ISLAMABAD: Given Pakistan’s observable characteristics in terms of economic size, level of development, remoteness, and factor endowments, it is estimated that Pakistan’s potential annual exports are at US$ 88.1 billion, about 4 times the actual current level, World Bank said in its recent report “Pakistan Development Update”.
This large gap between actual and potential exports, or “missing exports, ” places Pakistan among the top quartile of the distribution of countries with missing exports. Were Pakistan’s exporters to tap into that potential, the resulting export-to-GDP ratio would place the country at around the middle of the distribution of countries according to export orientation. To reach that point, Pakistan’s exports would need to grow at the same rate as Vietnam’s for 10 years, or Bangladesh’s for 13 years.
The report said that the opportunity cost of Pakistan’s “missing exports” is estimated at 893, 000 jobs and US$ 1.74 billion in foregone taxes. Of these, 152, 000 jobs could be created in the agriculture export sector, and 741, 000 jobs could be created in the manufacturing export sector.
While some of these jobs could be newly created, others may imply the reallocation of labour from relatively lower productivity, domestic-oriented firms, to higher productivity, export-oriented firms.
In terms of foregone tax revenue, a back-of-the-envelope calculation suggests that realizing the export potential would bring an additional US$ 1.74 billion in direct tax revenues annually, taking into account Pakistan’s value added share in gross exports, as well as the implicit direct tax rate across sectors.
The report added that since the turn of the century, Pakistan has become a more inward-oriented economy. A long-term examination of export performance reveals structural stagnation. In 1990, Pakistani firms served 0.19 percent of the world’s imports. By 2019, they served only 0.12 percent—a nearly 40-percent decline in their market share. As a share of the economy, exports stood at 16 percent of GDP in 1999, but less than 10 percent in 2020.
To tap into the export potential, Pakistan needs to upgrade its trade policy framework. Specifically, it needs to reduce the anti-export bias of tariff policy. This entails gradually reducing import duties across the board, as well as reducing the extent of the cascading by applying larger import duty cuts to final goods relative to intermediates and raw materials. Analysis shows that protecting the domestic market through high rates of import duties, as the ones observed in Pakistan, comes at the expense of missing out in terms of exports, because it incentivizes firms to sell domestically rather than to export.
The high levels of protection observed in Pakistan carry a high opportunity cost in terms of export-oriented jobs lost, and a higher productivity path the economy could undertake.
Second the government needs to reorient trade enhancement schemes. Currently, schemes such as those put forward in Statutory Regulatory Order (SRO) 711(I) 2018, provide support to exporters that reach destinations with low export potential and low
dynamism, thus not leading to an effective and efficient allocation of scarce public funds.
High-potential Asian destinations should be targeted rather than low potential African, Latin American, or Pacific Islands ones.
Thirdly the Pakistan government needs to negotiate market access with high potential destinations. Central Asian republics are a high potential for Pakistan, because of high missing exports to those countries, and because of their import dynamism.
Preferential trade agreements with Uzbekistan or Kazakhstan should be priorities, along with the negotiation of agreements on transit trade with Afghanistan to facilitate physical access to those markets, the report suggested.