Trade has not been fully leveraged to effectuate growth in Pakistan, as exports rose by only $4.35 billion in more than a decade due to decreasing export competitiveness.
“Over the period 2005–16, Pakistan’s exports of goods rose from $16.05 billion to $20.4 billion –an increase of only 27.3 percent compared to an increase of 276 percent in Bangladesh, 445 percent in Vietnam, and 165 percent in India,” stated a report of the World Bank. In the same manner, Pakistan’s trade-to-GDP (T/GDP) ratio was close to that of Bangladesh at 28.1 percent in 2000. Over the past decade, Bangladesh’s T/GDP ratio has raised to 42.1%, while Pakistan’s T/GDP has remained almost unchanged at 28.1%.
In the last 6 years alone (FY11–17), export earnings have reduced by almost 20% Pakistan’s subpar trade performance in recent years is a result of decreasing export competitiveness. Export competitiveness, as indicated by the country’s market share of global exports, has been reducing over the years, while market shares of peer economies such as Malaysia, Mexico, and Thailand have doubled. Pakistan has lost 1.5% yearly in export market share over the past decade. This number is put in perspective when broken down by markets and products. Over the period 2013–15, Pakistan only managed to raise its export share in 9 out of its 20 biggest export markets. World exports to China decreased by 5.4% over the period 2013–15, while Pakistan’s exports to China dropped by a higher rate of almost 10%. Similarly, world exports to the UAE dropped by 2.9% over the period 2013–15, while Pakistan’s exports dropped by 20.2%. Pakistan’s higher ‘decay’ rate, as opposed to the world decay rate for China and the UAE, points to the existence of barriers to trade that have impeded growth in exports.
Reducing export competitiveness has also discouraged entrepreneurship and innovation in the export sector, as evident from Pakistan’s export dynamics in recent years.
Pakistan’s export basket is relatively concentrated in terms of both products and markets, leaving the country exposed to price- and partner-specific shocks. Just one product category, cotton manufactures, has over the past decade accounted for approximately 55% of Pakistan’s export basket. Three largest exports – cotton manufactures, leather, and rice – together amounted to over 70% of total exports. This share has remained unchanged for over a decade. Pakistan’s export market base and penetration, much like its product base, has also remained stagnant over the past decade. Five markets have historically accounted for over 60% of Pakistan’s exports. Geographically, the European Union and the US represent the most important destinations of Pakistani exports, with the US absorbing 17% and the European Union 22% of all exports.
The World Bank said that reforms in three areas including trade policy, trade facilitation, logistics, and infrastructure; and the overarching investment are necessary to regain export competitiveness. Pakistan is required to commit to a simple and transparent tariff structure with low average tariffs, minimum dispersion, and minimal use of para-tariffs. Its present tariff policy has been shaped more by revenue and protectionist considerations than long-term competitiveness-enhancing measures. Pakistan’s tariffs are almost twice as high as the world average and three times higher than those in Southeast Asia. Tariff rates in Pakistan are also considerably higher than in other countries in South Asia. Pakistan’s simple average tariff rate was 13.6 percent in 2014, compared to an average of 11.7 percent in South Asia – this measure excludes the impact of para-tariffs such as regulatory duties.
According to the report, trade policy needs to be sensitized to the differences in firms’ requirements by size, location, and sector. Exemptions granted to importers and exporters through different government schemes shed light on the need for disaggregating policy measures based on specific firm characteristics. Although duty exemptions decrease the effective customs duty paid by exporters, they do not benefit all firms in Pakistan and their impact is skewed toward larger firms. Exporters are required to import their own intermediate inputs to benefit from the primary customs duty exemptions; less than a third of exporters (31%) did so in FY16. Moreover, smaller exporters are less likely to import. Only 19.2% of micro-exporters and 31.5% of small exporters imported goods and services, compared to 84.1% of large firms in FY16. Larger firms have also benefited the most from duty exemption schemes. The top 100 firms in Pakistan accounted for roughly three-quarters of duty-exempted value, and only five firms accounted for about a third of that total.