NationalVOLUME 16 ISSUE # 14

Industrial sector’s revival

Pakistan’s exports crossed the $2 billion mark in four consecutive months in January, for the first time in eight years. The overall large-scale manufacturing output increased by 8.16pc during the first half of the current fiscal year, compared to the corresponding period last year. The new data supports the government claims that the economy has started recovering from the deep impact of the pandemic.

Large-scale manufacturing (LSM) grew by 11.4pc in December 2020, as compared to December 2019, according to the Pakistan Bureau of Statistics (PBS). It is expected to expand much faster in the second half of the fiscal year because industrial output had dropped massively after the onset of the pandemic, lockdown restrictions and the cancellation or deferment of export orders due to the closure of international borders. However, the data shows that LSM recovery is not broad-based, as much of the growth in production in recent months has come from sugar, steel, fertilisers, cement, cigarettes, automobiles and pharmaceuticals. The remaining industries have yet to increase their output, which is crucial to sustainable growth.

Pakistan’s exports have maintained growth and crossed the $2 billion mark in four consecutive months, for the first time in eight years. Exports for January 2021 were up by 8pc to $2.14 billion, compared to $1.98 billion in January 2020. Exports in the first seven months (July to January) of the ongoing fiscal year 2020-21, increased by 5.5pc to $ 14.245 billion as compared to $13.507 billion during Jul-Jan 2019-20. Large-scale manufacturing grew by 11.4pc in December 2020, as compared to December 2019. The overall LSM output increased by 8.16pc during the first half (July-Dec) of the current fiscal year, compared to the corresponding period last year. Industrial production during July-Dec FY21 was recorded at 143.30 points against 132.49 points last year. On a month-on-month basis, the country’s industrial output witnessed an increase of 13.51pc in December 2020 as compared to November 2020. Textiles grew by 3.54pc, food, beverages and tobacco 17.72pc, petroleum products 23.91pc, pharmaceuticals 13.82pc, chemicals 16.95pc, automobiles 43.91pc, non-metallic mineral products 17.52pc, fertilisers 11.98pc, paper and board (8.93pc) and rubber products (8.24pc). On the other hand, electronics declined by 35.59pc, leather products 40.55pc, engineering products 23.93pc and wooden products 30.20pc.

Pakistan’s rising exports are impressive in view of difficulties created by the pandemic, the regional export situation and contraction in major markets. Pakistan hopes to increase exports to address its longstanding financial issues. However, it has never been able to perform according to its potential. Pakistan can increase its exports by up to $12 billion by 2024 even after taking into account disruptions due to the pandemic, according to the International Trade Centre’s latest export potential assessment for the country. More than half of the country’s exporters struggle with domestic and foreign regulatory barriers, says Invisible Barriers to Trade — Pakistan 2020: Business Perspectives. The report, prepared in collaboration with the World Bank Group’s country office, says market frictions such as regulatory obstacles and lack of information transparency put up to $7b of the untapped export potential at risk — especially for small businesses looking to trade more across borders.

“There is great scope for the government of Pakistan to streamline processes, improve quality management and work with exporters to provide consistent, transparent and timely information,” it said. The report, based on a survey of 1,152 importers and exporters, identifies the toughest trade hurdles facing Pakistani businesses. Almost half of the hurdles are homegrown, which means the government can fix many of the problems holding back exporters. The report suggests ways for the government and the private sector to increase competitiveness by addressing issues such as export inspections, tax refunds, and certification.

It identifies the most challenging non-tariff measures that Pakistani businesses face which include: complying with technical requirements, lack of trade-related information and inadequate domestic infrastructure. Women entrepreneurs also face social constraints and a general lack of support in government agencies and other institutions. The NTM Business Survey in Pakistan finds that 49pc of small enterprises and 57pc of medium-sized firms have trouble with non-tariff measures, while 54pc of large companies consider them to be burdensome. Almost half of the challenges the firms reported stem from Pakistani rules on matters such as export inspections, tax refunds, and export certification. The invisible barriers to trade affect exporters and importers differently, and their impact varies across sectors.

It finds that regulations and the procedures to comply with them are difficult for 51pc of Pakistani exporters and 46pc of importers. Most agricultural exporters (60pc) — especially those dealing with fresh and processed foods — experience difficulties with these measures, as most countries have stringent regulations in place to protect human health and the environment. In comparison, 47pc of the Pakistani companies that export manufactured goods face problems. Conformity assessment is the top challenge with requirements like testing and product certification are a bigger concern (41pc) than rules related to quality standards, safety, and production processes (4pc).

Pakistani exporters say complying with European rules is difficult and the accompanying conformity assessment procedures are too strict. The neighbouring SAARC countries account for only 5pc of the problems that local exporters experience with foreign regulations. At the individual partner country level, the United Arab Emirates and the United Kingdom are responsible for the most reported regulations, each accounting for 8pc. German measures account for 6pc, while Oman and the United States for 5pc each.

Meanwhile, local regulations account for about 45pc of the troublesome measures that exporters face. Most of these involve export inspections (31pc), tax refunds (27pc), and export certification (10pc). Pakistani policies cause 55pc of the problems reported by exporters of manufactured goods, and one-third of agriculture. Large firms (52pc) face more problems with domestic export regulations than small and medium-sized businesses (45pc).

Exporters say the regulations are overly strict or compliance is difficult in just 12pc of the cases. In contrast, the procedures are the problem in 70pc of the cases — and most of these occur in Pakistan itself. The remaining 18pc are difficult due to both the regulation and related procedures, of which more than two-thirds occur in the country. The most important ones are slow processes on the necessary paperwork and high fees and charges to obtain required certification or testing. Informal payments and inadequate facilities for testing and certification in Pakistan were also frequently reported.

As a way forward, it identifies numerous challenges, especially regarding export-quality management and infrastructure in the country. For instance, Pakistan should increase the capacity of local laboratories to carry out required testing and certification. Efforts need to be made to strengthen the capacity of small and medium-sized enterprises to comply with international market access requirements. The absence of a proper warehouse and cold storage facilities at major borders points is a serious problem that must be fixed. Trade procedures need to be streamlined and paperwork at government and customs offices be automated to reduce the administrative burdens and costs shouldered by Pakistani exporters. Traders need a proper portal that can provide reliable export- and import-related information which should also guide on trade regulations and procedures, provide facts about relevant agencies, port authorities, and customs.

Finally, Pakistani trade regulations and processes must be streamlined to facilitate exports. A policy rethink is needed on advance payment restrictions on raw material imports and processes involving the duty drawback scheme. Export inspection processes at the customs also should be improved. The government should act upon the guidelines to improve exports.