Pakistan should leverage CPEC, GSP Plus to attract investment

Investors require competitive business environment, safeguarded from uncertainties <br /> such as war

Aadil Nakhoda March 18, 2019
Investors require competitive business environment, safeguarded from uncertainties. PHOTO: FILE

KARACHI: The recent military escalation between Pakistan and India raises warning flags that the South Asian region is still very much susceptible to war.

Although recent events may have been triggered by a combination of domestic politics in India and a reaction to the Pulwama attack, it is important to note that given the challenges being faced by Pakistan on the economic front, a war would only have exacerbated them. Efforts to avert the war at this critical time are commendable. It is essential that the Pakistan Tehreek-e-Insaf (PTI) government strives for economic stability in Pakistan. Today, Pakistan faces a balance of payments crisis that requires financing from the International Monetary Fund (IMF).

The current account deficit coupled with a volatile exchange rate has led to economic uncertainty. It is crucial that Pakistan steps up efforts to maintain peace in the region by ensuring greater investments and enhancing trading relationships.

The current government is making strides to improve business environment in Pakistan. The Finance Supplementary (Second Amendment) Bill 2019 includes incentives to increase cost competitiveness. The importance of increasing exports cannot be understated. In a recent address to a business delegation, the prime minister correctly identified trade and investment as important pillars of foreign policy. Focusing on establishing export-oriented industries will not only help tackle the balance of payments crisis but will also strengthen diplomatic relations with global and regional powers.

A closer look at Pakistan’s recent trade patterns indicates a reduction in the trade deficit. According to data extracted from the Pakistan Bureau of Statistics (PBS), the trade deficit was 20% lower in February 2019, relative to the gap reported for February 2018. The push came from a fall in imports as they decreased more than 12%.

Exports from July 2018 to February 2019 were 1.85% higher than the amount in the previous corresponding period while imports were 6.13% lower. During the same period, the trade deficit decreased 11%.

In essence, the reduction in the trade deficit is mainly driven by a fall in imports of machinery, transportation equipment and petroleum products. This is determined by import demand and fluctuation in global prices.

It is imperative that the government instead focus on increasing exports in order to make the reduction in trade deficit more sustainable.

Impact of trade disputes on Pakistan’s deficit

Uncertainty in global trading relationships, such as between the US and China, can have an impact on Pakistan’s trade deficit. In a recent development, the US and China have agreed to ease tensions as it is expected that Washington may roll back tariffs on a significant proportion, approximately $200 billion worth, of imports while Beijing may reduce tariffs on major imports from the US such as automobiles.

However, on the other hand, the Trump administration has ended preferential treatment for more than $5.6 billion worth of US imports from India as a result of a lack of equitable access for US goods in the Indian market. Affected products include food and beverages, textile, leather, metal and plastic.

According to the Global Trade Alerts, the US introduced a large number of harmful interventions to limit trade, particularly in the iron and steel sector. On the other hand, it liberalised imports of wearing apparels, particularly men’s and boy’s suits.

Pakistan is likely to have benefitted from the trade liberalisation as its exports of men’s and boy’s suits increased by more than $800 million between 2015 and 2017. Furthermore, imports of base metals into Pakistan increased by $1.26 billion, mainly driven by the China-Pakistan Economic Corridor (CPEC)-related demand.

Major export markets for Pakistan include the US, China and the UK. According to data extracted from the State Bank of Pakistan (SBP), export receipts from both the US and China increased more than 5% between July 2018 and January 2019 over the same period of previous fiscal year. Exports to the three markets constituted more than 31% of total exports from Pakistan.

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Exports to the US and the UK mostly comprise finished textile products while exports to China are heavily focused on cotton yarn. In 2017, cotton yarn contributed more than 40% of total exports to China from Pakistan, according to data borrowed from ITC’s

Export receipts for knitwear increased more than 12.7% between July 2018 and January 2019 relative to the same period of previous fiscal year. On the other hand, import payments on raw cotton increased more than 52% between July 2018 and January 2019 relative to the same period of last year.

Imports from the US

In recent years, the textile industry has increased its dependence on imported raw cotton. Pakistan imported $279 million worth of raw cotton from the US in 2017, which replaced India as the top origin country. In 2016, Pakistan imported $86 million worth of cotton from the US.

Pietra Rivoli’s “Travels of a T-shirt in the Global Economy: An Economist Examines the Markets, Power and Politics of World Trade” documents the resistance from textile lobbies in the US when Pakistan requested relief in tariffs on finished textile products and apparel in the mid-2000s. However, a recent spike in trade with the US should help meet contract requirements between the US and Pakistani producers necessary for preferential treatment.

Pakistan to pay China $40b on $26.5b CPEC investments in 20 years

Imports from the US increased in 2017 by more than $800 million, a growth rate of 42% from the previous year. Apart from raw cotton, Pakistan imported more than $346 million worth of soybean seeds for sowing from the US, up from $123 million in 2016. This increase in imports of soybean seeds should help create new opportunities for Pakistan.

In 2018, the export of soybeans from the US to China was almost a quarter of the value of soybeans exported in 2017.

Therefore, it is essential that Pakistan leverage CPEC and the GSP Plus status awarded by the European Union to attract investment, both domestic and foreign, to improve economic conditions in the country. It is imperative that investors are provided a competitive business environment, safeguarded from uncertainties such as war, to increase exports and reduce the trade deficit.

The writer is the Assistant Professor of Economics and Research Fellow at CBER, IBA


Published in The Express Tribune, March 18th, 2019.

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