Pakistan’s Export Recovery
Four actions to speed up the process
After months of decline in Pakistan’s exports, the Ministry of Commerce recently claimed that the country’s exports in June 2020 witnessed a decline of 6.83pc, terming it a “sign of recovery particularly after the historic fall by 8pc, 54pc and 33pc in March, April and May, respectively. This is the time the government introduces such policies that may help the country regain the trajectory in exports that it was on before the outbreak of the corona pandemic— prior to the coronavirus outbreak at the end of February in Pakistan, exports were on an upward trajectory and it was reflected in an increase of 14% in dollar terms during the month compared to the same period of last year.
As the ‘great lockdown’ emerged from the global Covid-19 pandemic, it is continuing to devastate communities and jobs, challenge businesses that struggle to survive, and strain fiscal space of governments working to protect both lives and livelihoods. Global trade is heavily impacted as governments took swift measures to stymie the outbreak, declaring partial or total lockdown measures in countries around the world that have not yet been completely lifted. Pakistan is not immune to the economic shock caused by the coronavirus, and its exports have been hit hard. Last May, the country recorded $1.39 billion in merchandise exports, the lowest number in years and a 34 percent drop from a year ago.
Short-term global trade prospects don’t offer room for optimism as maritime traffic analyses, a good predictor of trade flows, forecast contractions in exports in the months ahead. At such a time, exports are crucial to Pakistan’s recovery for several reasons.
First, exports in Pakistan are labour-intensive and provide plenty of good jobs for Pakistanis.
Second, exports offer a genuine boost to otherwise stagnant productivity as Pakistani exporters are 25 percent more productive than non-exporting firms, and their productivity grows as exports pick up.
Third, exports are a good source of foreign currency to pay for imports.
Last, the world economy is 258 times larger than Pakistan’s, making the global marketplace an inevitable destination for Pakistani firms, and offering vast opportunities for Pakistani firms to scale up.
Here are four actions to help Pakistan speed up its export recovery.
- Make exports competitive
The initial priority is to make exports competitive is to ease up import restrictions. For this, firms need to import inputs to export competitively.
The success of the recently announced industrial strategy ‘Make in Pakistan’ relies mainly on the ability of Pakistani producers to access raw materials and intermediate inputs at world prices. For example, for a potential Pakistani maker of N95 masks, this means the elimination of tariffs, regulatory duties and additional customs duties on melt-blown fibre, that currently stand at 12 percent. And, if ‘Make in Pakistan’ is to be successfully complemented by a ‘Sell to the World’ initiative, import duties on final goods will also need to fall gradually.
With effective rates of protection at 261 percent for food processing, for example, it is unlikely that Pakistani makers will go global anytime soon, since they will prefer the cosiness of the highly-protected domestic market. In this way, import taxes are nothing but export taxes in disguise. Introducing sunset clauses to tariff protection is the key to eliminate the anti-export bias.
- Promote exports smartly and proactively
Covid-19 did not just reduce export flows; it broke many of the underlying buyer-seller links. Large global buyers like JC Penney and J. Crew, which filed for bankruptcy or stopped their operations, have left many Pakistani exporters without clients. Helping firms seek new ones needs to be policy priority.
Finding new trading partners will take time and money. In the past, trade fairs and exhibitions would offer business matchmaking platforms for producers and their prospective clients. But Covid-19 has upset such opportunities. And in the same way, people discovered they can run their meetings from their living rooms, buyers and sellers will, too, opt for remote business meetings.
The Trade Development Authority of Pakistan (TDAP) should take note of this fast-changing reality and leverage artificial intelligence and big data to help exporters harness the potential of the online marketing platforms.
- Helping firms comply with international standards
In addition, it’s critical that Pakistan help its firms comply with international standards and secure the right certifications to prove it.
Pakistan has a comparative advantage in the personal protective equipment (PPE) market. Many textile and apparel firms have adapted quickly to the Covid-19 crisis and shifted their production to face masks and shields for healthcare providers and frontline workers at home and abroad. But complying with strict health standards expected by clients is expensive.
When a Pakistani denim exporter decided to turn its materials into protective face shields, the company first got its fibres tested. However, not all tests that conform to standards set by the United States and Europe can be done in Pakistan—unlike in Turkey, one of the world’s leading producers of medical personal protective equipment, where tests cost about $6,000.
Since testing standards are non-negotiable in global markets, producers from across the world have seen their products turned down at the border of importing countries because they were not properly certified.
These rejections create reputational risks for both exporters and their countries of origin. In that context, the government of Pakistan needs to provide information about standards requirements and support the country’s exporters to comply with them.
- Upgrading the regulatory environment
Last, with tele-work becoming a more prevalent reality, exports of services – and in particular of information technology (IT) and IT-enabled services (ITES) – will grow substantially. To take advantage of this trend, Pakistan needs to upgrade its regulatory environment.
To sustain growth in these sectors and encourage firms to innovate in the industry, intellectual property needs to be adequately protected.
In a recent study we conducted among IT and ITES firms in Pakistan, we found that three out of four exporting firms and almost two-thirds of non-exporting firms considered that insufficient intellectual property rights (IPR) in Pakistan is an obstacle for their business.
Growing in this segment will also require to facilitate the movement of talent in and out of Pakistan, expediting the issuing of business visas for foreigners coming into Pakistan, and actively negotiating expedited visa processes for Pakistani experts travelling to visit their clients.
The Covid-19 pandemic has brought in massive changes in the ways we interact, consume, and produce. What hasn’t changed is the need for more and better exports for Pakistan’s growth and development.
The success of the ‘Make in Pakistan’ strategy, crucially depends on its complement ‘Sell to the World’. This demands policy makers to lift all existing barriers to export, and industry leads to make smart decisions and take informed risks to venture into the global marketplace.
The Cabinet of Pakistan approved Pakistan’s first-ever e-Commerce Policy in October 2019 thereby according to a long due recognition to an important segment of the economy. E-Commerce in Pakistan is at a nascent stage, with modest internet retail sales, despite 161 million cellular subscribers, 70 million 3G/4G subscribers, 72 million broadband subscribers, and total teledensity of 76.56 percent, as of July 2019. However, it is an emerging sector with a noticeable surge in recent past in online vendors, local e-Commerce platforms, and online payment facilities introduced by banks and large cellular companies. According to the State Bank of Pakistan, excluding Cash-on-Delivery (CoD) sales, e-Commerce sales stood at Rs 18.7 billion by the end of June 2018 while the total size of Pakistan’s e-Commerce market in 2018 was Rs 99.3 billion. The number of registered e-Commerce merchants has risen by 2.6 times and e-Commerce payments have surged 2.3 times in just twelve months.
Formulation of the e-Commerce policy is a step in fulfilling the Government vision and commitment to effectively promote and encourage businesses, especially Micro Small and Medium enterprise (MSMEs) to go online and foster holistic growth of e-Commerce in Pakistan. The policy covers and provides guidelines on key components for the promotion of e-Commerce including the regulatory environment, financial inclusion, and digitization through payment infrastructure, empowering youth and SMEs, consumer protection, taxation, ICT infrastructure, logistics, data protection, and engagement in multilateral negotiations. Since its approval, the ecommerce policy has made headways in smoothening the e-commerce business environment in the country. For instance, freelancers’ remittance limit has been enhanced from US$ 5,000 to US$ 25,000, IT companies and freelancers are now given better exchange rates for dollar in-line with the interbank rate offered to exporters & trade receivable of IT companies will now be used as collateral for loan procurement from commercial banks.