Though the export industry performed well during the first half of the current financial, yet exports are not growing steadily as compared to developing countries.
Many developing countries are swiftly developing their exports, Pakistan still continues to struggle to accelerate the export of manufactured goods.
Pakistan is unable to expand its market share due to the country’s exports are not competitive in international markets.
Most of its regional neighbors and competitors were able to transform their export base from primary commodities to high value-added items. For example, compared to an increase of 16% point in the share of manufactured exports in Pakistan’s total exports, a similar share of regional competitors has on average increased by 43 percentage points over the past two decades. Truly, structural reforms aimed at export promotion, such as efforts for product and market diversification, focus on education and research, etc., have played a key role in making a difference in these economies.
Factors affecting Pakistan’s export growth
Pakistan should be made its exports easier by making more improvements in the following sectors for enhancing its exports.
1. Cost of Doing Business
The cost of setting up a new business and running existing facilities has gone up in Pakistan. As per the World Bank’s latest ranks, Pakistan’s current ranking of 136 out of 190 on the Ease of Doing Business Index.
Exporters in Pakistan are facing stringent competition from neighboring countries. The exporters blame Pakistan for lack of policy consistency, repressive taxation, high utility costs, cumbersome procedures, weak contract enforcement, and dispute resolution capacity. In Pakistan, high business costs are associated with higher inflation and interest rates in the recent past along with the adverse security situation in the country. Likewise, rising energy prices in Pakistan witnessed during the past ten years have also contributed to this increase in the cost of doing business.
2. Availability of Electricity
The trade activities of Pakistan are badly affected due to the current energy crisis. Frequent electricity outages structural obstacles in promoting exports from Pakistan during the last decade. When compared to peers, these outages have translated into substantial output losses for the export sector. Pakistan most industries are not self-capable of generating power and are also distressed with heavy taxes and costly energy supply with continuous disruption which results in loss of output production especially textile industry whose exports are restricted to a very low level and are shutting down or either shifting to the neighbor countries.
In the short run, Pakistan is implementing several policies such as payment of the circular debt, coal-based 600MW electricity, 10,000-acre solar park in Punjab with support of China, and importing electricity from Iran. Although government needs to take some serious steps in long run to completely end the energy crisis.
No doubt the government efforts to ensure uninterrupted electricity supply to the industrial sector have led to a modest improvement in recent years, there is still a need for improvement. Power projects under the China-Pakistan Economic Corridor (CPEC) will further help in reducing Pakistan’s energy woes in coming years and would help in restoring the country’s export competitiveness.
3. Foreign Direct Investment (FDI)
Pakistan, with a high ratio of young population, tends to have a low level of savings than overall investments in the economy. To finance this gap, the country is consistently dependent on external financial flows to avoid pressures in the external sector. FDI inflows are generally considered as one of the stable sources of external financing. Uninterrupted flows under FDI, particularly in the value-added sectors, also help in improving the export revenues through technological transfers and advancements in labor skills. With an average 0.4% of FDI-to-GDP ratio in the last five years, Pakistan is considerably lagging behind its peers/competitors for attracting FDI flows.
Furthermore, the country’s environment has not been sufficient to attract any inflow of FDI in exportable sectors. Although the presence of some sizable setups providing opportunities for economies of scale amid rising domestic demand. Leather and its products, pharmaceuticals, sports goods, transportation, dairy, and textiles are some of the sectors having the potential for attracting foreign investment to encourage the country’s exports.
4. Spending on Education and Research
In this era of globalization, those countries having skilled and educated labor forces perform better in terms of competitiveness.
during the last decade, the average public spending on education stands at 3.1 percent of GDP in South Asian countries compared to 2.3% in Pakistan. Similarly, countries like most of the East Asian economies, invested heavily in research and development. As a result, they were able to achieve high and sustainable economic growth and generated higher levels of high-value-added exportable surplus with economies of scale. However, neither the Government of Pakistan nor the private sector invested in R&D. The promotion of R&D holds significance if Pakistan has to attain export growth, especially in high-tech products.
With an average of 0.3% of GDP, research and development expenditure in Pakistan is considerably low when compared to regional and other peer group countries. Specifically, according to the latest figures, South Asian countries on average spend 0.7 percent, while low and middle-income economies spend 1.3 percent of GDP on research and development.
5. Non-Compliance of Quality Standards
The opportunities arising from increased global trade are accompanied by numerous challenges for exporters. The inability of Pakistan to participate effectively in international standardization activities poses serious problems to the trade of these countries.
In Pakistan, the infrastructure which is required for certification of conformity to standards has not yet been fully developed. The result is that importing countries often insist on post-arrival examination of the product after importation and approval of the products in the exporting country by their officials. These requirements not only add to the costs of exporters but also in some cases lead to delays and even cancellation of orders in case of non-satisfaction for products.
Pakistan has to strictly follow the technical standards under Technical Barriers to Trade (TBT) and Sanitary and Phytosanitary (SPS) standards to increase its exports to developed countries. Otherwise, Pakistan would not be able to export its products to that country. With greater competition, innovations in technology, and stricter measures of quality being enforced, Pakistan needs to take all possible measures to meet international quality standards and certifications for its exports.
6. Lack of Trade Facilitation and Infrastructure
Pakistan requires considerably more days to export an item compared to other efficient countries, due to lengthy procedures in terms of time taken and documents required. There is a need to adopt modern, simplified export procedures and best practices.
The poor condition of the road network and lack of maintenance ships or rails continues to be one of the major factors in export growth. Pakistan ranks 72 out of 132 countries in terms of road quality network. Poor roads not only cause delays but also cause wear and tear of vehicles causing an increase in transport cost. The railroad network in Pakistan is also highly inefficient and caters to only 10 percent of total cargo movement. Pakistan ranks 60 out of 132 countries in terms of quality of railroad infrastructure. The exporters in meeting with NTC have also raised this point of high cost due to the inefficiency of the rail system.
7. Tariffs on Imports
As higher tariff rates could help in reducing unnecessary imports, the tariff on imported raw materials could affect the country’s export. With the increasing significance of global value chains at different stages of production, the share of exports made up of imported inputs has also increased, and Pakistan is no exception. Estimates suggest that around 20 percent to 30 percent of imported inputs have been used at different stages of production in Pakistan. Despite such significant importance of imported inputs in production, applied tariff rates are relatively high in Pakistan when compared to its competitors. Given the import intensity of exports is rather significant in Pakistan; high tariff rates could seriously damage the country’s export competitiveness in the international markets. By importing cheaper and better-quality inputs, exposure to new products, and better methods of production can provide access to better machines and make new technology available to domestic firms, ultimately affecting the productivity of exporting firms.
There are a lot of gains from reducing tariffs on intermediate inputs. It helps in improving the availability and variety of inputs for domestic exporters eases the input constraint for export. By improving quality with the availability of better inputs, firms can increase the unit value of existing output being exported. it also helps exporters climb up the export ladder by manufacturing and ultimately exporting products in which the country is not yet very active.
8. Women Participation in Labor Force
Over the past decade, the role of female participation in the labor market has significantly increased around the world. Particularly in low and middle-income economies, their participation in the manufacturing sector is playing an important role in supporting the firms by increasing the pool of labor, which also supports achieving potential levels of manufacturing capacity. Pakistan, despite having half of its working-age population consists of females, has the lowest female participation rate in the labor force when compared to regional and other peer countries. This low female labor force participation represents a major loss of potential productivity.
Besides of mentioned factors, there are other structural problems related to taxation, labor policy, institutional developments, and firm-specific factors which are responsible for the lethargic export performance. Although Pakistan’s exports have moderately improved, it is still considerably lagging behind its regional and other competitors. Improving structural bottlenecks is not only essential for consolidating the gains achieved from recent macroeconomic stability but also important for the sustainability of the country’s balance of payments position and its medium-term growth trajectory.
- There is an urgent need to increase awareness of quality standards. While Pakistan has set up the necessary institutional arrangements for certification, implementation remains limited mainly because exporters are not aware of these standards in the first place. Raising their level of awareness can result in significant gains in certification and quality improvements.
- Features commonly perceived by firms as hurdles to export competitiveness include market imperfections, weaknesses in physical infrastructure, and the lack of R&D. Thus it is essential that such constraints are removed so that an environment conducive to business is created for exporters of manufactured goods.
- Energy shortages are a binding constraint to manufactured exports and that there is an urgent need to resolve energy-related issues.
- The fewer women participation is a more severe issue in more productivity. Most firms believe that, if women labor become available, they would be able to reduce their costs and thus enhance their competitiveness. In terms of location decisions, the availability of various inputs plays a more decisive role than the presence of an output market.