PTI’s 100-day agenda: The BoP challenge
August 02, 2018
Managing Pakistan’s rising current and trade account deficit constitutes the most difficult challenge for the incoming government. This crisis requires immediate policy interventions to reverse the deteriorating economic situation. Pakistan Tehreek-e-Insaf, which has been mandated to form the federal government, in their first 100 day agenda prioritizes addressing key economic and governance issues. All these are secondary to harnessing the growing deficit in the Balance of Payments (BoP). This requires limiting the trade deficit and building foreign exchange reserves by working on the external and internal fronts simultaneously. Trade deficit reduction can be achieved by two equally important policy measures; one to curtail import bill and the other to enhance export earnings. In the last fiscal year, import surged to $60.9 billion while exports were only $23.2 billion leading to a trade deficit of $37.7 billion. This was partially covered by remittances. However, the current account deficit was still $ 17.99 billion which increased 42.5 percent over the last one year. The concern with limiting trade deficit through import curtailment is that many of our imports are inelastic in nature and there are no substitutes available domestically like for fuel, machinery and raw materials required for manufacturing sector. Increasing import duties will also run afoul of World Trade Organization (WTO) covenants. The more effective strategy is to increase exports rapidly. This is challenging but a substantially more sustainable approach bearing long-term benefits in accordance with PTI’s 100-day agenda goals in the form of creating mass employment opportunities, increased economic activities enhancing production and therefore exports.
These agenda goal items can be achieved by making synchronized policy interventions like tax rationalization, zero rating raw material imports, early refunds, LTFF schemes extended to indirect exporting sector and the most important making energy accessible and affordable for exporting industry. The Prime Minister in waiting Imran Khan in his victory speech emphasized on reducing the cost of manufacturing and enhancing ease of doing business.
According to the recent World Bank report, “Pakistan’s poor trade performance in recent years is an outcome of diminishing export competitiveness”. The reason for the loss of competitiveness is deep rooted into increased cost of doing business.
Small steps add a lot of value while we are struggling in the highly competitive international market. Easily implementable and concrete policy measures can go a long way towards realizing economic goals set out in 100-day agenda by PTI. A few policy measures that can be implemented immediately and can accelerate the economic recovery process are listed below.
a) In order to reduce production cost of exporting goods, all duties on raw material imports should be removed. The contemporary world markets are evolving at a much rapid pace and if we have to keep up with them, we need to at least provide raw materials at the import price.
Taking the example of Pakistan’s largest exporting segment “textiles”, World Market consumption of manmade/synthetic fibers against natural fibers has shifted to a ratio of 70:30 while a decade back it was 30:70. We are still sticking to the old cotton strategy, Manmade fibers like Polyester Staple Fibre (PSF) which is the basic raw material for synthetic textiles is burdened with regulatory duties which reaches up to 20%, such irrational duties should be immediately removed along with custom and regulatory duties on cotton to facilitate largest exporting sector.
b) Over the last five years cotton production has decreased from 13.86 million bales to 11.98 million bales, witnessing a decrease of 14pc which has caused a loss of Rs.535 billion (almost 2pc of total GDP) to the economy. To meet the domestic demand of 14.5 million bales Pakistan heavily relies on cotton imports. Under these conditions 11pc cotton duty and non-tariff barriers (NYB) will worsen the situation and will leave Pakistan globally uncompetitive.
c) In the light of current energy sector situation, energy sector reforms are vital for sustenance of economic activities. Electricity tariffs in Pakistan are much higher than regional competitors leaving our export sector uncompetitive in international market since electricity cost is 35pc of total processing cost. Regionally competitive electricity tariff rate can be provided to exporting industry by introducing a separate electricity tariff category for the sector.
d) In order to ensure sustainable gas supply and competitiveness, price and priority of gas supplied to different sectors of the economy should be reviewed in a way that productive sectors of the economy that add more value to GDP be given preferential priority in domestic gas allocation and supply. One of the pillars of the economic emergency should be to allot 1st priority to export industry ahead of domestic, commercial and power sector. To make the gas sector sustainable, exploration activities should be accelerated to add new gas to the system e-g Block 28 has 3 times higher potential reserves than Sui field itself.
e) LNG sector has remained suspicious and non-transparent under the last government, bringing transparency in LNG contracts should be a priority to reduce import costs and add-ons by PSO, SSGC and SNGPL and hence the consumer gas price.
f) The regressive taxes like turnover tax of 1.25 percent on export items act as a disincentive for exporting industry so exporting industry should be exempted from any such tax. All taxes should only be collected on the basis of profitability.
g) The working capital of the textile sector remains blocked in delays in sales tax refunds, custom duty drawback and income tax refund. The cash flow crunch caused by these blocked refunds squeezes the financial streams of exporting industry, breeding liquidity jerks. All pending refund claims should be immediately paid to provide much needed breathing space to industry. Aggressive policy measures are required to improve export competitiveness like China’s and India’s. China’s Xinjiang Uygur Autonomous Region has provided cheap electricity at US 6 cents per Kwh to industry, rent-free factories in industrial parks, interest free loan deals and maximum tax rate of 15%, while Indian Punjab has frozen their electricity price for industry at Indian Rs 5/KWH for the next five years.
Pakistan’s export performance has been particularly lackluster in recent years. Should the government implement progressive policy measures, the textile industry of Pakistan alone has potential increase in export volume to US $ 45Bn plus in next five years and creation of 3-4 million additional jobs through tapping unutilized potential. Similarly, a share by all exporting industries will mitigate ballooning trade deficit and current account deficit.