AT the end of its tenure, the PML-Nawaz government extended the Prime Minister’s Export Package for another three years. It also lifted the ban on sugar exports. How beneficial have these two decisions proved to be?

In January 2017, an export package worth Rs180 billion was unveiled for providing subsidies in the form of duty drawbacks to the five export-oriented sectors: textiles and clothing, carpets, medical and surgical equipment, sports goods, and leather.

The current decision not only extends the duration of the package but also provides coverage to some other sectors, such as light engineering goods, mechanical and electrical appliances, and fruits and vegetables.

Continuous subsidisation of businesses, whether it takes the form of revenue forgone or direct cash transfers, perpetuates lack of competitiveness and other structural constraints to export growth

The purpose is to add competitiveness to exports by bringing down the cost of doing business. In order to assess the impact of the package, we need to look at Pakistan’s recent export performance. Since the package was announced in January 2017, analysis may be done on a financial year basis based on the Pakistan Bureau of Statistics data.

During ten months of the fiscal year 2018 (July-April), textiles and clothing exports grew 8.13 per cent to reach $11.13bn compared to $10.29bn over the corresponding period of fiscal year 2017.

Exports of readymade garments, knitwear, bedwear, fabrics, and yarn registered increases of 11.96pc, 14.65pc, 4.77pc, 83.09pc, and 7.2pc, respectively. The reason behind these rises is the relatively high cotton prices, which have persisted in 2018 — between January and April 2018, the average international cotton price was $0.91 per pound.

However, during this period, the exports of carpets declined 5.18pc to $63.6m from $67.1m, while the exports of sports goods increased 7.29pc to $275.3m from $256.6m, exports of leather manufactures increased 6.78pc to $435m from $407.4m, and the exports of medical and surgical equipment increased 14.4pc to $318.m from $278.4m.

On the other hand, a faster export increase was registered in other sectors, such as sugar (309.4pc), vegetables (37.8pc), chemicals and pharmaceuticals (21.74pc), petroleum sector (128pc), engineering sector (11.78pc), fruits (4.74pc), and rice (24.77pc).

The phenomenal increase in sugar exports was underpinned by the generous subsidies granted by the government to sugar mills to overcome the vast difference between international and domestic sugar prices.

This brings us to the recent decision to make sugar freely exportable. Previously, exporting was prohibited to prevent the commodity’s price from rising sharply in the domestic market. However, in the face of a glut, the government would lift the ban on sugar exports occasionally to prevent its price from falling drastically.

The exorbitantly high domestic prices for sugar relative to international prices made the commodity uncompetitive. For instance, in 2017, the average world and domestic sugar prices were $383 and $480 per tonne, respectively. As a result, the government had to provide a subsidy of Rs10.7 per kilogramme to sugar mills to enable them to export 2m tonnes of sugar in 2017.

The total subsidy amount was in excess of Rs 21bn, which is equivalent to $200m (at the exchange rate of 105). In 2017, sugar exports increased to $161.3m from $132.3m in 2016. Thus, the increase in sugar exports was almost equal to the subsidy granted.

Although the sugar exports went up substantially in 2017, it was at the expense of taxpayers’ hard-earned money. The major reason for the price differential is sugarcane support prices set by the government, which distort the market and harm consumers, who not only have to buy expensive sugar but also subsidise sugar exports.

Instead of reforming the price support system so as to make it less distortive, the government has lifted the ban on sugar exports. However, it is certain that in view of the enormous price differential, sugar millers, an exceedingly powerful lobby, will not be able to export without state subsidies.

This is surely not a desirable way to enhance exports. Export subsidies are also forbidden by the World Trade Organisation rules. Continuous subsidisation of businesses, whether it

takes the form of revenue forgone or direct cash transfers, perpetuates lack of competitiveness and other structural constraints to export growth.

A better option would be to allocate funds for increasing the productivity of the workforce, which holds the key to competitiveness. If subsidies have to be provided, the purpose should be to encourage innovation or at least product upgradation and quality improvement.

hussainhzaidi@gmail.com

Published in Dawn, The Business and Finance Weekly, June 11th, 2018