National tariff policy
The Vision 2025 prepared by PMLN in its early days of the tenure had set a target of exports of $150 billion by 2025. However, the number has in essence declined from $24.8 billion (10.7% of GDP) in FY13 to $22.0 billion (7.2% of GDP) in FY17.
The target was nothing but a wish of a toddler with no attention of elders. There is a clear case of creating anti export bias in many of the domestic industries and the problem has compounded in the current regime. For example, textile tycoons are finding domestic market for apparel conducive than highly competitive export market. Their export share kept on declining while the domestic retail network growth is rampant.
Since the boom of 2000s, no serious domestic or foreign investment came in the exporting sectors. Independent power generation (IPP) has remained the most attractive avenue for big investment in the country as government guaranteed return policy lured traditional exporters to invest in the sector. The foreign investment came in banking, telecommunication, energy and FMCG sectors, all catering to domestic demand.
The investment polices has remained skewed towards attracting investment to cater domestic demand. The vision gave the elusive export target; but Planning Commission did nothing to chart down and implement policies to create conducive environment for investing in exporting industries.
The other problem of discouraging investment in exporting avenues is skewed imports tariff structure. The non existence of tariff liberalization policies resulted in premature moving of the economy to services sector. In the process, industrialization could not take place in the country to become part of the global value chain. Hence, the manufacturing industries either spurred on protection or died down to be replaced by imports.
According to SBP annual report FY17, the liberalization efforts have been slow in Pakistan as compared to other regional economies. For instance, India, Sri Lanka and Bangladesh all lowered their average tariffs during FY92-98; but Pakistan waited till FY02. That has resulted in lower investment in expansion due to higher tariffs; and if it was made, the costs were high relative to other players.
Then there was no uniformity in liberalization of tariffs as some lobbies were too strong to protect rent seeking such as textile, automobile, ceramics, cement, sugar etc. In this way, local markets were shielded from foreign competition. This has created further anti export bias by allowing firms to invest and earn higher returns from upbeat domestic demand.
The prime example is of the auto sector, where unnecessary protection has kept industry uncompetitive and desired economies of scale could not be achieved. The other case is that of the cement industry which has become competitive in Pakistan but protection of cement imports resulted in collusion in the industry to milk domestic demand. The industry is competitive which is shown by its high EBITDA margins on domestic sales and it does not make commercial sense for them to explore export avenues.
In general, the tariff structure is such that it hinders the import of final goods where the import tariffs are higher; but provides space for raw material and semi-finished products to come in the country as the protection (import tariffs) remained low. This has not only eluded industrial backward linkages; but kept Pakistan out of the global value chains.
The problems pre-dates to Vision 2025; the question is what has been done in last 3-4 years to undo the trend to make a realistic case of reaching exports anywhere close to $150 billion by 2025. In this tenure, the finance ministry has dominated the tariff policymaking where import duties and levies are enhanced as an avenue to generate tax revenues rather than bringing export competitiveness or to expand industrial base. There is a clear case of separation of interest and policymaking where planning commission and commerce ministry were kept at bay when FBR was imposing SROs solely to generate revenues.
The other example is to support cartels in sugar industry which ownership is dominated by politicians. The support price structure is incentivizing farmers to gain from sugarcane production. The cotton production dipped in the PMLN tenure to further lower textile exports while sugar production is in surplus. Since the sugar prices at home are at premium to international prices, now sugar is being exported in the last few months with the help of government subsidies.
This has resulted in some growth in exports lately. And Miftah recently said that if March, based on PBS numbers, export growth was at 24 percent and import growth was at 6 percent and the country will not need any bailout from the IMF. It is easier said than done. The one-offs exports cannot change the structural imbalances created in the last 2-3 decades which have worsened in the current regime.
However, at the tail-end of the tenure government is realizing these age old problems and are working on policies which have to be adopted by next government for implementation. The new auto policy is welcomed as entry of new players would make the market competitive.
And now commerce ministry is coming up with National Tariff Policy (NTP) seeking reduction on more than 450 tariff lines in upcoming budget FY19. The ministry has taken National Tariff Commission (NTC) on board to make it part of Strategic Trade Policy Framework (STPF) 2018-23. The idea is to shift power of imposing regulatory and custom duties from FBR to federal government.
The concept of NTP is to make exports more competitive and to facilitate local manufacturers, including SMEs, to become part of global value chains. The idea is right; and it’s never too late. It’s going to close conduit of rent seekers and put a dent on FBR revenues.
Thus, it’s a politically tough call and its success is hinged upon ownership by the next government.