KARACHI:
As ominous clouds of growing economic woes continue to gather for Pakistan, the escalating crisis needs to be controlled.
The government introduced additional legislation in February 2023 to increase sales tax on certain goods and services, as well as income tax on certain capital investments. As the economy worsens and the government sinks deeper into the abyss, consumers and investors may face an increased tax burden.
These challenges suggest that Pakistan needs to rethink in terms of adopting new trade strategies and ideas to escape the brutal trap of recurring balance of payments crisis.
One important factor leading to recurring balance of payments crises is a large trade deficit, calculated as the value of imports minus the value of exports.
According to the Pakistan Bureau of Statistics, imports exceeded exports by $48.4 billion. Exports amounted to 31.8 billion dollars, while imports amounted to 80.2 billion dollars.
Although both trade flows are the highest in Pakistan’s history, the inability to generate enough exports, as they account for less than 40% of total imports, leads to a crisis every few years. It is very important to avoid this trap.
Any new agenda developed as a way forward must address the most pressing issue – unsatisfactory exports. Exports have been relatively stagnant, with modest growth, especially in countries such as Bangladesh and Vietnam, which have enjoyed exceptional growth over the past decade.
According to international trade center Trademap.org, Pakistan has never exported more than $28.9 billion worth of goods in a single calendar year. The previous highest figure was in 2011, when Pakistan exported goods worth $25.3 billion.
In comparison, Bangladesh exported goods worth 24.3 billion dollars in 2011. It has increased its exports to 53.9 billion dollars in 2021. Vietnam’s exports amounted to 96.9 billion dollars in 2011, which will increase to 335.8 billion dollars in 2021. In Pakistan, exports declined as a percentage of GDP. as it is reported to be less than 10% in 2021, reaching levels similar to those reported by some poor and least developed countries in sub-Saharan Africa.
Imports to Pakistan increased from $43.6 billion in 2011 to $73.1 billion in 2021. The same trend was observed in Bangladesh, while Vietnam’s imports increased from $106 billion to $330 billion over the same period.
It should be noted that as the economy grows and consumer demand expands, imports increase. However, unlike Bangladesh and Vietnam, Pakistan has not been able to increase its exports, leading to a widening trade deficit.
One of the biggest challenges facing Pakistan is the lack of diversification in exports. Pakistan’s exports are heavily concentrated in textiles and cereals, which dominate the country’s top 10 exports. While Bangladesh has a similar composition, it exports more value-added garments and garments, while Pakistan’s top 10 exports include low-value-added bedding and towels.
On the other hand, Vietnam has expanded its export portfolio to include high-value-added and complex products. It exported more than $33.6 billion of mobile phones in 2021, becoming the second largest exporter in the world. It reported zero exports in 2007.
Lack of competitiveness due to low level of productivity and high trade costs is the main reason why Pakistani exporters are not able to participate in export activities.
As a widening trade deficit causes panic among policymakers, they often resort to increasing trade restrictions and introducing domestic policies to reduce the trade deficit. Restrictions on imports and increased import tariffs on several goods led to shortages of goods in the country and reduced production activities.
The Business Confidence Index, published by the State Bank of Pakistan in association with the Karachi Institute of Business Administration, notes not only a sharp drop in overall business confidence since last year, but also capacity utilization in the manufacturing sector. Such difficulties may further depress exports.
One of the major challenges facing Pakistan is the lack of consumer access in its key markets. Although the European Union provides duty-free access to several goods under the GSP Plus scheme, Pakistan’s exporters do not meet EU standards.
Additionally, given that the United States is Pakistan’s largest export destination, basic textile products imported from Pakistan face tariff rates of up to 17%. The recent trade and investment dialogue between Pakistan and the US should address tariff issues as increased market access will help boost opportunities for Pakistani exporters.
Finally, it is necessary to reduce the trade costs of domestic producers. One of the biggest obstacles to participating in export activities is the presence of information asymmetry.
For example, lack of information about various technical measures inhibits exporters. The Pakistan Single Window and TDAP have taken steps to reduce this information asymmetry.
However, roadshows and training programs targeting SME exporters are the need of the hour.
The writer is Assistant Professor and Research Fellow, Department of Economics, CBER, Institute of Business Administration, Karachi.
Published in The Express Tribune on March 13th2023.
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