Trade Policy 2004-05: Critical Analysis

Last week Commerce Minister Humayun Akhtar Khan announced incentives- laden Trade Policy for 2004-05 with a target of $13.7 billion exports. Unveiling the new policy Commerce Minister Humayun Akhtar Khan said the target for imports has been set at $16.7 billion. The trade deficit has been estimated at $3 billion, compared with $3.2 billion in 2003-04.

The commerce minister was hopeful that a quantum leap would be to increase exports to between $25 billion and $30 billion in five years and this could be achieved through enhancing market share of textile exports, diversification and improvement of quality of its goods.

MAJOR INCENTIVES

The government has announced around 35 new measures in the trade policy of 2004-05 for increasing the volume and base of the country’s export. The trade policy 2004-05 also announced 23 new measures for further liberalizing the import regime of the country.

The major incentives offered to traders and investors to achieve targets and other long-term objective are given below

– Elimination of sales tax on ginned cotton to reduce costs for the spinning sector

– Setting up of garments cities in major cities of the country. In this regard, Lahore and Hyderabad cities have been selected. Textiles and garment exports during the last financial year were $8.302 billion, accounting for 68 percent of the total exports. A comparative advantage may be under pressure at the dawn of WTO 2005 and government of Pakistan and policy makers should be aware of that.

– Removal of ban on import of cotton waste to help towel manufacturers

– The garment sector would be provided technical, commercial and marketing support at the cost of Export Promotion Bureau to improve its total productivity and product range Almost all restrictions on relocation of used textile machinery and related equipment have been removed to encourage aggressive establishment of enhanced textile production capacity at the dawn of WTO, SAFTA and furthermore, to successfully compete with inroads of Chinese Textile might.

– Supplier credit fund has been set-up to facilitate the exporters. Concessional credit scheme has also been announced.

– The policy addresses the WTO issue in depth and many integrated policies have been initiated. The stakeholders have been ensured that the government is fully alive to the implications of WTO regime and taking all possible steps to deal with the subject effectively to protect national interest.

– A Communication City would be established in Islamabad to provide all infrastructure facilities to information technology [IT], telecommunication and media companies to promote export of information technology products.

– Special allocations have been made from export development fund for potential areas. All previous schemes have been carried forward for 2004-05 to ensure continuity in economic reforms and policies.

– Other measures announced in the Trade Policy include increase in the cost of samples for export to $25,000 and increase in the limit of gift parcel scheme to $5,000. The new improved duty drawback rates would be announced in a few days for the man-made fiber sector.

– In the trade policy a comprehensive import strategy has been made.

– Relocation of industrial projects from foreign countries has been allowed in all manufacturing and industrial sectors.

– Taxes and tariffs have been reduced on agro-industrial sector-related machinery and raw materials.

– Under gift and transfer of residence scheme, import of tractors, bulldozers, laser land levellers and combined harvesters is being allowed.

– Import of motorcycles in CKD kits has also been allowed to recognised assemblers.

– The units in export processing zones in the countries would export up to 20 percent of their production to various areas in Pakistan and 80 percent to foreign countries. To seek more profits almost all the exports use to export all commodities in others countries and common people of the country use to suffer. e.g. intensified exports of orange, citrus, mango, dates, and others items to Middle east, and European countries.

– Import of animal fur is being allowed to facilitate leather garment industry. Ban on import of cotton waste has been lifted. Import of used hand plant, machinery and equipment excluding passenger transport vehicles, trucks would be allowed to the construction, mining, oil and gas and petroleum sectors.

– Lifting of ban on the import of industrial dry cleaning machines, vending machines for postage stamps, food and beverages and money changing machines and several scientific equipment have been announced.

– Ban has also been lifted on used mobile trolleys meant for textile industry.

– Import of scrap of stainless steel waste for re-melting has also been allowed.

– The working of the Commercial Courts would be further improved in consultation with the law division. A software has been developed which can help our exporters in becoming compliant and hence competitive. The EPB will subsidize 25 per cent of the cost of acquiring the software.

– The Foreign Trade Institute of Pakistan [FTIP] will be strengthened by enhancing the capacity of the institute faculty.

THE EXPORT OF NON-TRADITIONAL ITEMS AND TRADE POLICY 2004-05

It is first time that importance of non-traditional items has been recognized in the trade policy of the country. A comprehensive policy has been announced for the export of non-traditional items like gems and jewellery, fish and agricultural products and promotion of "Made in Pakistan" products. The federal government in collaboration with the provincial and district governments and private sector would provide assistance for rehabilitation of the infrastructure of existing industrial estates. In Punjab, at least 900 fish farms have been revived and there is huge potential for the export of seafood and fishery industry in the countries of Far East. For this purpose, the government would contribute up to 50 percent of the cost. The private sector would be encouraged to invest in green houses and cool chain infrastructure to increase export of value-added horticultural products. There are great chances of horticultural product’s exports in Middle East countries.

FACILITIES OF EASY AND SPEEDY LOANS

The exports of non-traditional items would be provided facility of concessional financing and in order to speed up the export volumes the first 6% of the mark-up rate would be picked up by the Export Development Fund. Pakistan Standards for Horticulture products to be developed to increase export of horticulture products. Fifty-percent subsidy is being restored for registration of pharmaceutical products in foreign countries. The policy also provides incentives for priority export sectors, including leisure equipment, fisheries, shrimp farming, furniture, gems and jewellery, footwear and medical equipment. To encourage export of finished products of granite and marble as well as furniture from far-flung areas, inland export subsidy of 25 percent of freight would be allowed. A Suppliers Credit Fund of $10 million each is being set up to facilitate development of markets in Africa and Central Asian Republics for exports.

In order to facilitate re-export of imported goods, the condition of value-addition has been waived. The government would provide 100 percent cost of consultancy services to private parties for development of accredited testing facilities of international standards within the country. A country-specific programme beginning with Japan would be launched to identify the causes of decline in export and suggest remedies.

TWO FUNDAMENTAL PILLARS OF TRADE POLICY 2004-05

Export strategy for 2004-05 based on two fundamental pillars

1). Driving volume & value to increase the profitability and earn more foreign reserves.

2). Creating an enabling environment to achieve all the targets mentioned in the trade policy of 2004-05.

– Upgrading export-related infrastructure i.e. rehabilitation of existing infrastructure of industrial estates including effluent treatment plants, etc.

– Special package for garment sector for post-quota regime

– Incentives for priority export sectors. i.e. Leisure equipment, fisheries shrimp farming, horticulture flowers, fruits, vegetables, furniture, gem & jewellery, footwear, medical equipment
Hand-holding of potential exporters on a one to one basis and encouraging women entrepreneur-ship through special incentives

– Focused market access strategies for quantum leap in exports to Japan, USA & EU

– Reducing cost of doing business

– Import Policy re-designed as instrument of investment and export promotion.

BUSINESS COMMUNITY OPTIMISTIC ABOUT EXPORT TARGET

Business and industry, with a cautious note, appreciated the measures in the Trade Policy 2004-05.

– The business leaders stressed that measures suggested in the new trade policy would be helpful in facing the challenges in the post-quota period starting from 2005. However, it was generally being feared in the last trade policy most of the measures were not implemented.

– They are of the opinion that government always talks high and do nothing to facilitate the process of speedy exports in the country. It is estimated that the export target with 12 % growth at $13.7 billion is easily achievable particularly when there would not be more quota restriction for textiles, which are our major exports. But it is also feared that at the dawn of WTO, SAFTA, decrease in international market price of cotton in the region and increasing presence of Chinese Textile products in the local and international markets may harm our export volumes and overall profitability.

– All Pakistan Textile Mills Association [Aptma], say that overall the new policy is good but it has not given enough strength to the largest export sector i.e. textile. The reduction in duty drawback on polyester is bound to discourage exports. Around 25 to 30 per cent of textile exports are based on polyester but reduction in drawback rates would also have adverse impact on overall textile exports and government of Pakistan should seriously recognize the genuine demands of the exports of the country. The rupee shed five paisa against the dollar last week as importers jumped in to purchase foreign exchange and exporters delayed selling of export proceeds. The exporters should be prepared to work harder to achieve $13.7 billion export target during this fiscal year up 11.6 per cent from the actual exports of $12.27 billion in the last year.
Pakistan Leather Garments Manufacturers and Exporters Association [PLGMEA], feel doubt that announcing such mega projects as rehabilitation’s of existing industrial estates, funding of display centres aboard and subsidising brand names and warehousing would need huge funds and these integrated activities would gain lesser.

– The government would protect Intellectual Property Rights [IPR] this would attract foreign investment, which had been reluctant so far because IPR is not defended in that trade policy 2004-05.

– The new trade policy, focused on market access by entering into multi and bilateral agreements. In the past we have already affected with the wishful multi and bilateral agreements with many countries around the world. All multi or bilateral agreements become null and void with the change of regional and international geo-strategic scenarios and doctrine of Give & Take always dominates. The imposition of Quota-System (EU), Trade Restriction (USA, Canada and many African countries) have already badly affected the exports volumes of the countries.

– The political risks are very high in our region and era of integration is swaying in the whole Europe and Latin America and any wishful thinking of multi and bilateral agreements would not be more fruitful to achieve all the targets of trade policy of 2004-05. The support to Small and Medium enterprises would give growth to production base and generate employment.
Pakistan Bedwear Exporters Association [PBEA] hailed the trade policy and said that permission to import combined effluent treatment plants on 5 % duty and in-house effluent plants will help the industry meet the post-quota challenges of social compliance’s.

– The export-oriented industry is going to confront in the WTO regime starting from 2005. Payment up to 6 % on mark up from EDF on such plants would lessen the burden on export-oriented industry and help ease its liquidity.

– Advisory Board of Korangi Association of Trade and Industry [KATI] said removal of sales tax from cotton was a good measure but suggested that cotton yarn should also be exempted from Sales Tax.

TRADE DEFICIT AND FLAWS IN TRADE POLICY 2004-05

A $3 billion trade gap has been maintained in the current fiscal year if there is no major disruption in the regional and global trading environments, the GDP grows at over 6.5 % and exchange rate remains at internationally competitive levels. The total exports during the current fiscal year projects at $13.7 billion and imports at $16.7 billion.

According to Federal Minister of Commerce a $3.19 billion trade gap suffered in the outgoing fiscal 2003-2004 when imports outgrew the projected $12.8 billion by almost 21 per cent to $15.4 billion. This phenomenal rise in import bill outmatched the 10 per cent growth in exports and ended up with a colossal imbalance of more than $3 billion, which was more than three times of the $1 billion dollar trade deficit suffered a year earlier in 02-03. But is also living reality that the Pakistan’s exchange rate is under immense pressure in the current fiscal year is more than evident in the State Bank’s recent third quarterly report of 2003-04. The SBP expressed the identical views on rise of import bill but could not help in ringing an alarm bell.

Food import during 2003-04 cost us $1 billion. The $4 billion machinery and equipment import more than $1.2 billion worth of aircraft for PIA and motor vehicles. But it again bitter reality that the recent government has already announced an import programme for one million ton of wheat to fulfill the demand and supply gap in the country and which would cost us up to $400 to $425 million. It is also feared that the government would be forced to import half a million tons more wheat late in the year which means the total wheat import bill during 04-05 may go up to $600 million in the current fiscal year. Pakistan is likely to face a shortage of water to irrigate its winter wheat crop because of lower than expected monsoon rains in July 2004 and slower snow melting which has reduced water levels at the country’s two main reservoirs.

The international trade scene for Pakistan in the current fiscal year looks erratic and that may harm the optimistic targets of trade policy 2004-05. There are some major distractions in the overall trade environment of Pakistan. To meet the country requirements the government will have to import edible oil of Rs. $650 million to $700 million this fiscal year which may be exceeded up to $1.5 billion to $2 billion in the final counts due to budgetary concession given to dry fruit, species and many other edible commodities.

The critical analysis of international markets suggests that there are upward trends in the prices of raw materials and chemicals. China, the main supplier of chemicals and industrial raw material is facing acute energy shortages, which is reported to have brought down production of chemicals and industrial raw material which may increase our import bill in the near future. The worsening situations in the Middle East are supposed to be key factor to increase in our import bill. The oil price issue will pinch the country more this fiscal year because of the termination of Saudi oil facility. The end of textile export quota phase at the end of 2004 should be an opportunity for our textile exporters. But the textile industry is under tremendous stress at the beginning because of sharp fall in international cotton prices. There are reports that China is giving a mega bumper cotton crop of 29 to 30 million bales, which could upset the international market.

The government has identified seven non-traditional items for diversification in the trade policy but the Trade Policy has failed to understand the measures to boost exports of these items. Today textile exports contributed roughly 2/3 to our over all exports earnings. Together with rice and leather they account for 3/4 of total export earning. A poor cotton crop can severely affect our total export earnings. Similarly nearly 3/5 of our exports goes to the European Union and the North America. The government and the exports should work together to diversity exports both in terms of commodities and regions.

The most important lapse of the Trade Policy 2004-05 is the electronic commerce. Pakistan has great potential in electronic commerce and infrastructure for the development of electronic commerce. According to a report of the WTO (2004), a category of services that includes computer and information services, financial services, insurance, telecommunications, and personal, cultural and recreational services has grown faster than many groups and its share in world exports is up from 6.3 per cent of world exports in 1985 to 9.4 per cent in 2002. The Trade Policy 2004 has ignored this group out rightly which is not a fair treatment.

The Trade Policy 2004 did mention of involvement of foreign investment to harness the true export potential of the country. To attract FDI it is extremely essential to maintain political stability and keep law and order under control but our committed stance against terrorism, poor law & order situation in Karachi and rest of the country is creating doubts in the minds of foreign investors. Appropriate macroeconomic policies ought to be pursued. There should be price stability in the country. We must have a rational exchange rate regime that does not discourage export initiatives.

RATIONAL APPROACH TO INCREASE VOLUMES OF EXPORTS

For sustaining and enhancing Pakistan’s export competitiveness in the global markets, a strong public-private sector partnership is the key to success. It is suggested that labor productivity should be increased through education, on-the-job training, skill up-gradation and dissemination of new knowledge and techniques. This will translate into higher value-added and low unit labor cost. Integrated measures ought to be adopted to attract foreign investors for export-oriented joint ventures in Pakistan and establish joint ventures in countries such as China.

Reliable and low cost supplies of power, water, gas and telecommunications should be assured for export industries. Long-term financing and hedging products need to be developed by the financial institutions. Measures to ensure compliance with environmental standards and labor standards agreed under international codes and agreements. Concrete measures should be initiated to diversify the export base by moving to develop engineering goods and chemicals industry. As steel and auto industry are beginning to look efficient other downstream and upstream industries should be established. Within textile sector clothing and value-added products should be expanded as the economics of conversion makes it obvious. One pound of cotton converted into finished fabric fetches $ 1.61 on the world market while the same amount of cotton converted into woven garments raises the earnings to $ 4.17.

CONCLUSION

The trade policy 2004-05 provides huge opportunities for exporters to enhance the volumes of exports but it also poses some potential worries for our exports-oriented industries, which has to be tackled. Nothing is achieved/existed in empted space. In order to achieve targets of trade policy of 2004-05 we have to stream line our politics, economics, judicial traditions, and multi and bilateral relationships with other countries.