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A Critique of Trade Policy 2015-18

Trade Policy 2015-18

Industrial growth, which invariably contributes substantially to the GDP and consequently economic development of a country, depends on continuous expansion in the domestic and international markets for the goods and services produced in a particular country. In the modern world of economic interdependence and free market economies, countries lay more emphasis on enhancement of their exports to propel the process of sustained economic growth. In Pakistan, although the last three federal budgets invariably focused on boosting of exports, removal of the bottlenecks in the expansion of export markets and encouraging exports of value-added goods, yet acute energy crisis, poor infrastructure, outdated technologies, lack of export culture and weak contract enforcement mechanism hamper the growth of exports. To address this issue the government has announced Strategic Trade Policy Framework 2015-18, which envisages enhancement of Pakistani exports to $35 billion by 2018.

The Federal Minister for Commerce Khurram Dastgir unveiled the three-year Strategic Trade Policy Framework 2015-18 with the overarching objective of achieving $35 billion exports by 2018 — the election year — which, at first glance, appears to be more realistic than previous trade policies given that the current level of exports is around $24 billion. Quite boldly, the Framework suggests overcoming local production problems — energy, efficiency, competitiveness, value addition, etc. — and increasing trade across the region, as if by the stroke of a pen. The budgeted amount for the achievement of this ambitious trade policy in the current year was Rs. 6 billion; however, it is most likely that this amount will be deferred to next fiscal year by the Finance Minister, Ishaq Dar, as it would reduce the pressure on him by that amount in terms of meeting the deficit target agreed with the IMF team under the $6.64 billion Extended Fund Facility. Be that as it may, without the necessary funding and with tax concessions announced in the trade policy unlikely to be implemented till next year’s budget, again because of Ishaq Dar’s focus on meeting the deficit agreed with the Fund team, the trade policy is in effect a two-year policy — 2016-2018. And this raises the question of whether the $11 billion increase in exports that the policy envisages is indeed realistic as it is a two-year period and not three.

The policy consists of four pillars, in marked contrast to previous policies that either focused on import substitution or export promotion: product diversification and sophistication which one would hope envisages producing exportable products rather than exporting what we produce, market access, institution development and trade facilitation.

According to the finance minister, the main reason for Pakistan’s poor performance in exports is a competitiveness crisis which, in effect, is a heavy reliance on only two products. The Minister averred that cotton output fluctuates which is in the nature of the crop; however, what he ignored was the fact that the fluctuation in farm output, including cotton, is also attributable to government policies particularly the lack of support extended to the agriculture sector by the federal government. This is unlike our regional competitors who extend massive subsidies on fertiliser and other inputs, including high quality seed as well as on the maintenance and expansion of the irrigation system.

The trade policy envisages providing support to the agri-business sector with a 50 percent support on the cost of imported new plant and machinery for specified undeveloped regions or 100 percent mark-up support on the cost of imported new plant and machinery throughout Pakistan. This concession raises two questions: would the envisioned support be extended by the commercial banking sector and if so this scheme may well go the way of the Prime Minister’s Youth Scheme as the private banking sector’s requirements for a loan can only be met by those with guarantees/assets? And if the government is to bear the cost, then one would have to wait and see if this is budgeted for the next fiscal year. With the IMF programme still ongoing, it is unlikely that the Dar-led Finance Ministry would be able to extend any subsidy in 2016-17.

A short-term strategy, the Commerce Minister noted, would target three markets (Iran, China and Afghanistan) and focus on four products (horticulture, meat and products, jewellery, basmati rice). It is unclear how Dastgir defines short-term as many economists would define it as at least 2 years with respect to raising exports by 11 billion dollars which is the duration of the entire policy. Two of the three target identified markets raise a lot of questions given that our official trade with Iran has never been high while our trade with Afghanistan remains hostage to the ongoing conflict in relation to dealing with the Taliban. China, as the minister stated in his press conference, is suffering from an economic downturn which incidentally is not expected to reverse in the next year or so. With respect to the four products, it is necessary to point out that the three countries are unlikely to be buying jewellery given the state of their economies. Meat and products or horticulture exports would perhaps have been more successful were the focus Middle Eastern countries. Basmati rice would be a product that is saleable in the three countries however India exports basmati rice and takes the lead in sales to Iran and Afghanistan.

Dastgir maintained that leather, pharmaceuticals, fisheries and surgical instruments have higher export potential. Indeed, but the fact remains that these items are already being exported and if cotton and products are taken out of the equation these items are high on the list of generating export revenue. One would have hoped that the focus would have been on leather manufacturers including footwear, engineering goods and sports goods.

The new policy aims to boost pharma exports. But so far none of the 600 pharma companies has the World Health Organisation (WHO) approval let alone certification by FDA of the US or European Drug Regulatory Agency’s certification. Perhaps, TDAP could help out in paying the US$20,000 fee and facilitate the visit of WHO inspectors to local pharma companies. WHO certification would allow export of Pakistani drugs in case of emergency to WHO-registered countries. To conclude, the delay in approval of the trade policy, attributed to the Prime Minister, shortened its duration to two years; and while one would have expected the Commerce Minister to present a two instead of a three-year policy or failing that to extend it to 2019 yet for the Sharif administration the buck stops in 2018. One must not lose sight of the fact that Finance Ministry holds the key to successful exports. It has consistently denied refunds/rebates to exporters — which are due as far back as 2002. We need to ‘walk the talk’ or else it will remain ‘talk the talk’. Export diversification (in terms of products and regions) and greater market access have been aims of trade policy for over two decades with little or no progress. We are afraid that mere rhetoric will not suffice. Incremental refunds have never worked. Let us not create another circular debt in the export sector as we have done in the energy sector. Refund of taxes to exporters is long overdue. But our fiscal woes continue to worsen. We need to urgently issue bonds as planned and seek permission from the International Monetary Fund (IMF) in this regard.

Highlights of the Trade Policy

  • Following are the highlights of the Strategic Trade Policy Framework (STPF) 2015-18:
  • Enhancement of annual exports to US$ 35 billion by 2018.
  • Improvement in Export Competitiveness.
  • Transit from ‘factor-driven’ economy to ‘efficiency-driven’ and ‘innovation-driven’ economy.
  • Increase share in regional trade.
  • Enhance competitiveness through quality infrastructure, labour productivity, access to utilities and level of technological development.
  • Compliance to standards (convergence of local & international standards, protection of intellectual property and effective and efficient disputes resolution mechanism).
  • Ensure policy environment (monetary policy, tariff & tax regime and synergic industrial & investment policies).
  • Explore market access including multilateral, regional and bilateral.
  • Enhancing share in existing markets, exploring new markets, trade diplomacy and regionalism).
  • Product sophistication and diversification (research and development, value addition and branding).
  • Institutional development and strengthening (restructuring, capacity building and new institutions).
  • Trade facilitation (reducing cost of doing business, standardization and regulatory measures).
  • 20% investment support up to a maximum of Rs. 1 million per annum per company will be available for import of new plant and machinery.
  • 50% of mark-up support on up-gradation of technology will be provided for import of new machinery/plant, subject to a maximum of Rs. 1 million per annum per company
  • Matching grant up to a maximum of Rs. 5 million for specified plant and machinery or specified items to improve product design and encourage innovation in SMEs and export sectors of leather, pharmaceutical and fisheries.
  • Common Facility Center for surgical sector will be established.
  • Provision of matching grant to facilitate the branding and certification for faster growth of the SME and export sector in Pakistan’s economy through Intellectual Property Registration (including trade and service marks), Certification and Accreditation.
  • Draw-back for local taxes and levies will be given to exporters on free on board (FOB) values of their enhanced exports if increased by 10% and beyond (over last year’s exports) at the rate of 4% on the increase.
  • To reduce the wastage of produce, increase income of the farmers and foreign exchange earnings, the policy envisages 50% support on the cost of imported new plant and machinery for specified under-developed regions.
  • 100% mark-up support on the cost of imported new plant and machinery on all Pakistan basis.
  • In the wake of upcoming review of the GSP Plus in 2016, it envisages a robust public information campaign.
  • It envisages exploration of new markets through market research, opening of new trade missions, exhibitions and delegations.
  • It also envisages working on its three-pronged strategy of trade diplomacy in the multilateral, regional and bilateral arenas for increasing market access.
  • Resolution of outstanding issues in Afghanistan Pakistan Transit Trade Agreement (APTTA).
  • Negotiation and early conclusion of Afghanistan, Pakistan and Tajikistan Transit Trade Agreement (APTTTA).
  • Effective implementation of Transports Internationaux Routiers (TIR) Convention.
  • Reactivation of Quadrilateral Transit Trade Agreement (QTTA) among Pakistan, China, Kyrgyz Republic and Kazakhstan.
  • Restructuring/Reorganization of Ministry of Commerce and Trade Promotion Organizations.
  • Placement of Intellectual Property Organization-Pakistan (IPO- P) in Ministry of Commerce.
  • Export Development Surcharge to Export Development Fund (Prospective) and capacity building.
  • Creation of New Institutions: Export Development Councils and reducing cost of doing business.
  • The Focus Markets for short-term export enhancement will be (i) Iran, (ii) Afghanistan, (iii) China and (iv) European Union.
  • These markets have been selected on the basis of potential for enhancement of Pakistan’s market share in the short term.

Courtesy: Business Recorder

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