PAKISTAN’S exports, after touching a seven-year low of $20.4 billion in FY2017, are back on the recovery path. During the first half of the current financial year FY2018, exports grew by 11.24 per cent compared with the corresponding period last year.

At this rate, the exports are likely to rise to $22.7bn in FY 2018. In order to maintain the growth momentum, it is important to identify the drivers of growth to ensure that the endogenous factors contributing to the recovery are sustained.

The exports recovery can be attributed to three major factors. Firstly, the Prime Minister’s Export Package of Rs. 180bn provided a much-needed respite in the face of waning export competitiveness due to an overvalued currency, high energy tariff, increasing labour costs and rising tariffs on imported inputs.

The export package has delivered precisely what it aimed to deliver — increasing export volumes by quoting competitive prices. During the first half of FY2018, quantities of 73pc of the exports covered under the package have increased; 90pc of this increase was linked to a simultaneous decrease in average unit price.

Secondly, the addition of new electricity generation capacity to the network, import of liquefied natural gas, and the policy of zero electricity load-shedding for the industrial sector have improved access to energy for the export sector.

Thirdly, global commodity prices showed a significant recovery in 2017. The prices of cotton, basmati and non-basmati rice- which cumulatively constitute 68pc of Pakistan’s exports- had declined by 19pc, 39pc and 12pc, respectively in 2015-16 compared with 2013-14.

However, they recovered by 13pc, 38pc and 9pc in 2017. Consequently, the global market after contracting by 16pc to $15.9trillion in 2016, recovered by 9pc in the first three quarters of 2017.

Though short-term export enhancement measures, aided by the improvement of global commodity prices, have put exports back on a growth trajectory, recovery remains fragile due to the long-term structural frailties of the export sector.

Since 2003, Pakistan’s share in global exports has declined by 19pc due to structural problems rather than short-term exogenous shocks or endogenous constraints.

Pakistan’s product and market mix is highly concentrated — few low value-added products are exported to few markets. Furthermore, due to low product sophistication, Pakistan targets the low-end market segment and fetches low prices.

For instance, Pakistan’s average unit price of top 30 export products, of an export value of $14.6bn in 2017, was 40pc less than the average price achieved by China, India, Turkey and South Korea. The overall ecosystem here is unfavourable to exports — Pakistan’s ranking in the critical global indices ie Global Competitiveness Index (115 out of 137), Ease of Doing Business (147 out of 190) and Enabling Trade Index (122 out of 136), is dismally low.

In a global environment of hyper competitiveness, our exporting concerns are characterised less by production and management efficiencies and more by rent-seeking and policy capture, impeding the growth of sunrise sectors.

The foreign direct investment in export-oriented manufacturing has been low due to a challenging security environment and low competitiveness caused by high input and labour costs and low labour productivity. The domestic investment in manufacturing has been cannibalised by lucrative alternatives like real estate, stock market and power generation.

Moreover, the overvalued currency makes exports expensive and imports cheaper; import tariffs are employed as a revenue tool rather than a trade policy instrument.

The recovery in exports during the current financial year is a welcome relief. The export recovery during the last six months has demonstrated that enhancing competitiveness can help recover the loss of $4.13bn in export volumes since 2013-14.

Though short-term export enhancement measures, aided by the improvement of global commodity prices, have put exports back on a growth trajectory, recovery remains fragile due to long-term structural frailties of the export sector

The challenge to the export sector, however, requires a comprehensive plan — a short-term strategy for consolidating the recent gains, a mid-term roadmap for competitiveness and efficiency enhancement, and a long-term vision for structural reforms.

In the short term, the incentive package, aimed at increasing competitiveness, needs to be extended till 2018-19 and broadened to cover additional non-textile sectors. Simultaneously, competitiveness enhancement measures — rationalisation of energy and import tariffs, moratorium on minimum wages, and enhancement of labour productivity — may be taken to sustain export competitiveness.

The medium-term strategy needs to focus on: leveraging the incumbent export sectors to bridge the price deficit of 40pc with the competitors through product sophistication (with an annual potential of $10.5bn by 2023); attracting investment into export-oriented manufacturing by diverting domestic investment from the non-manufacturing sectors and relocation of industry, especially from China; and creation of an export ecosystem through policy reform, tariff liberalisation, institutional strengthening and improving Pakistan’s ranking in the crucial global indices.

The long-term strategy for export enhancement hinges on transformation of the export product mix from labour-intensive sectors to innovation-based high-value sectors e.g. pharmaceuticals, engineering and ICT.

The growth strategy for the sunrise sectors should capitalise on the domestic market as the driver of growth and competitiveness through economies of scale.

Published in Dawn, The Business and Finance Weekly, February 12th, 2018