Achieving ambitious $60b export target

It will require ginormous effort to structurally transform industrial, other export-focused sectors

KARACHI:

The prime minister has recently set an ambitious target of increasing exports to more than $60 billion in the next three years. If this target is realised, Pakistan would effectively increase its exports of goods and services by approximately 67% in the next three years.

This would imply an annual growth rate in exports of goods and services of 18% for the next three years. According to the World Bank's World Development Indicators, exports of goods and services from Pakistan, based on constant local currency, has never increased more than 13.2% annually, which was reported in 2019, since 2006.

Given that the Pakistani rupee has depreciated over the years, the growth rate in dollar terms is lower.

Even countries considered as "export miracles", having achieved high export growth rates in a short period such as Vietnam, have not reported annual growth of 18% in their exports in the last 10 years. The highest it reported was 17.8% in 2013 and 17.3% in 2017.

It will indeed be a Herculean task that will not only require a ginormous effort to structurally transform the industrial and other export-oriented sectors in Pakistan but will also include an all-out effort by the government to facilitate all exporters to foster improvement in productivity levels and growth in value addition across all sectors.

However, it is important to mention that exports of goods and services from Pakistan as a percentage of GDP have not breached 11% in the last 10 years. It is one of the lowest in the Asian region. The South Asian average hovered around the 18% mark, while the East Asia and Pacific average was approximately 30% in the last 10 years.

Therefore, Pakistan could have attained approximately $60 billion worth of exports if its exports as a percentage of GDP had performed comparatively to its South Asian neighbours and surpassed $100 billion if it had achieved the same levels as those of its more distant neighbours in the East Asian and Pacific region.

Pakistan reported $39.5 billion worth of exports of goods and services in 2022. This was due to favourable policies to support industrial growth as the country recovered from the pandemic-related crisis in the previous two years. This decreased to $35 billion in 2023.

It suggests that the country does have the capacity to produce approximately $40 billion worth of exports. The first task for the government must be to utilise this excess capacity of exporters and increase confidence, which has likely eroded because of different measures to curtail increasing pressure on both the external and fiscal accounts.

To achieve sustainable growth in export activities, the government must facilitate and foster the growth of productivity and capabilities of various industries such that they can generate the most optimal output more efficiently.

In essence, the government must ensure that businesses are able to supply their products using the most effective mix of inputs, which would not only lower their costs but also increase their ability to compete in regional and global markets.

First, it is imperative to digitalise the business processes undertaken by international traders, both exporters and importers, to not only reduce costs of documentation but also eliminate bureaucratic red tape as well as unnecessary interaction between various stakeholders.

Digitalisation of trade procedures and processes has generated export revenue across major regional counterparts and has also reduced significant costs involved in trading processes. Pakistan Single Window has provided such an opportunity and it is imperative that all stakeholders involved in trading processes capitalise on the opportunity.

Second, it is crucial that Pakistani exporters aim to increase their market share in main consumer markets such as the US and the EU. Approximately 50% of exports from Pakistan are destined to them. This is as high as 80% for Bangladesh and approximately 40% for India.

It is more important to diversify the range of products, not only across industries but also within traditional industries, targeting more value-added products that generate greater export value rather than less sophisticated products.

Furthermore, the role of export subsidies needs to be more critically analysed as it may suppress the ability of exporters to increase their margins from innovative activities due to increasing reliance on government subsidies.

Third, it is imperative that producers adopt international certifications that are commonly adopted by firms exporting to their main destinations.

A recently published study of Dr Farrukh Iqbal and myself titled "The Determinants of International Certification among Manufacturing Firms in Pakistan" in the Lahore Journal of Business highlights the importance of adopting international certifications by firms as it finds that they are more inclined to seek international certifications if they operate in competitive environments, have well-qualified workers as well as adopt a more open information-sharing culture.

Exporters are more likely to encounter competition from firms originating from better business environments than their non-exporting counterparts, increasing the importance of international certifications.

The findings of the study reflect the fact that the promotion of exports requires improved management as well as compliance with international certifications.

Fourth, the government must introduce technical non-tariff measures that improve the quality of products produced and sold in Pakistan.

As major export destinations enforce such requirements, it would become increasingly costly for Pakistani firms to adopt these measures if the goods produced and sold in the domestic market fail to comply with the quality standards imposed in export markets. High compliance costs will lock out potential exporters.

Adapting local and exportable products to higher quality standards will reduce compliance costs. As non-tariff measures become more prevalent globally, Pakistani exporters will face further challenges in increasing exports.

Finally, it is important to ensure that Pakistani exporters participate in global and regional value chains. These linkages involve products that cross borders multiple times.

Backward linkages involve imported inputs that are converted into exportable output. Several East Asian economies have developed their export capabilities by enhancing their participation through backward linkages. Their exports are dependent on low tariff rates at both home and in partner countries.

It is essential that the government encourages firms to import the most effective mix of inputs and convert them into exportable products. A holistic approach is needed to increase exports to more than $60 billion in the next three years.

The writer is the Assistant Professor of Economics and Research Fellow at CBER, Institute of Business Administration, Karachi