In the face of massive economic challenges, a burgeoning population,
energy and water shortages, and a huge and growing number of unemployed
workers, especially youth, Pakistan needs to look for ways to steer itself out
of the economic quagmire by diversifying exports not only in terms of
commodities but also in terms of markets.
Heavy concentration of exports in few commodities and few markets can lead
to instability.
According to World Bank data, Pakistan recorded a trade deficit of Rs213.55
billion in May 2013. The balance of trade showed average deficit of Rs184.082
billion from 1957 to 2013, with the surplus reaching the peak at Rs5.457
billion in June 2003 and the deficit hitting the worst at Rs215.020 billion in
December 2011.
Pakistan runs a regular trade deficit primarily because of heavy imports of
energy products. Main import goods are fuel (40% of total imports), machinery
and transport equipment (18%) and chemicals (16%). Major exports include cotton
and knitwear (28% of total exports), bedwear, carpets and rugs (8%) and rice
(8%).
This year, the country is expected to fare badly in fruit exports to Dubai
and the UK. A consignment of 50 tons of fruit sent to the UK has been rejected
on the grounds that it was infected with fruit fly. Until June 21 in fiscal
year 2012-13, 28,700 tons of fruit had been exported, but much of this was
destroyed because of quality issues.
In the outlook for 2013, continuous weak global growth outlook and
heightened uncertainties lead to expectations that world trade will continue to
expand at a moderate pace of 4.3% in volume, compared to 3.3% in 2012 and 6.8%
from 2005 to 2008.
Recent trade data reflects the spill-over effects on the growth of
Pakistan’s exports. Geographically, the EU and the US represent the most
important destinations for exports and their markets absorb 31% and 23% of
shipments from Pakistan. Therefore, slowdown in US and European economies and
weak demand have significantly impacted export growth.
China is the third most important destination for Pakistan with an 11.5%
share. Recently, UAE, Afghanistan, Oman and Turkey have also become important
destinations.
Despite focusing on a limited number of markets, Pakistan has seen some
diversification in exports in the past few years. A few years ago, around 43%
of exports were concentrated in five markets (US, UK, Germany, Hong Kong and
UAE). This share has been going down continuously and it now stands at 36.3%
whereas the share of other countries has increased to 63.7%.
This improvement came mainly on the back of the Strategic Trade Policy
Framework (STPF 2009-12) and the resulting increase in exports to China,
Afghanistan and Bangladesh.
In 2012-13, the export target was set at $24.8 billion, 4% higher than the
previous year. The moderate growth target was set in the wake of energy
shortages and slow growth in developed economies.
Exports in the first 10 months (July-April) reached $20.147 billion, up 4.2%
from $19.329 billion in the same period of previous year. Of the total, the export
of food group rose 12.3%, textile group 6.1% and other manufactures 8.7%.
However, exports are restricted to a small number of items such as cotton
and cotton products, leather, rice and few others. Jewellery has recently
become another significant export item.
Cotton and cotton products, leather and rice accounted for 63.7% of total
exports in the first nine months of 2012-13 with cotton products alone
contributing 51.4%.
The share of major export items has come down over the years as they earlier
constituted around 70% of total exports. However, compared to the previous
year, the share has not improved. Further data assessment shows that most of
the export earnings have come from textile manufacturers.
If a country’s exports depend on a narrow range of products, then its export
earnings will fluctuate with international price changes and shocks. But the
country with a more diversified portfolio will find that fluctuations in prices
of some products will not have any significant impact on total earnings.
The lack of diversification in Pakistan’s export markets exacerbates the
vulnerability to economic shocks. This leads to volatility and instability in
export earnings, which in turn has adverse effects on growth, employment,
investment planning, export capacity, foreign exchange reserves, inflation,
capital flight and debt payments.
Therefore, Pakistan is required to diversify its export portfolio by adding
new products to the export basket. This will enable the country to avoid the
risks associated with production and distribution of different products and
also reduce reliance on one or few geographical destinations for exports.
For diversification of export markets, Pakistan should develop trade
linkages and introduce products in leading markets like Canada, Japan, South
Korea and the Netherlands.
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