C ontinued...

Not only will the government need to revisit the above to see where changes are needed to rekindle interest in exports, but to also restore the entrepreneur’s confidence – the current mistrust between the businesses and governmental institutions is by all accounts since the 70s nationalization. Further, a more precise cum direct strategy will have to be evolved that clearly identifies the strong areas and then backs them with direct support in capacity building and attaining regional competitiveness. As an example, the Ready Made Garments (RMG) category seems a potential future winner, because whereas, quite a number of categories lost volumes despite the 32% devaluation, RMG instead posted a robust gain of around 15%. Similarly, in today’s Data rich world we can easily determine via IT which categories to support, where to focus on skill development, how and where to tweak existing FTAs, precisely what new products to launch, what specific subsidy is required and where, what kind of guidance to give our exporters to achieve optimum price points, and which markets to target. 

Finally, if the government is still serious about arresting the present economic decline, it needs to, a) Stop experimenting with new taxation ideas on the exporting industries and b) Going forward, defend its currency and not allow the Rupee to sink further. On the first, the new FBR Chairman must be a very clever and pragmatic person, but the fact remains that his contradictory remarks are now beginning to make stakeholders very nervous. This greater public fear being generated is not just limited to his imminent intrusion into businesses through setting over ambitious revenue targets, but goes far beyond this to all sorts of other additional proposals that seem to be doing the rounds on the government’s behest. Like, for example, abolishing of the present zero-rating facility on the 5 principal export sectors of the country; subjecting the ‘expenses’ entries to scrutiny, currently exempt under section 115(4) that allows the exporters a full and settlement of their tax liabilities by deduction at source and once the zero-rating is finished, going on to impose, as high as, 17% GST on the exports’ sectors. Needless to say that these concerns should be quickly and properly addressed, because such levies will not achieve much for the national exchequer, but result in tying up scarce liquidity of the exporters and increase their costs, thereby making our exports uncompetitive - e.g. 70-75% of the production in textiles is meant for export and only around 25% gets consumed locally. The trouble is that for anyone who has little or no practical understanding or the sensitivities of the Pakistani economy, it is difficult to understand that it has a peculiar way of working. Over the last 40 or 50 odd years in many ways the informal and formal sectors have become intertwined where they complement each other by cutting corners cum costs at different stages of the manufacturing chain and today a large portion of our export competitiveness is driven by the low cost structures of the undocumented sector – For example, the ready made garmenting sector, which by the government’s own admission is our fastest growing (by nearly 29%) export sector, would suffer immensely if suddenly its entire supply chain was to put under a sales tax regime. Now one is not against documenting the economy, but only saying that key supply chain structures cannot and should not be changed overnight. Any brash cum knee–jerk actions like suddenly abolishing the zero–rating of the 5 main exporting sectors of economy or burdening the home manufacturing disproportionate to regional realities, runs the risk of dismantling the entire economic system of the country and with it whatever little manufacturing based exports that we have at the moment.

On the second point, there exists no empirical evidence (or data) to establish a real correlation between devaluation and sustainable growth in a country’s exports. The stories of successful exporting countries climbing the value added chain over the last decade come out as being no different. In fact the WTO study on value addition (2008) points to a stable currency environment as one of the main pre-requisites to a sustainable value-addition drive in an economy. All we need to do is to learn from the global economic history on merits and de-merits of high currency devaluations and implications of a falling currency on sustainable exports, investment (both domestic & FDI), real growth, value addition, debt trap, inequality and most of all, on poverty. 

Already, there is a wave of inflation in the economy, threatening to enter double digits by as early as April 2019, net disposable income has significantly declined, and with Central Bank’s interest rate @ 10.25% (threatening to rise further), the real effective borrowing rate for the SME (small and medium sized enterprises) sector is touching around 17 to 18 percent – this in no way can be good for business. No need to reinvent the wheel, closer to home, the new Asian tigers like, China and Bangladesh have likewise managed a surge in their exports during a stable currency period and not through any abrupt devaluation measures. And by the way, the new emerging champion around the block is likely to be Myanmar – A country many economic pundits had simply written off till only a few years back; and its recipe: The Bangladeshi and the Taiwanese exporting models!