Is export growth sustainable?

Pakistan continues to have a narrow export base and remains mainly an exporter of low value-added products

By Hussain H. Zaidi

The first nine months of the current financial year (FY11 July-March) have seen an improved performance on external account. The current account deficit fell to $362 million (0.1 per cent of GDP) from $3.45 billion (2.4 percent of GDP) during the corresponding period of the preceding financial year. For the full FY11, the current account deficit is projected to be less than 2 percent of GDP compared with 2.3 percent in FY10.

The two principal components of the current account are remittances and trade balance. Remittances have registered remarkable growth during the last few years. However, trade deficit has remained a problem. In FY09 trade deficit was $12.62 billion, which was reduced to $11.53 billion in FY10. During July-March FY11, $8.01 billion trade deficit was registered, which was $184 million less than that for the first nine months of the previous fiscal year.

The good news is that the trade deficit has been brought down not by curtailing imports but by increasing exports. Imports went up from $22.54 billion in FY10 (July-march) to $25.95 billion in FY11 (July-March). Exports rose from $14.34 billion to $17.95 billion during this period by more than 25 percent and are projected to touch $24 billion for the full year. The important question, however, is whether the current export growth rate sustainable.

To answer this question let us begin by looking at the composition of exports. Textiles continue to be the major item in Pakistan’s export basket. In FY11 (July-March), textiles export reached $9.28 billion accounting for 52 per cent of the total exports. Within the textiles group, the major exports are of knitwear ($1.99 billion), fabrics ($1.72 billion), bed wear ($1.45 billion), yarn ($1.18 billion) and readymade garments ($772.85 million). The share of value added textiles (knitwear, bed wear, readymade garments, towels and made-ups) was $4.93 billion, while that of non-value added textiles (cotton, yarn, fabrics, tents & canvas, and synthetic textiles) was $4.34 billion.

The second major exports were of food items ($2.80 billion), including rice ($1.55 billion), fruits and vegetables ($402.37 million), wheat ($219.58 million) and fish ($188.84 million). Other main export items include petroleum products ($1.01 billion), leather products ($651 million), sports goods ($335.37 million), plastics ($343.80 million), engineering goods ($314.63 million), cement ($353 million), and medical equipment ($231.57 million).

A similar pattern has been observed over the years. For instance, during FY10 (July-March), out of total exports of $14.34 billion, the share of textiles was $7.49 billion, which was 52 per cent. Within the textiles group, the major exports were of knitwear ($1.50 billion), fabrics ($1.38 billion), bed wear ($1.20 billion), yarn ($917.34 million) and readymade garments ($719.5 million). The other major exports were of food items ($2.37 billion) including rice ($1.51 billion), fruits and vegetables ($270.34 million), and fish ($147.04 million). Other main export items included petroleum products ($851.7 million), leather products ($499.23 million), sports goods ($269.17 million), plastics ($247.98 million), engineering goods ($217.41 million), cement ($380.21 million), and medical equipment ($206.82 million).

In FY11 (July-March), the share of top 10 products -- knitwear, fabrics, rice, bed wear, yarn, petroleum products, ready made garments, leather products, synthetic textiles and fruits and vegetables -- in total export basket was $11.18 billion, which is 62 per cent. In FY10 (July-March), the share of top 10 products -- rice, knitwear, fabrics, bed wear, yarn, petroleum products, ready made garments, leather products, synthetic textiles and fruits and vegetables -- in total export basket was $9.12 billion, which is 64 per cent.

This means Pakistan continues to have a narrow export base and remains mainly an exporter of primary or low value added low technology products. Pakistan’s export pattern continues to be diametrically opposed to the world’s. Engineering goods make up nearly 60 percent of the global trade, while textile and garments constitute only 5.8 per cent of the global trade. In contrast, engineering goods have a very low share in Pakistan’s export basket. In FY08, export of engineering goods was $325.24 million (1.59 per cent of total exports), in FY09 $347.49 million (1.81 per cent of total exports), and in FY10 $300.77 million (1.52 per cent of total exports). In FY11 (July-March), engineering goods worth $314.64 million have been exported, which represents 1.75 per cent of total exports. Thus the share of engineering goods in total exports has remained less than 2 per cent.

The robust export increase during the current financial year is mainly due to significant rise in international commodity prices and partly due to increase in aggregate demand in the major export markets as economic activity picked up after two years of global recession. Based on data for July-February FY11, export quantity of some textiles products went down though their export value went up due to higher per unit price. For instance, export quantity of raw cotton, yarn and bed wear declined by 45, 20 and 3 per cent respectively while their export value appreciated by 13, 45 and 17 per cent respectively and per unit price increased by 106, 81 and 20 per cent respectively over the corresponding period of the preceding fiscal year.

Simultaneously, the rise in world commodity prices has also gone to our disadvantage as imports have gone up from $ 22.54 billion to $25.95 billion by 15 per cent during the above referred period. As the State Bank of Pakistan (SBP) notes (2nd Quarterly Report FY11), import growth is likely to outpace export growth in the remaining months of the current financial year mainly due to continuous rise in world petroleum and palm oil prices and partly due to domestic shortage of some key commodities such as sugar and cotton.

A country’s export performance reflects its state of industrial development. Pakistan has a narrow export base and is an exporter of primary and low technology products, because this is what the domestic industry offers. Hence, industrial development is arguably the most important factor for sustained increase in exports. A capital scare and technology deficient country like Pakistan needs foreign investment in the manufacturing sector to expand and upgrade its industrial base. Unfortunately, though during the last few years, Pakistan has received a lot of investment in the services sector, such as financial services and telecommunications, there have been meager FDI inflows into the manufacturing sector, particularly the textiles sector.

The industrial and export constraints of Pakistan are well brought out by its persistently low ranking on global competitiveness index--91 in 2005, 94 in 2006, 92 in 2007-08, 101 in 2009-10 and 123 for 2010-11.

In follows that in order to achieve sustained increase in exports and thus reduce trade deficit, Pakistan needs to widen its industrial base and shore up its export competitiveness. In case we continue to rely on export of commodities and manufactures thereof, we will remain vulnerable to price fluctuations in the world commodity market.