Incentives for exporters


Editorial

The federal minister for finance, Ishaq Dar, while speaking to a delegation comprising representatives from the private sector, including the President of Federation of Pakistan Chambers of Commerce and Industry, President Saarc Chamber of Commerce, as well as, Chief Executive of Trade Development Authority of Pakistan reiterated the government’s intent to offer a package of incentives to exporters. This is considered critical to reversing the declining trend in exports witnessed during the last two years.

There are external as well as internal policy-related factors that account for a decline in exports during the past two years. The external factor that has reduced our commodity exports in particular is the decline in the international price of commodities which in addition to our rising input costs, has made our exports uncompetitive both in the regional as well as in the international context. But critics of the government zero in on the rise in input costs over and above the regional average as the factor most responsible for a decline in exports – a factor that accounts for a decline of not only commodities but also of value-added products. Energy prices, a major input for most outputs, have been rising steadily together with sustained high periods of loadshedding that has disabled exporters from being able to compete internationally or meet the orders on time. A foreign buyer, once lost to a competitor, is difficult to attract again, exporters have been informing the government time and again.

There are, however, some policy decisions taken by the Finance Ministry that have directly contributed to a decline in exports and perhaps the most significant of these is the decision to sustain a low nominal (as opposed to real effective) exchange rate given the implications of a more realistic value on our ever rising external debt – a debt which has been rising based on the Finance Minister’s policy to retire the more expensive domestic debt (at 12 percent) in favour of the cheaper foreign debt (around 5 to 6 percent). A statement in the fourth and fifth mandated quarterly review of the International Monetary Fund under the 6.64 billion dollar Extended Fund Facility (December 2014) noted the “depreciation of the rupee by 4 percent over the past quarter, the real effective exchange rate has appreciated 6 percent since the start of the programme.”

Secondly, the government has begun to rely heavily on borrowing from the commercial sector, abandoning its earlier heavy reliance on borrowing from the central bank as a condition of the EFF, which has effectively crowded out private sector borrowing – yet another reason behind export decline. The government has relied on lowering the base interest rate as an incentive for encouraging private sector borrowing. It has, however, failed to tackle its own rising borrowing levels that has led to banks increasingly relying on buying government paper to generate profits, thereby reducing private economic activity in the country. Furthermore, the imposition of withholding tax on all bank transactions has led to a drop in bank deposits and a massive increase in currency in circulation since 30th June 2015. Noted economist, Dr Hafiz Pasha, maintains that the banks should not be in the business of determining who is a filer or non-filer as that job must rest with the Federal Board of Revenue. Thirdly, the delay in processing refund claims of exporters, not unique to this government, is creating severe liquidity problems for the exporters cited as yet another reason for a decline in exports. And finally, there is a serious policy flaw with respect to our largest export earner namely textiles. Unlike in our regional competitors, including China and India, our textile policy does not reflect a significant preference to value-added products over and above lower value-added products and this requires an urgent revisit.

Exporters during the recent meeting with the Prime Minister requested some additional incentives including zero rating, withdrawal of Gas Infrastructure Development Cess and, not to raise the gas charges. The response of the government to these demands would be known once the incentives package is announced. However, the petroleum minister did offer that if the owners of captive power plants were willing to surrendering their quota of gas, the government would be willing to supply electricity round the clock at 9 cents per unit. This offer reportedly has been turned down by APTMA.

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