In the last article, we discussed what Pakistan import and why it needs such huge volume of imported products. In this article we will discuss how we can reduce its imports and boost the exports to solve the crisis of payment and trade deficit. In last few years, imports has ballooned to $55 billion while exports stagnant around $24 billion.
The economic slowdown, rising dollar and lower demand decrease the imports. This issue will come back when the economy started to grow at fast pace. The government has got this temporary relief due to the adverse economic conditions in the country. The issue of trade gap and ballooning imports will come back unless addressed and resolved properly.
Pakistan needs short term and long term policies to address this issue. In the short term, the control on imports will help to reduce trade deficit. That is what PTI government is trying to do. But what is lacking is the long term policy to boost exports to increase productive capacity.
A bird’s eye view of Pakistan’s industrial landscape – dotted with textile and grain mills; steel and cement plants; oil refineries and power plants – reveals that the demand for imported machinery and equipment encompasses all sectors as in the current technological environment, Pakistan does not have the domestic capacity or capability to meet this demand.
Oil is the main import of Pakistan. Never before in the country’s history have imports been over two-and-a-half times of exports as they are now. This unprecedented trade deficit has occurred despite the prevalence of relatively low international prices of our biggest import, oil.
To reduce the oil import it is necessary to convert the transport on electric mode. The electric cars, rickshaws, loaders and public transport could significantly reduce the consumption of oil. The oil is also used to produce electricity. If the other energy means used to produce electricity then oil consumption could be reduced. It can be done within few years. But it needs concrete policy to convert the transport and power plants.
Pakistan needs to develop a strategy to build its own heavy industry. Pakistan needs to get modern technology to manufacture motors, engines and heavy machines to reduce the import of machinery. This will help to meet the needs of domestic industry.
To reduce the import of food and dairy products, Pakistan needs to develop modern dairy industry. It will not only reduce imports but also can increase exports. Industrialisation is the only way forward to create jobs and to boost exports. Production capacity needs to be increased.
Policymakers need a paradigmatic shift away from short-term, tactical solutions such as exchange-rate manipulation, subsidies and taxation structures that inhibit growth and create barriers to entry. A holistic approach to economic development – built on sound monetary and fiscal policy, developing infrastructure and investing in education and modern industries to realise the potential of one of its greatest assets: its people – is a critical and immediate need.
Explaining the rapid growth in imports in 2016-17, the government has stated that this is largely due to the upsurge in machinery imports, especially for projects related to the China-Pakistan Economic Corridor (CPEC).
This is only partially true. Up to April, the rise in the CPEC linked imports accounted for 38 per cent of the total increase in imports. Other major contributors to the increase are food, petroleum, automobiles and other intermediate goods.
The government needs to appreciate that the burgeoning imports are not due to extraordinary growth of the economy, which continues to show a moderate growth rate of 4-5 per cent. The principal factor is the relative cheapness of imports due to our currency being overvalued by over 20 per cent.
The PTI government has devalued the Pak Rupee by almost 32% in one year. This measure has made the imports expensive and so the demand of some items has fallen. This step has helped to bring down the imports. But it is short term solution.
Consequently, many import-substituting industries within Pakistan have been unable to compete and the volume of major imports has gone up by anywhere between 18 and 56 per cent for different items. Such big increases are unprecedented for many imports.
Exports are the back bone of any economy. Where domestic consumption is low, the primary mode of enhancing the growth rate of a country is through its exports. Exports help earn valuable foreign exchange, which is quite important for a country like Pakistan, which has to pay its oil and defense purchase bills through foreign exchange.
The exports of almost all the countries in South Asia are on the rise. Unfortunately with Pakistan, the case is opposite. In the fiscal year 2015-16, Pakistan’s exports witnessed a 12pc decrease from US$23.6 billion to US$20.8 billion. This is an awkward and embarrassing situation for Pakistan given the fact that we had been awarded the GSP Plus status by the European Union to help boost our exports.
One of the primary ways of enhancing exports is to support entrepreneurship and to create new avenues for growth by guiding the youth. Entrepreneurship creates a virtuous cycle of prosperity as the people not only get employed themselves and create value for the society and the economy but they also promote employment opportunities.
The second way out of the problem is to diversify our current export base. Our current export base is mostly limited to basic commodities which include textiles, leather, cotton and other basics grains, fruits, etc. We should make a transition from these exports to more value added items in the global value supply chain computer chips, integrated circuits, semiconductors, parts used in mobile and laptop manufacturing and other high tech items. It will have two benefits. First is the transfer of technology, which is in itself a barrier in Pakistan for enhancing exports. Second is the encouragement of local entrepreneurs to build these high tech devices themselves as well.
A woman in China realised the potential of the protective glass cover which has to be used with every smart phone. She started manufacturing it and now Zhou Qunfei is worth $7 billion. Similarly, there are many parts associated with a smart phone or other tech products. If even only one or two start getting manufactured here, it would bring a revolution in Pakistan’s exports. Transition to high tech equipment will also require industry academia linkages to be developed, which are currently non-existent in our country and the establishment of high tech educational infrastructure in the country in collaboration with the foreign universities.
The third way is to enhance the export of value added items within the existing portfolio of exports. Value addition has two key benefits. One is that we are able to fetch a higher price and a better profit for them. Second is that we can build a brand in value added products which creates trust for the product and trust again means higher profits. Instead of exporting simple cotton and yarn, we should try to manufacture and export more garments, towels, bed sheets and hosiery items. Bangladesh, which imports cotton from other countries, is now the fifth largest textile exporter in the world owing to its value added textile exports.
In Pakistan, data shows that the export of cotton yarn has been down by 32pc but the export of readymade garments has improved by around 4.2pc in the current fiscal year, which tells us about the importance of value addition. Similarly, in the meat and dairy sector we can export frozen meat products, powdered milk, cheese and other value added creative products instead of exporting raw products. For example, a frozen meat company in Pakistan recently launched a burger patty in which there was a cheese filling in the center which was indeed a creative idea. Likewise, a steel company in Islamabad, instead of manufacturing simple steel bars, manufactures ball bearings and other steel parts for different automotive companies in the world and gets a much healthier profit compared to traditional steel mills.
The fourth point is to focus on the services sector along with manufacturing. The services sector is now contributing nearly 35% of Pakistan’s GDP and 25% to the cumulative global trade. Services sector includes the global outsourcing industry, IT, telecom and the tourism sector. Philippines, which is a country half the population than Pakistan has roughly US$25 billion of exports in the global outsourcing industry, only second to India. Similarly, Dubai earned US$36.4 of foreign exchange through tourism in 2015.
Pakistan’s work force is also skilled and it can become a major player in the global outsourcing industry if given proper attention by the government. Pakistan also has got a lot of potential in tourism for the adventure seekers and history lovers. We have got some breath taking scenery, palatable food, and a wonderful cultural history for the global tourists. If we can develop Gwadar in a proper way and make sure the security of the beaches, then we can also show them some of the best beaches in the world.
The fifth way is support by the government. Our government takes a more liberal view for export promotion offering only the government backed loans like the youth loan scheme or offering just the policy incentives for export promotion. It should take a holistic view of the situation and should adopt a rather activist and Keynesian approach towards export promotion. The government should make a multipronged strategy towards the promotion of exports.
The first prong should be the immediate supply of cheap energy to the industry. The second prong should be to build foreign partnerships with technical universities and to build industry academia linkages to build innovative and high tech R&D based products. The third prong should be to not only give the loans to the youth but to inform, train and educate the youth about the new avenues and possibilities of exports. The industry based veteran mentors should be placed in the board of directors of those firms who are taking the loans from the youth loan scheme.
The real solution lies in boosting exports and in-turn boosting manufacturing, job creation and a more equitable wealth distribution. Exports, as we know, thrive on creating productivity through increased rewards to the low –tier work force, thereby creating upward mobility in a society.
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13 November, 2019