ISLAMABAD - Pakistan has heavily relied on export subsidies to prop up industries and increase exports, but at the cost of competitiveness. The International Monetary Fund has asked the authorities to remove these ‘unstainable’ subsidies as part of its new conditionalities for Pakistan to be able to put the stalled loan programme back on track. In this respect, the likely removal of such subsidies is seen by many as a means of increasing competitiveness and productivity.
Dr Omer Siddique, a senior research economist at the Pakistan Institute of Development Economics (PIDE), told WealthPK that the elimination of export subsidies would help make industries more resource-efficient. “The move will help create a level playing field for all industries, which will foster competition within the domestic market.” He said though the subsidy elimination might present short-term challenges, industries must find ways to improve product quality, develop a comprehensive export marketing strategy, and enhance their technical knowledge in order to succeed in the global market. According to him, subsidies are provided to specific industries and not the whole sector. “Ending government subsidies will have a significant impact on the economy, both in terms of increasing competitiveness and improving fiscal stability.”
The PIDE researcher pointed out that a number of key sectors, including textile, leather and tanneries, sports products, food processing, logistics, automobiles, fertiliser, and engineering were heavily reliant on government subsidies, which was stifling private sector growth and discouraging innovation. He said by removing these subsidies, industries would be forced to find new innovative ways to remain competitive, thus leading to a more productive overall economy. “Reduced spending on subsidies can be redirected to address more pressing needs, such as infrastructure and social services.” Omer Siddique emphasised that in the absence of subsidies, industries must continuously improve their efficiency in order to thrive in the face of increased competition. “By doing so, they will not only benefit themselves but also contribute to the overall growth of the economy,” he added.
In order to support the growth and competitiveness of the five export-oriented industries of textile, leather, carpet, surgical, and sports goods, the government has allocated a substantial subsidy of Rs100 billion in electricity tariff, fixing the price at Rs19.99 per unit for the current fiscal year 2022-23. Muhammad Zeeshan, another research fellow at PIDE, told WealthPK that elimination of export subsidies was a crucial step in boosting competitiveness in international trade.
He added that with the elimination of these subsidies, firms would be forced to become more self-sufficient and adopt new strategies for success, resulting in a more dynamic and resilient private sector. Moreover, he said the elimination of high import tariffs would provide more affordable access to intermediate and final consumption items, both for firms and consumers. He said that the government implemented its import policy through the self-regulatory organisation (SRO), but stressed that an import policy implemented through a tariff code was more effective.
According to Muhammad Zeeshan, higher import tariffs hinder competitiveness in exports and lead to the need for government subsidies to key industries such as textiles and agriculture. He explained that in order to address this, a tariff rationalisation policy needed to be put in place with two primary objectives: to achieve domestic sustainability, reduce reliance on expensive imported raw materials and consumer goods, and to decrease the need for large foreign exchange reserves for imported items. He said the import substitution policy in Pakistan had not been successful in reducing the use of imported intermediate inputs, which had increased in the agriculture, manufacturing, and services sectors over the last two decades. The PIDE researcher said domestic industries should be encouraged to focus on research and development, enabling them to meet both domestic and export demands, while also diversifying their products and markets abroad.