Since 1995, the trade deficit has been fermenting. During the time period between 1995 and 2018, Pakistan experienced deindustrialisation. As a percentage of GDP, its exports fell from 16.7 percent in 1995 to 8.7 percent in 2018 while imports declined from 21.5 percent to 19.4 percent during the same period. An all-time high current account deficit of $18.3 billion was experienced by Pakistan in 2018. Pakistan financed this deficit by the foreign investment of $12.4 billion and used $6.3 billion of its foreign exchange reserves. It already used $4.3 billion of its reserves for the same reason in 2017. Resultantly, a currency crisis situation emerged due to the excessive use of its reserves. This, in turn, has caused difficulties in paying import bills and debt servicing. In addition, excessive demand for the currency has resulted in Rupee devaluation from 104.97 to 141.14: Rupee/Dollar parity between July 2018 and April 15, 2019. Moreover, the State Bank has set an unparalleled high policy rate which has raised the cost of production. Data of exports in the first-quarter of 2019 makes this evident; the reason being a fall in exports. Currently, imports are 2.2 times higher than exports.
Value degrading and low-quality commodities, and the lack of diversification are three major dimensions of export stagnation in Pakistan. First of all, in terms of market share, Pakistani firms were exporting about 1.6 dollars as per 1000 dollars that were bought worldwide in 2005. Currently, they are exporting 1.2 dollars in 2020. In comparison, Bangladesh was exporting 50 cents of a dollar for every 1000 dollars but today it’s almost 2 dollars for every 1000 dollars. The market share of Pakistan has fallen drastically.
Likewise, the Pakistani export bundle resembles almost the 2005 export bundle, that is, the major portion depends on textile and its commodities. In contrast, Vietnam has expanded its basket with multiple products (technology products like electronics, televisions, computers, mobile, etc.) along with textile commodities. From 2009 to 2019, Pakistani exporters introduced 146 new product varieties but they discontinued 437 product varieties. Today, Pakistani exporters export fewer varieties than they did 10 years ago.
Furthermore, Pakistan didn’t take part in global and regional value chains. This has increased transaction costs. In addition, it also has not adopted new business techniques and technologies. Resultantly, the quality of the product has been compromised and become less competitive. Productivity has also become low in comparison to competitors.
In the long run, productivity is almost everything in terms of export performance. Firms need to reach a certain productivity threshold to be able to export. Total factor productivity of the largest 500 firms of Pakistan listed in the stock market has on average barely increased over the period. For these firms, the threshold is going higher and higher due to the increase in productivity by competitive firms in the world market. Three things are more important in this concern.
Firstly, the exchange rate’s appreciation may boost competitiveness and depreciation shrinks domestic costs. In Pakistan, until recently, the exchange rate was largely appreciated and overvalued compared to the real exchange rate. This made duty free imports extra cheap and exports more expensive for trading partners. Pakistani exports have shown the pattern of slow rockets and fast fenders.
Secondly, low-profit margins have resulted in meagre foreign investment. Besides, Pakistan didn’t use economic diplomacy for better market access. For instance, in 2001, Vietnam signed a bilateral trade agreement with the US which lowered tariff from 40 percent to 3 percent on a number of goods. Consequently, their trade volume rose from $1451 million dollars to $54 billion dollars between 1995 and 2017. Lastly, the level of import duties in Pakistan has an anti-export bias. The Pakistani automobile sector is a perfect example of this.
In this distressing situation, policy pundits should be concerned about the sluggishness of exports as export earnings did not grow to closely match with import payments. To access the global market, good economic diplomacy is the need of the hour for Pakistan. Free Trade Agreements must be planned and negotiated carefully so that they would create exports rather than just diverting exports from existing trading partners. Furthermore, regional value chains or global value chains must be focused on to make our exporters integrated into global markets and supply chains. Through CPEC, Special Economic Zones (SEZs), new FDI increasingly in export-oriented industries must be encouraged. Different policy packages should be given for the promotion of heterogeneous export-oriented industries. For high quality and market competitive products, skills must be imparted to workers. Change in technology and techniques ought to be timely accepted for modernisation, enhancement, integration, and competitiveness. In the end, we ought to remember what Iqbal said in 1924, ‘Change is the only permanent in this universe’.