Kudos to domestic demand that is cheerleading GDP growth! But delight turns to dismay when it comes to exports, the leading non-debt dollar inflow for the country’s forex. Exports, which have shown some temporary spike this fiscal, now matter little in Pakistan’s GDP expansion, but too little of them can halt the joyride. Exports cut a sorry figure since the decade turned: from $24.6 billion in FY11, goods’ exports receipts declined to $21.3 billion in FY17.
That’s a nominal CAGR decline of 2.3 percent per annum, but an even bigger drop when measured in real terms. Credit goes to the double whammy of expensive and inadequate power supplies and precarious security situation keeping exports in check earlier this decade. But those issues have been largely under control lately; so it is time to focus on what fundamentally ails Pakistan’s export competitiveness.
Towards that end, two themes consistently come up in stakeholder interactions. One is the over reliance on import tariffs as a revenue-maximization tool, instead of using tariffs as a trade-policy instrument. And the other is regional trade partnerships. The column will take up import tariffs today.
As per the Commerce Ministry, customs revenues accounted for 13 percent of Pakistan’s tax revenues in FY17, which is way more than what is collected by other regional economies – such as Malaysia (1.6%), Turkey (2%), Indonesia (2.5%), Thailand (4.3%) and China (4.6%).
What is lacking is sustained political will to reform the tax system such that wealthy individuals and companies pay their fair share of taxes. Right now, imported goods share the burden of duties after duties. But this renders exports uncompetitive, as a lot of value-added exports depend on imported raw materials, intermediate goods and machinery. But when tax revenue is the immediate concern, it is no wonder that FBR, instead of Commerce Ministry, comes to the driving seat when it comes to import tariffs.
Last decade and a half has seen tariff liberalization happen across the developing world. But reverse is now the case in Pakistan, thanks to imposition of new custom duties, regulatory duties and tariff increments every year. As per the Commerce Ministry, Pakistan’s effective import tariffs went up by 11 percent in the last decade, compared to Vietnam and Bangladesh which reduced their import tariffs by 72 percent and 51 percent, respectively, and presided over high levels of export growth.
A correlation between import tariffs and export growth exists in Pakistan’s case, too. As per the Commerce Ministry, between FY01 and FY11, Pakistan’s applied weighted mean tariff was reduced from 18.91 percent to 8.92 percent, which helped exports expand nearly three times. Between FY12 and FY17, the applied tariff was gradually increased to 9.99 percent, causing a double-digit fall in exports.
Proponents of high import tariffs argue that tariff liberalization will lead to cheaper imports, which will harm local industry.
However, several independent economists dispute that assertion, citing the fact that decades of protection to sectors – such as automobiles – still haven’t been able to break out internationally. Besides, the idea is to drastically lower tariffs on imports of raw materials and intermediate goods for the purpose of exports, and not to create an anti-export bias.
For its part, the Commerce Ministry has issued a draft National Tariff Policy to simplify and liberalize the tariff structure over a period of five years starting FY19. Critics argue that it is too little, too late, and that the ministry is still not in the driving seat when it comes to tariff rationalization. Still, the policy drift is right, and it is up to the next government to see to it that the NTP’s policy recommendations are reviewed and implemented to reduce tariff distortions and help promote export-oriented industries.
