Pakistan’s New Trade Policy: A Step in the Right Direction?

At a time when Pakistan’s phenomenal economic growth of the past few years under the Musharraf regime has hit a severe road block, the country’s Trade Minister Ahmed Mukhtar, who also holds the defence portfolio, announced a new trade policy on July 18, 2008. The announcement of the new trade policy has been governed by the state of Pakistan’s economy, which has been on a downward spiral since February. The trade policy states that GDP growth has come down to 5.8 per cent, while the State Bank of Pakistan estimates fiscal deficit to have touched 8.3 per cent and current account deficit 8.4 per cent of GDP. Debt-to-GDP ratio has started rising again after having declined consistently for the past few years. Rising global prices of oil, metal and food have caused severe macroeconomic imbalances in the economy, contributing to severe inflationary pressure on the economy. The new trade policy hopes to encourage investment and trade in Pakistan with the purported aim of bringing the economy, especially the bourgeoning fiscal deficit, under control. Enhancing productivity is the main focus of the new trade policy.

At this juncture, Pakistan’s exportable surplus in the agriculture sector has been reducing on account of a bourgeoning population and declining production of major crops. Major crops have declined by three per cent and forestry by eight per cent during 2007-08. The production of wheat, which is the staple diet of most people in Pakistan, has come down 6.6 per cent from last year and has resulted in severe shortages of Atta (Flour). The consequent ban on inter-provincial movement of wheat has exacerbated inter-provincial tensions and has caused severe strains on the federation. The production of cotton, which is the main commercial crop of Pakistan, has also come down 9.3 per cent from last year’s production of 12.9 million bales. Rice production is down three per cent from last year. The situation is unlikely to improve in future as the irrigated cultivable area cannot be increased, given that water available for irrigation has been reducing consistently due to silting in dams and leakages from canals, while the construction of new major dams is still mired in political controversies.

On the industrial front, the situation is equally bad; acute power shortage has hit industrial production very badly. Peak power shortage has touched 4500 MW, resulting in almost eight hours of load shedding. On top of this, Hub power company, which is currently producing 1200 MW electricity, and Uch Power plant, which produces 586 MW of electricity, have threatened to switch off the plants if their dues – Rs. 60 billion and Rs. 6 billion respectively, are not paid. Besides power shortages, the international economic environment has also impacted on industrial production and large scale manufacturing has been coming down for the last four years. The textile industry, which comprises almost half of all manufacturing in Pakistan, employs approximately 38 per cent of the country’s entire labour force and contributes over 57 per cent to total exports, is in a mess, as its cost of production has been rising consistently. Fuel prices have been raised seven times since February and cotton prices have also risen due to lower production of cotton. The export of textiles has come down by 2.5 per cent as compared to the last financial year.

There has also been a slowing down of the US economy, which accounted for more than a quarter of Pakistani exports during 2006-07. As a result, the options available to Pakistani policy makers for rectifying the increasing trade deficit are limited. The new trade policy highlights these dilemmas¬¬¬ – textiles, leather, rice and sports goods comprise over seventy per cent of Pakistan’s exports; and the United States, Germany, Japan, the United Kingdom, Hong Kong, Dubai and Saudi Arabia receive over half of Pakistani exports. Similarly, Pakistan is virtually absent in 81 per cent of products traded in the world. The trade policy therefore aims at diversification of products for export as well as destinations for export. It specifically aims to target Latin America, Africa and East Europe.

While exports during 2007-08 grew by over 13 per cent, imports sky rocketed by over 30 per cent to around $40 billion resulting in a huge trade deficit of $20.7 billion. The huge rise in imports has been attributed to the high oil import bill, which rose significantly from $7.3 billion to $11.3 billion, the import of wheat at higher prices, increase in palm oil prices, raw cotton imports due to reduced domestic production, increased import of machinery mainly those used for power generation and import of chemicals and fertilizers. As the import target for 2008-09 has been pegged at $30 billion and given that most of these factors are inelastic, the export strategy for the next year is aimed at poverty alleviation, value addition, quality enhancement and improving competitiveness.

Though a number of steps have been proposed to attain these objectives, the most significant thrust has been to open up imports from India, so as to reduce the costs of imports and enhance international competitiveness. It proposes steps to facilitate cross-border trade with India, which is going to be the cheapest option on account of lower transport costs and allows import of 136 new items from India, thereby increasing the list of tradable items with India to 1,938. Of these, 72 tariff lines include raw materials, chemicals and industrial inputs for industries. Of the remaining 64 items, 9 tariff lines are for pharmaceutical products, 2 for fruits and vegetables, 19 for fertilisers, 32 for machinery and parts, and 2 for fuel oil and diesel. Besides raw material for industries and essential food stuff to reduce prices, the import of diesel and fuel oil is most significant and has been allowed to take advantage of cheaper transportation costs. It has the potential to become the most significant component of bilateral trade. According to The Dawn, last year the total import of these 136 tariff lines stood at $2.8 billion of which $2.2 billion was only on import of POL and diesel. The policy also specifically allows import of CNG buses from India and from any Indian manufacturer who commits to set up such a facility in Pakistan. This would probably be the first ever open invitation to an Indian firm to set up manufacturing facilities in Pakistan and needs to be responded to favourably. The policy also states that Pakistan will participate in renegotiating the list of SAFTA and the Regional Agreement on Trade in services among the SAARC countries. According to The Dawn, if the new policy were to be implemented, trade with India could triple from the existing level of $1 billion to $3 billion and make India the second largest trading partner of Pakistan after China.

The trade policy analyses the limitations of Pakistan’s trade basket and has initiated bold steps to normalise trade with India. These would enable Pakistan to import cheaper raw materials from India, so as to make its own exports much more competitive. But like every other thing that is associated with India, it has been criticised by the opposition groups in Pakistan. PML(Q), which headed the previous government and is close to President Musharraf, as well as Jamat-i-Islami have criticised the new trade policy. PML(Q) has dubbed the policy as ‘India centric’ and an attempt to accord India MFN status through covert means. It has claimed that Indian goods will flood the Pakistani market and has accused the government of planning to sell the Thar coal reserves to Indian industrialists.

However, despite these provocative allegations, they have failed to draw in public support. This clearly indicates that the common man in Pakistan realises that trade with India will reduce the cost of his daily requirements considerably. The new trade policy appears to indicate Pakistan’s renewed, albeit delayed, commitment to meeting its obligations under SAFTA and is a step in the right direction.