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Trade policy: under the shadow of uncertainty
M. SHARIF
22nd July, the commerce minister declared the trade policy for the current fiscal year, a bit belatedly. Whereas the reaction of the business community was mixed, some of the promises, concessions, initiatives proposed in the policy admissions made up for not delivering the results on promises made last year, a statement of facts made by the minister, that our exports have increased from $7.78 billion in 1999 to $10.4 billion in 2003, is a considerable improvement.
The statement made by the minister, clearly indicated that the trade policy was inching towards a hazy goalpost in the midst of fiscal and export policy framework. The irony is that the areas of the economy which have quite a bit of export potential such as SMEs have been left untouched, and in certain other respects a policy to safe-guard the interests of certain classes of entrepreneur has been adopted. Such a compromised policy can keep the goalpost surrounded by mist. Only a bold and aggressive trade policy; supported by a compatible fiscal policy, can be instrumental in achieving the exponentially growing trade targets, which is the need of time to pull the country and people out of recession and poverty respectively.
Export performance: FY-02
Going back to the statement of facts made by the commerce minister, exports have increased by $1.3 billion between the FY-1999 and 2002. It shows an average increase of $0.43 billion. In case the average increase is calculated between FY-1999-2003 keeping in view current fiscal year's export target of $10.4 billion, the average would increase to $0.52 billion. It is not an enviable achievement by any stretch of imagination that should have prompted the minister to state that a "considerable improvement" has been made in exports particularly in the backdrop of boosting exports by at least $1.0 billion each year during past three years to give certain degree of respectability to our exports.
An export target of $10.1 billion was fixed last year with continuation of policy of greater value addition, diversification of products and markets, reduction of anti-export bias and nurturing an export culture as has been stated repeatedly in previous years. The result was an export of $9.1 billion. The shortfall has been attributed to three factors: post-11 September economic scenario that resulted into cancellation of export orders and imposition of insurance surcharge of around $450 million; global recession which fetched lower unit value of exports revaluation of rupee by 8 per cent and uncertainty in domestic political scenario that affected economic activity. These factors are apart from a number of other factors that affect exports. Despite such obvious constraints, exports worth $9.1 billion for FY-2002 that are less by $0.1 billion than exports worth $9.2 billion for the FY-02, maintaining status quo in exports cannot be belittled for one reason; it was feared that exports would be substantially lower than $9.0 billion.
The minister enlisted a number of achievements by commerce ministry during outgoing fiscal year. Conspicuous among them are: good performance in value-addition by textile sector by installing new machinery; diversification in product, like export of wheat and its milled products to the tune of $122 million and stepping into non-traditional markets. Yet, the quantum of achievement in areas of value addition diversification of products and markets at desired level is one of the weakest area of exports regime at present as has been the case during past many years. The commerce minister was specific to state that in "sectors" other than textile, "we clearly need to do a lot of work". The fact is that over years our commerce ministers have been harping the same mantra and an obvious questionnaires: When "a lot of work" that is to be done, will be done?
The minister while making an objective review of achievements and failures of trade policy for FY-02, claimed that trade deficit was reduced to $1.2 billion, a reduction of 21 per cent - the lowest in last 25 years. Imports were reduced by 4 per cent primarily because of lower tea and oil prices, sugar imports - $23 million against $252 million last year. Textile mining and construction machinery registered 10 per cent and 43 per cent increased respectively. Steel consumption increased by 10 per cent. Apart from these positive factors as admitted by the Minister, "roll back of implicit subsidies like export Finance, and duty-drawback rates and above all the problem of sales tax refunds that continued to plague the exporting sector", have remained the weakest part of economic governance. Having briefly enlisted the performance of exports during outgoing fiscal year, an analysis of trade policy is easy to make.
Principles and strategy
Export policy is based on certain principles of policy formulation shared by the authors of the policy with various stakeholders in economy. The principles embody maintaining continuity of policies, market driven policies with minimal intervention by the government, de-regulation, liberalisation and reduction of cost and stable macro-economic framework specific to export related indicators of inflation, interest rates and exchange rates. It also includes a five year roadmap for four major product groups i.e. textile, leather, horticulture and rice. The trade policy also spells out national export strategy (NES) for the current fiscal year. It will centre around sound macro-economic framework, low tariff, capacity development of exporting enterprises, enhanced market access, improved social and physical infrastructure and reduced anti-export bias. Policy framework and export strategy sound a bit rhetorical and repetition of past export policies. Nevertheless their repetition might indicate certain degree of commitment on part of the government, but more important than mere commitment is prompt execution of policies throughout the year that would help to achieve the projected export target and objectives of NES.
Main features
Export policy enunciates a number of policy initiatives which should boost exports. The important ones are listed as under:-
Export target has been fixed at $10.4 billion with 13.4 per cent growth rate over last year exports. It is not an ambitious target and is in line with bare minimum quantum jump that exports should get to help in achieving economic growth rate of 4.5 per cent of GDP fixed for the current fiscal year.
Trade deficit of $700 million: A number of factors such as price of crude oil, essential edibles, stability in exchange rate and access to markets will play important role to achieve this target. Reduced tariff (25 per cent) might create environment for liberalised imports which could be balanced only by increase in exports. Import target has been fixed at $11.1 billion, 7.4 per cent higher than imports of billion for FY-02.
25 per cent freight subsidy for products whose annual export value is less than $5 million in any one of the last three years. It will be applicable to new markets in Latin America, Africa, East Europe or Ocenica or any other country where exports have averaged less than $10 million during last three years.
* De-regulation of exports of petroleum.
* No need to seek registration with EPB.
* End of pre-shipment inspection condition for rice and restriction on minimum price of rice which will add more responsibility on the shoulders of exporters.
* End of 0.5 per cent agricultural produce cess.
* Establishment of Gawadar as a free trade zone.
* Establishment of a inter-ministerial committee to examine tax regime already available to Karachi EPZ that is being allowed to operate with duty free inputs on a 'just in time' basis.
Other features include protection of intellectual propriety rights, increase in value of samples from $5000 to $10,000, withdrawal of import license for gold/silver increase in airlift charges for spare parts from $15,000 to $30,000 and revamping of open trade and production of contamination free cotton and better regulation of ginning.
Challenging areas
Main features of export policy sound lackluster and are routine because they provide incremental benefits to exporters here and there. Substantial benefits that are likely to accrue from projects like operation of Karachi. EPZ and Gawadar free port are long term projects. That is why the overall impact has not been that of spontaneous acclaimation of the policy.
The commerce minister has expressed confidence that with the revision of Duty and Taxes. Remission for Exports (DTRE) Rules, 2001 in consultation with CBR to allow duty drawback and sales tax refund on domestically procured tax paid inputs, DTRE rules will become more user friendly. This will resolve the problem of delayed sales tax refunds to a greater extent. But, will it really? Similarly, export finance scheme launched in November, 2002 has not shown the desired result. Much has been talked about EXIM bank. Substantial work should have been done by now but it is unlikely if anything substantial benefit will be achieved during current fiscal year as the committee is to submit report by end-March, 2003. Analysts are of the view that real dollar-rupee parity is around 1:55. Over valuation of dollar viz-a-viz rupee might help exporters because they want to export less competitive and quality items through cheaper rupee. But, notwithstanding SBP's prudent policy, in case Pakistan's exports have to increase, they have to be cost-wise and quality-wise competitive. To prop exports through SBP's intervention as demanded by the exporters simply means shying away free market dynamism and competition from India, China and Bangladesh particularly in textile sector which is mainstay of exports. Whereas, the trade policy strives to stir competition keeping in view free trade under WTO, fiscal policy subdues it. These are some of the challenges that export regime faces.
Conclusion
Trade policy announced by the Commerce Minister though consistent with the policies that have been pursued so far by the army led government but lacks an incentive based approach. There is tangible element of liberalisation that might benefit big business but the policy has practically nothing to offer to SMEs that is playing an important role in exports. The export target is not too high but its achievement rests on slippery grounds of stable exchange interest rates, access to markets, low price of exports like crude oil. These factors are not specific to Pakistan's exports. They are there and have always been there. Therefore, there is greater need to pursue an aggressive export policy that should achieve the targets.
Courtesy Business Recorder
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