There is an urgent need to contain the escalating crisis as the ominous-looking clouds that represent Pakistan’s growing economic woes continue to gather.
In order to raise the sales tax on a number of products and services as well as the income tax on a number of capital projects, the government submitted a supplement to the original bill in February 2023. Tax burdens on consumers and investors are likely to rise as the economy deteriorates and the government sinks more into the mire.
These issues show that Pakistan needs to reconsider its trade policies and ideas, if not completely reset, in order to avoid the vicious cycle of recurrent balance of payments crises.
The significant trade deficit, which is determined by subtracting the value of imports from the value of exports, is one of the key factors that contributes to the ongoing balance of payments crisis.
The Pakistan Bureau of Statistics reports that in FY22, imports were $48.4 billion more than exports. Although imports totaled $80.2 billion, exports were $31.8 billion.
Despite the fact that both trade flows were the largest ever recorded in Pakistan, the inability to produce enough exports—less than 40% of all imports—will lead to crises every few years. It is essential to get out of this trap.
The unsatisfactory exports are the most important issue that needs to be addressed in any new agenda that is created as a course of action. Exports have grown very slowly and stagnantly, especially when compared to Vietnam and Bangladesh, who have had tremendous growth over the previous ten years.
Pakistan has never exported more than $28.9 billion worth of commodities in a calendar year, according to Trademap.org of the International Trade Centre. The previous peak was $25.3 billion in exports from Pakistan in 2011.
Comparatively, Bangladesh exported commodities valued $24.3 billion in 2011. In 2021, its exports rose to $53.9 billion. The exports of Vietnam were $96.9 billion in 2011 and will be $335.8 billion in 2021. Pakistan’s exports as a share of GDP have declined; in 2021, they were estimated to be less than 10%, matching figures from some of the least developed and poorest sub-Saharan African nations.
From $43.6 billion in 2011 to $73.1 billion in 2021, Pakistan’s imports have grown. Bangladesh was noted to be following a similar trend, while Vietnam saw an increase in imports from $106 billion to $330 billion during the same time period.
On the other side, Vietnam has increased the amount of high-value-added and complex goods in its export mix. In 2021, it became the second-largest cellphone exporter in the world, with more than $33.6 billion in exports. In 2007, it had reported having no exports.
Pakistan’s exporters’ reluctance to engage in exporting operations is largely due to their lack of competitiveness, which is correlated with poor levels of productivity and high trade costs.
As the trade deficit widens, authorities become uneasy and frequently impose more restrictive trade laws and inward-looking regulations in an effort to close the gap. A lack of goods and a decline in manufacturing operations in the country are the results of import restrictions and higher import tariffs on a number of commodities.
The State Bank of Pakistan and the Institute of Business Administration, Karachi collaborated to create the Business Confidence Index, which shows a substantial decline in capacity utilisation in the manufacturing sector as well as a sharp decline in overall company confidence since last year. Such difficulties are probably going to hurt exports much more.
Lack of access to consumers in Pakistan’s important marketplaces is one of its major problems. Through the GSP Plus programme, the European Union has granted duty-free access to a number of goods, however Pakistan’s exporters do not adhere to EU requirements.
Furthermore, because the United States is by far Pakistan’s main export market, major textile imports from that nation are subject to tariffs of up to 17%. The recently started trade and investment talks between Pakistan and the US must address the tariff issues because improved market access can help boost the capacity of Pakistan’s exporters.
Thirdly, it is critical to reduce the trade costs faced by domestic producers. One of the biggest obstacles to participation in exporting operations is the prevalence of knowledge asymmetries.
For instance, a lack of understanding of specific technological techniques hinders exporters. To decrease this information gap, TDAP and Pakistan Single Window have taken action.