FeaturedNationalVOLUME 17 ISSUE # 16

Pakistan’s limited economic openness

Pakistan’s exports are steadily increasing and the government has announced fresh incentives for industrial growth in the country. As Pakistan aims to bolster up its economy, it will have to diversify its exports and look for new markets, besides improving its trade relations with regional countries.

Pakistan eyes $31 billion exports in the current fiscal year as its earnings from exports of goods saw the fastest-ever growth on a monthly basis in February, at $2.808. According to the commerce ministry, Pakistan’s exports increased at the rate of $100 million/day, the fastest for any month in the country’s history. Exports surged by 26pc in the first eight months of the current fiscal year and stood at $20.5 billion against $16.3 billion in the same period of the previous year. The textile exports also reached new heights after they reached Rs1.55 billion in January.

In fact, Pakistan’s annual exports could reach over $100b if it increases its trade openness. According to the Asian Development Bank, Pakistan has one of the lowest trade-to-GDP ratios in the world showing at just 30 per cent. In its recent report, it also noted that Pakistan’s trade is currently oriented to the United States, Europe, and China only. “It specialises in textiles, though some of its agricultural products are sold to the Middle East. Interestingly, it does not have a significant trading relationship with its proximate neighbours in South Asia. The only economy for which it is a major market is its northern neighbour Afghanistan. While the vast majority of its export products fall under the textiles grouping, formal measures of export concentration suggest that Pakistan’s exports basket is relatively more diversified, especially compared with other major textile exporters like Bangladesh and Cambodia. However, its exports are less diversified than India,” it observed.

The ADB report, which used statistics from 2019, says Pakistan is only more open than Ethiopia, Brazil and Sudan among 166 countries and economies with available data. However, it said the country has a lot of room for improvement. It suggests that a viable strategy that Pakistan can adopt to boost its growth is to further open its economy to trade. Advancing its argument, it said studies have affirmed numerous benefits to economic openness, including opportunities for specialisation, access to wider markets, the inflow of know-how, and the formalisation of the economy. Pakistan is a relatively large country, however, its trade openness remains remarkably low. Citing examples, it says, countries that have GDPs comparable to that of Pakistan but with much higher trade-to-GDP include the Philippines, the Netherlands, and Viet Nam. India’s GDP is almost 10 times larger than Pakistan’s, yet trade plays a greater role in its economy. What it does export is dominated by textile products and rice, though a formal measure of concentration suggests that its exports basket is on the whole quite diversified.

The dominance of textile products in Pakistan’s exports raises the issue of diversification — or potentially the lack of it. Concentrating too much on only a few sectors or products poses risks to an economy since shocks to the dominant sector can more easily cause an economy-wide recession. Pakistan can adapt to boost its growth to further open its economy to trade. Benefits to economic openness include opportunities for specialisation, access to wider markets, and the inflow of investments, technology, and know-how. There is also evidence that trade promotes the reallocation of labour from the informal to the formal sector.

In its earlier report, the ADB noted that Pakistan had the potential of becoming a hub of economic activity for Central, South and West Asian countries if it follows the model of economic corridor development. The ADB study examined how Pakistan could address economic challenges. “Through market reforms, Pakistan needs to transform its economy into an export-led growth trajectory. In addition to improving the economy’s competitiveness and productivity with a vibrant private sector, it is critical to attracting domestic and foreign investments to support the transformation,” it said.

Recently, the government announced a new package for industrial promotion, revival of sick units and foreign investment. A general amnesty is given to all persons who declare assets by paying a general tax rate of five per cent by investment in new industries. There will be complete immunity from a probe on the amount of investment in new industrial units and expansion and modernisation of existing units. The minimum investment threshold for availing the amnesty is Rs50 million and an industrial unit is to be set up as a company. It will be binding on new industrial units to start commercial production by June 30, 2024. Beneficiaries of amnesty schemes of 2018 and 2019 are not eligible to avail the facility. Moreover, bank loan defaulters in the last three years are also not eligible. Any proceeds of crime, corruption, money laundering and terror financing will not be eligible. Similarly, any amount which is subject to any departmental or court proceedings is also not eligible. The sectors which will not be eligible to avail the amnesty scheme are arms and ammunition, explosives, sugar, cigarettes, aerated beverages, flour mills, vegetable ghee and cooking oil manufacturing excluding extraction units.

Though Pakistan has expedited its efforts to increase trade with other countries, including Russia, yet its business dealings with regional countries have been on the decline. According to the Pakistan Statistics Bureau, Pakistan’s exports to Iran and China have plunged by 22pc during the first eight months of the current fiscal year. The World Bank estimates that trade between India and Pakistan could easily reach $37 billion. Recently, Adviser to the Prime Minister on Commerce Abdul Razak Dawood said that trade with India was the need of the hour and beneficial to both countries. However, it is a sensitive issue and the two countries will have to make serious efforts to settle their disputes in the larger interest of their people.