and 2.9 to 11.5 percent anti-dumping duty.
Resultantly, imported PSF (input to our spinning mills) becomes more expensive than international prices. The aforementioned anomaly in regulatory duties is making domestic MMF yarn production uncompetitive, even in their own domestic market. The irony is that when MMF yarn is imported directly it faces a lower import duty of five percent (under the South Asian Free Trade Agreement) to 10 percent, under chapter 55 for MMF yarns import, resulting in unsustainability in the synthetic yarn industry. This led to a reduction of 36 percent of domestic MMF yarn production capacity in the last one year alone.
Pakistan has imposed these duties in a hope to protect obsolete PTA and PSF plants in the country working on inefficient technology. If the government wants to provide protection to these plants, this should not be done at the cost of whole textile value chain, but policies like in 2003, of deemed duty drawback, can be reintroduced. The whole textile sector should not be forced to cross subsidize PTA and PSF plants in Pakistan.
In contrast, today, world is transforming at a faster pace than ever, consumer preferences are changing across a wide range, from food consumption to the standard of living, to travelling and then to clothing. Simple textiles and clothing have evolved into fashion brands. Textile consumer preferences are shifting from cotton-based apparel to synthetic man-made apparel. In the world market, consumption of man-made or synthetic fibres against natural fibres has shifted to a ratio of 70:30, with synthetic fibres having the lions share – a decade ago it was 30:70.
On the domestic front, our policies are distorting both cotton and synthetic fibre market. Pakistan’s share in US’s total textile and apparel imports in 2016 was 3 percent, as per the Office of Textile and Apparel, USA, and for cotton-based products, it was 5 percent. US’s total man-made fibre imports in 2016 were $52 billion of which Pakistan’s share was $200 million. This means that if we do not keep up with the new world preferences, our international market share will continue to shrink.
Our policies have become so regressive in last years that even “cotton” which is considered the backbone of our textile industry is burdened with an import duty of 11 percent regardless of consistent fall in cotton output in the last 3 years. This year cotton production is estimated to fall 25 percent short of its target of 14.37 million bales in the current season as water shortage and pest attacks have squeezed the crop yields signaling hard time ahead for the already struggling economy that is heavily reliant on fibre.
One reason for reliance on cotton based products in Pakistan is that, apart from polyester, nothing is made in Pakistan. We virtually import all synthetic fibres including nylon, viscose etc.
Amidst the ongoing crisis, foreign exchange spent on the import of MMF yarns from Indonesia, China, Thailand and India is around Rs 12 to 16 billion. In Pakistan, the domestic production of polyester viscose blended yarns is approximately 165,000 tons per annum. More than 50,000 tons of PSF yarns are imported per annum. This is equivalent to the production of almost 15-20 domestic mills in the business of 100 percent polyester, polyester viscose blended, viscose or polyester yarns and other synthetic fibre-blended yarns spun out of a total of 45-50 mills. These mills provide employment to more than 100,000 people. Importers of synthetic blended yarn not only put local industries out of competition but also fully exploit them to sell the product at a cheap rate equivalent to India. What is hurting the local synthetic fibre manufacturing industry most is the lack of a level playing field, with higher tariff barriers being imposed on the import of raw materials and a minimal duty on import of MMF yarns, leading to the widespread dumping of MMF yarn and fabrics in the country.
By imposing an appropriate level of regulatory duty on $100 million imports of MMF yarn, jobs of more than a 100,000 people employed in our spinning industry can be saved; however, this is not the ideal solution as the best solution would be to zero rate the duties on polyester and pay any subsidies to the PTA industry through other means. This would ensure that Pakistan can internationally compete in the MMF sector. It is high time that the new government shows its commitment to enhancing exports by rationalizing irrational duties imposed on raw materials which are already short in the country.
(https://fp.brecorder.com/2018/09/20180915407891/)