World Bank advises boosting exports instead of curbing imports

ISLAMABAD: Pakistan’s exports are slow to respond to depreciation in real effective exchange rate (REER) mainly because of supply-side constraints, but fall rapidly when it appreciates, a World Bank report revealed on Thursday.

The WB in its report titled “Pakistan Development Update: Reviving Exports” also advised the country to focus more on increasing exports instead of discouraging imports.

According to the report, Ministry of Finance has announced increases in regulatory duties on “non-essential, luxury” imports. Yet, these measures are unlikely to curb the deficit for three reasons. First, the share of imports of non-essential or luxury goods is too small to have an impact. Second, these items are already facing very high import duties and further increases will not curb their consumption substantially, as demand is relatively inelastic. Third, the import content of domestically produced substitutes is high and therefore any substitution away from imported and into domestic luxury goods will likely lead to an increase in imports of parts and components to produce the domestic versions. Thus, instead of achieving the intended goal, these measures exacerbate the already pronounced anti-export bias of Pakistan’s trade policy and add uncertainty by increasing the likelihood of sudden policy changes that affect firms’ cost structures, the report says.

It further said that setting aside the marked anti-export bias of the tariff policy, or incentives that did not favour growth or diversification, REER changes could play a role in the evolution of export competitiveness.

In the long run, Pakistan’s exports are sensitive to the REER in the expected direction as one percent depreciation of the REER is associated with a 0.5 percent increase in exports, all else equal.

It is relevant to mention here that it is generally believed the depreciation of the exchange rate resulted in boosting up exports but in Pakistan, it did not happen as the exchange rate nosedived from 2018 to 2021 but there was no reciprocal increase in the exports.

However, the bank says the speed at which exports respond to REER movements is asymmetric as exports fall faster after a one percent appreciation than they increase after one percent depreciation.

Results from recent research focusing on Pakistan ascribe the narrowing of this to two factors related to complementary services to exporting, which are credit and access to market intelligence.

Underlying Pakistan’s persistent and large trade deficit are the export competitiveness challenges that the country faces. Exports have been growing slowly since the beginning of the century. As a result, the economy has become more inward-oriented, as the share of exports in GDP declined from 16 percent in 1999 to 10 percent in 2020. This inward focus has had implications for the country’s foreign exchange, employment, and productivity growth.

With some exceptions on the services front, the stagnant export competitiveness over the years shows in the lack of diversification into higher value-added activities. Firm-level analysis hints at substantial barriers for firms to enter exporting, and to scale up once they have entered.

The causes of Pakistan’s export challenge are manifold. However, three factors can be identified as crucial. First, the marked anti-export bias of tariff policy in the form of the world’s highest levels of effective protection to domestic industries that makes exporting only a residual option —that is, the protection granted with the objective of substituting imports has substituted exports instead; second, the inadequate support services for exporters, particularly long-term finance (key for plant expansions) and market intelligence provision (key to lowering the information costs of exporting). Third is the structurally low productivity of Pakistani firms. To make export revival a priority, a policy reform agenda needs to be designed and implemented in a coordinated manner by federal and provincial authorities, along with the broadest support from civil society.

The export market share of Pakistani firms has declined since 2000 – particularly over the last decade. In 2000, $13 out of every $10,000 worth of goods and services exported worldwide originated in Pakistan. This has fallen to only $11 in 2020. In contrast, Vietnam increased its export market share from $21 to $127 over the same period.

The decline in Pakistan’s export market shares is generalised across sectors. Pakistan’s share in the global market for hides and skins, for example, shrank from 1.5 percent in the early 2000s to 0.8 percent in 2020. The share of Pakistan’s flagship export sector, textile and apparel, shrank from 2.3 percent to 1.8 percent over the same period. The services sector also showed stagnation, with only modern services (that include exports of computer and professional services), which have shown dynamism. Overall, Pakistan’s presence in global markets shrank since the turn of the century, while global trade almost tripled.

The quality of Pakistan’s export products is another indicator of export competitiveness. If exporters specialise in high-quality segments of the market, they create more value-added and better-paid jobs. However, the prices fetched by Pakistan’s exporters, for narrowly defined products in the textile and apparel sector, are lower than that of competitors.