Evaluation of Trade Policy (1999-2000)
Asad, S. Hasan, Economic Review
The trade policy for 1999-2000 has been presented by Commerce Minister on July 14 in an extremely unfavourable situation of declining exports and rising trade deficit. A brief retrospective view is necessary for evaluating the new trade policy.
The year 1998-99 recorded a decline of 10.5 per cent in export over the preceding year with a shortfall of 23 per cent against the target. At $7,718 million, it was below the level since 1994-95, a fact which is a matter of serious concern both for our policy makers and exporters. The galloping imports and trade deficit have adversely affected the exchange rate and accentuated the search for overseas borrowing with concomitant foreign debt liabilities. The following table depicts export, import and trade deficit over the recent years:
In the initial months of the last fiscal year, it was trumpeted by the government that although export is declining but trade deficit is narrowing which was due to lower import level. Yet, in the closing months, imports surged following lifting of curb and reduction in tariff in the aftermath of the revival of IMF structural programme. This caused trade deficit to jump to $1,569 million (2.8% of GDP) for the year 1998-99 from $1,490 million (2.3% of GDP) in 1997-98.
Ishaq Dar has announced zero-trade deficit in 1998-99 while projecting exports and imports at $10 billion. This clearly demonstrates the over-optimism of the government only to suit its political objective of depicting rosy picture. Such a policy needs to be supplanted by a "realistic" one which could help both the government and the private sector in formulating appropriate policies to achieve the targets. The projections failed to materialise owing to world wide slump which eroded the value of our products in the overseas markets. But these considerations were ignored by Ishaq Dar in fixing trade targets last year.
According to Ishaq Dar, 80% decline in export is due to price effect and the remaining 20% due to quantity effects. The production of cotton, the basic input in our exports at 8.8 million bales was lower by 4.3 per cent over the preceding year with a shortfall of 16.2 per cent over the target.
Exports are targeted at $9 billion and imports $9.8 billion, implying an increase of 16.6 per cent and 5.5 per cent respectively over the last year. The trade gap is therefore, expected to be half at $800 million. It is apprehended that the export target may not be achieved as it is based on the "rosy" assumptions of growth of manufacturing by 5.8% and of agriculture by 4.3% with cotton crop estimate of 9.7 million bales and rice crop of 4.8 million tonnes leaving over 2 million tonnes surplus for export. The trade policy has two main objectives. One, it would facilitate achievement of the target of reducing trade deficit through enhancing exports, and two, it would be able to cope with the tough requirements set by the international competitors. Only time will tell whether these objectives are fulfilled.
Various incentives have been provided in the trade policy. for example, to increase export of engineering, contracting and consulting services, foreign exchange earning will be charged income tax at 1%. Income from commission for services of buying houses and export indenting houses will be treated as export earnings and taxed as export of the same product. The income tax on export of rice has been reduced from 1% to 0.50% upto 5 kg packs. The income tax on export of canned and bottled fish and other food items has been reduced to 0.5% In order to promote the development of export of canned food, 90% depreciation allowance is allowed in the first year for income tax assessment. The income tax on export of precious stones has been lowered from 1% to 0.5%. Import of such stones for re-export is allowed duty-free. Import of spare parts/machinery upto $7000 a year is allowed without opening L/C if such import is made by air or by courier. …