Passing through stages of European Commission, European Council and, finally, European Parliament, Pakistan finally got Generalized System of Preferences Plus (GSP Plus) status after laborious efforts spanning 8 years.
European Parliament granted Pakistan GSP Plus status with a thumping majority of 406 members who supported the move. The facility, to be effective between January 2014 and January 2017, would allow duty-free access to 20% of Pakistani exports at zero tariff and 70% at preferential tariff rates. This is the second time Pakistan has been granted this status by the EU— Pakistan’s third largest trading partner. Pakistan enjoyed this facility from 2001 to 2004 but it was terminated after WTO raised objections on it.
For an economy that has been stagnant for well over a decade now, and that is badly hit by precarious law and order conditions coupled with the worst energy shortages, this, indeed, is a whiff of fresh air. The grant of this status is an expression of confidence in the quality and competitiveness of the Pakistani products.
The move would prove a watershed for the country’s efforts to come out of the quagmire of mighty economic challenges, particularly in terms of kick-starting the economic activity and creation of jobs. After the grant of this status, Pakistan would get an additional US$ 1 billion, with an estimated projection that the country’s export earnings from EU would soar from existing $13 billion to $26 billion.
Those at the helm of affairs in Pakistan during the last 8 years rightly deserve accolades on this remarkable achievement as they all had made sustained efforts to achieving this cherished goal. This success would augur well for the government’s motto “trade, not aid”, provided both the public and private sectors make most of this opportunity.
At a time when Pakistan’s economy is in dire straits with foreign reserves touching record low, exports stagnating, dollar hitting all-time high vis-à-vis rupee, and industries closing down, the grant of GSP Plus status offers both a set of challenges as well as opportunities.
The following is instructive in this regard:
Pakistan faces a tough competition from neighbouring India, Bangladesh, Sri Lanka and other countries. According to the Minister of State for Commerce, the trade concessions that the country has won from the EU cannot be fully exploited as, presently, Pakistan exports only 150 — or 2.5% — of the total 6,000 duty-free product lines that this 28-nation bloc offers. The real challenge before the government and private sector is to expand the base of export products to be at par with the regional rivals.
Tied to challenge of diversifying exports is the uphill task of overcoming energy crisis, which has hampered the pace of economic development rendering millions of Pakistanis jobless. The textile industry, a linchpin of the country’s industrial base, is worst hit by this scourge. Many textile units were shut down due to this menace, while many more moved out to Bangladesh, Turkey and Sri Lanka due to tariff concessions, easy market access, improved law and order situation and assured supply of energy. Textile units located in Punjab, who contribute nearly 75% to the total volume of textile industry, are badly hit by the energy shortages. So overcoming the energy challenge under short-, medium- and long-term basis appears to be the most daunting task for the government.
Another problem that mars the performance of the industrial sector is its outdated infrastructure. Without revamping support infrastructure, the goal of diversifying the export base will remain a far cry. Infrastructure development, on the other hand, is not possible without attracting foreign investment in this area. According to the Board of Investment (BOI), FDI inflows in textiles have decreased from $29.8 million (2012) to $10 million (2013). Other factors adding to the woes of the industry include rapidly-fluctuating prices of raw materials, increasing cost of production, bureaucratic hurdles faced by textile exporters and a rigid monetary policy.
The situation can still be improved if the government makes urgent policy interventions. The government can consider extending support to small- and medium-scale textile units. One way can be to offer loans for working capital on reduced interest rate. This will not only make these units operational but will also add to their production capacity. The government may also give concessions to units which produce their own electricity.
Foreign Direct Investment (FDI) should be attracted towards this sector to make it stand on its feet and become sustainable in terms of production capacity. When Bangladesh got GSP Plus status, it attracted massive investment in textile sector. Board of Investment (BOI) has a critical role to play in formulating a robust investment policy. Security of capital, guaranteed return of profits and tax exemptions can be considered in this regard.
The government can also consider diverting exports from high duty countries to EU countries.
European Union gives tariff concessions to exporting countries of the Third World as part of its efforts to promote democracy, protect human rights and improve governance. The preconditions set for continued availing of this facility are tough and broad in nature. Pakistan must adhere to these conditions through an institutional mechanism, failing which the facility can be withdrawn as happened in case of Sri Lanka.
The grant of GSP Plus status is a great achievement. It is hoped that both the public and private sectors are upto the challenge having the capability and passion to turn around economy.
By: Amanat Ali Chaudhry
(The writer is a civil servant and can be reached at email@example.com)