RESOLUTIONS are a new year’s tradition, as is the tradition of failing to live up to them. From a macroeconomic perspective, increasing exports may very well be the policymakers’ new year resolution, but it is unlikely that the hackneyed old roads will bear fruit. An overemphasis on the capacity-strapped textile sector and topsy-turvy incentives are as big a lingering malaise as the cake in the fridge that prevents the achievement of the popular resolution of losing weight.

On the other hand, stepping away from incentivising the manufacturing sector, the services industry has a low hanging fruit in the form of information technology (IT) exports. Standing at $1 billion currently for formal exports, informally the sector earns about 1.5 times the formal sector, said Syed Ahmad, chairman of the Pakistan Software House Association.

“The Ministry of Commerce has acknowledged that growth will not be driven from the industrial sector that has been provided several big incentives in the past. Growth will stem from the services sector which is led by the IT industry,” he said.

Most of the small and medium enterprises (SME) in this sector are not registered since this increases the cost by seven per cent through payroll packages, special securities, the Employees’ Old-Age Benefits Institution, etc. If the incentive offered is greater than the cost, companies will naturally gravitate towards the formal sector, he explained.

While exports of goods receive cash rebates, exports of services do not even though this facility was approved by the last government for the IT sector but not implemented by the current one.

Textile, taking up the lion’s share of exports, is unlikely to be a catalyst for growth despite the room created by the US-China trade war that has urged big textile manufacturers to increase capacity

This view was agreed upon by Ehsan Malik, CEO of the Pakistan Business Council (PBC). “A low-hanging fruit that can become big over time is IT and IT-enabled services. Assume that I am a freelance software developer and I am given a piece of program to write that I sent out electronically. The State Bank of Pakistan (SBP) does not know I have exported the service, and the payment is made to a contact abroad who gives it to me through an informal channel. This means work done in Pakistan does not accrue benefits to the country,” he said.

Any exporter of a physical item is entitled to a rebate when he exports, i.e. a percentage of the sales value is given when sales are made abroad. But the service sector is not given this incentive; if the SBP is impartial to a $1 being earned on a good or a service, then incentives should be given to both of them, said Mr Malik.

While an incentive package can double exports, in its absence the sector would achieve its average growth rate of 30-35pc, he said.

On the agriculture side, Pakistan was headed towards a record rice crop, before Mother Nature stepped in. “We would have clocked in close to 7.8 million tonnes compared to 7.1-7.2m tonnes which was the previous record,” said Safdar Hussain Mehkri, a former chairman of the Rice Exporters Association of Pakistan. However, the heatwave in the first half of September did a lot of damage to the yield, limiting the year-on-year increase to 5pc.

Keeping the production side aside, a source in the know lamented the subsidised rice from China which makes competition for non-Basmati rice very challenging; an issue Pakistan cannot take up with them due to the relations between the two countries.

Another big challenge on the demand side, for Basmati rice, is that we are selling our produce to the European Union market 40pc below its value. Pakistan’s Super Basmati rice exports to Europe range from 200,000-300,000 tonnes and are valued at $750 a tonne on average. In contrast, Europe buys Thai Jasmine fragrant brown rice, which is also a premium rice but inferior to our variety, at $1,100 a tonne.

We are selling a superior line at an underpriced rate because of lack of standards in the supply chain and poor ability to compete successfully. Provincial departments have not set standards such as those implemented in India, Thailand, and Vietnam where farmers are supposed to bring standardised produce to the mandis. As a result, tonnage is being increased but we are losing value.

Drying is an important aspect of standardising rice crop. “The government is so hungry for dollars that they don’t want to disturb anything. If 10 guys are drying rice but 90 are not, they are not incentivising the 10 in fear of offending the 90 who are bringing in the dollars,” the source said regretfully.

But some incentive has to be provided for those putting up the drying infrastructure. Those who are not drying would still be selling cheap but with government support, the ones who are drying could compete successfully in the premium markets. If the support came now, it would still take at least five years for it to yield benefits but at least the market would start shifting towards it, he added.

Textile, taking up the lion’s share of exports, is unlikely to be a catalyst for growth despite the room created by a trade war between the United States and China that has urged big textile manufacturers to increase capacity. While this may bring in dividends in the long run, an increase in exports in can only come from diversifying away from traditional industries.

Unfortunately, diversifying out from textiles to small and generally overlooked cottage industries such as surgical goods seems unlikely as well.

“The government has worsened the situation for us,” bemoaned Qaiser Mahmood, an exporter of surgical instruments. “According to the new rules, the payment has to come from the city to which we are exporting. The problem is that though we export to one country, the owner sits in some other country.”

Mr Mahmood explained that this rule had created a huge barrier for them. “I have already lost 6-7 customers. The previous government was managing affairs in a much better manner. I have customers in Egypt and Sudan who were routing from places such as Lebanon. They have now opted for vendors situated elsewhere.”

The retrospective nature of the incentives structure further discourages the expansion of non-traditional sectors with little exports. For example, exports of $100 worth of goods allow the exporter to keep $10 to reinvest in the overseas market. But if there is a brilliant product not exported before, there is no inflow of foreign exchange for its market development.

“Say you want to register a pharmaceutical product in an African country which can cost anywhere from $80,000 to $1 million. Without existing exports, where will you find the required amount since the SBP will not extend it to you? And this applies to any good,” explained PBC’s Mr Malik.

Furthermore, design capabilities are missing for smaller industries such as footwear and furniture. In sports good, the reason we are successful is that the know-how comes from elsewhere. If Adidas places an order for footballs, it also retains proprietary rights so their designs cannot be used for us to come up with our own product, Mr Malik added.

PBC’s back-of-the-envelope calculations in a do-nothing-new scenario where Pakistan and the rest of the world continue with the status quo estimate exports of $25bn by the end of this fiscal year, with an increase to $29bn by 2023. However, this will be accompanied by an increase in the trade deficit by $2bn in three years as growth in imports will be greater than the quantum of increase in exports.

Clearly, there is little joy to be had for a positive movement in exports in the new year.

Published in Dawn, The Business and Finance Weekly, January 6th, 2020