ISLAMABAD: Pakistan is required to undertake structural reforms to improve its exports for attaining a sustainable economic growth rate of above 3.8 per cent, suggests a new study released by the Asian Development Bank on Monday.The study — Why Pakistan’s Economic Growth Continues to be Balance of Payments Constrained — says this requires an upgrade in the country’s international specialisation profile.

“A more diversified economy results in more diverse exports, and this is required to acquire the wider set of productive capabilities that is needed to export goods with a higher level of sophistication,” it noted.

The first steps towards export diversification could be to identify causes of lost export value in important industries like glass and stone, mineral products, plastics and chemicals; and explore options for moving into new export products that require productive capabilities similar to those used for existing Pakistani exports, but have a higher level of sophistication within the product space.

Pakistan could also take steps to generate a conducive environment for export (terms of trade, export insurance, export promotion, and trade agreements; prepare a strategy for the garment industry, including a competitiveness assessment of current products; improve the capacities of the agencies overseeing national standards, accreditation, and certification of international standards; establish a national single window for exports; and improve the availability of trade finance.

To implement these steps, it is required that policy design, coordination, and implementation facilitate private sector attempts to acquire capabilities in latent and more sophisticated products, as well as encourage meaningful strategies to develop new capabilities in distant products.

On average, over the last decade, Pakistan has lost global market share by 1.45 per cent per annum, with foreign exchange reserves further declining from $9.8 billion at the end of fiscal year 2018 to $7.3 billion at the end of fiscal year 2019, only enough to finance about 1.4 months of imports.

Hence, improving Pakistan’s export performance remains the most relevant long-term structural challenge to alleviate the balance-of-payments constraint to sustained economic growth, according to the study.

The composition of imports contributes to the balance of payments constraint. Around 40 per cent of electricity production in Pakistan is oil-based, and 25 per cent is gas-based. Direct and indirect subsidies for the energy sector are incentivising oil consumption, thus driving imports.

Investments in the country’s power-generation capacity, partly under the China-Pakistan Economic Corridor has the potential to diversify the energy mix, moving the country away from a dependence on oil-based energy supplies; this could lower dependence on energy imports, since domestic coal reserves would be used for power generation, the study noted.

As a result of these investments, the IMF predicts a diversification of Pakistan’s energy mix between 2016 and 2024, with hydropower shifting from 36pc to 40pc, natural gas from 28pc to 22pc, furnace oil from 30pc to 8pc, coal from zero per cent to 18pc, solar and wind power from 4pc to 3pc, and nuclear energy from 3pc to 9pc.

Accelerating energy sector reforms to reduce and rationalise subsidies for oil-based generation, incentivise renewable energy generation, and reduce losses are important structural reforms to alleviate the effects of energy imports on the balance of payments.

The high proportion of remittances coming from Middle Eastern oil-exporting countries, specifically from workers in the highly cyclical construction industry, results in remittance receipt fluctuations in relation to oil prices.

On the upside, this provides a delayed hedge against fluctuations in the oil price, Pakistan’s main import. A more diversified distribution of migrant worker destination countries would help decouple remittances from oil price developments.

Published in Dawn, December 17th, 2019