Remittance rush can't hide export woes

July 13, 2024 (MLN): Pakistan’s diaspora, dispersed across the globe, rallied in support of their cash-strapped homeland in FY24 with $30.25 billion in terms of workers’ remittances, marking a remarkable 10.68% YoY increase from the previous year's $27.33bn.

Driven by love for their families and a sense of religious obligation on the eve of Eid ul Adha, June 2024 alone paints a dramatic picture as remittances surged by an extraordinary 44.4% YoY, leaping to $3.16bn from $2.19bn in the same month of the previous year.

On a micro level, this influx brings much-needed relief to countless households, offering a ray of hope in otherwise dark times of inflation.

The same remittances have also provided the much-needed buffer to the foreign exchange reserves of the country but this silver lining casts a shadow of concern, termed as Overreliance in the absence required surge in exports.

What made remittances increase and why it is difficult to attain the required surge in exports?

Lately, this notable influx of funds comes at a high cost as the country is losing its "cream" – highly skilled and educated individuals seeking better opportunities abroad. No doubt, this brain drain will likely stunt the nation’s growth and development.

According to the data provided by the Bureau of Emigration & Overseas Employment, 13.6 million Pakistanis have been registered for employment abroad up to May 2024.

Additionally, the rise in remittances is driven by steady oil prices, rapid development in the GCC, especially in Saudi Arabia and the UAE, and the majority of Pakistani workers in the GCC fuelling this remittance boom.

Now, let's dive into the second part of the above-stated question.     

The issue of stagnant growth in exports has always been Pakistan's Achilles' heel as this deep-rooted issue remains a hot topic among academics, corporate leaders, and policy analysts alike. Exporters were found to blame government policies for this stagnation.

Issues like increasing taxes, lack of subsidies, and increasing electricity and gas tariffs have further eroded the competitiveness of Pakistan’s industrial and export sectors, are the main culprits behind this.

This is the reason Pakistan remained far behind in exports as the exports in 11MFY24 stood at $35.81bn while imports stood at $57.63bn.  

Crushing all hopes, the federal budget FY25 introduced measures that have cast a dark shadow over Pakistan's exporters, making the business environment even more bleak.

Among these measures are the shift from a final tax regime to a minimum tax regime and an increase in the maximum tax rate for non-salaried individuals to 45%, leading to widespread concern and protests within the business community.

Moreover, amendments that allow sweeping discretionary powers to the Federal Board of Revenue (FBR) have compounded these challenges.

The redefinition of 'fraud,' extending the period for which the FBR can seek records from six to 15 years, and new powers to set minimum values for certain imported goods at the import stage for advance tax purposes, are likely to escalate import costs, disrupt cash flows, and increase the likelihood of valuation disputes.

Collectively, these changes are set to make the cost of doing business in Pakistan excruciatingly high.

It is the need of time that the government should reduce taxes for both the formal sector and individuals who are documented and paying their due share, as well as lower taxes on electricity bills.

Instead, the government should focus on collecting taxes from agriculture, retail/wholesale trade, real estate, and other tax-evading persons and businesses, Khurram Schezad CEO of Alpha Beta Core recommended while speaking to Mettis Global.

Additionally, targeted tax breaks (performance-linked) should be given to exporters, along with competitive utility costs and lower capital costs to enhance competitiveness.

Furthermore, the government should reduce import tariffs to decrease smuggling and under/over-invoicing, which would enable the government to collect more taxes.

He believes that export earnings can be boosted with targeted investments in productive sectors and structural reforms in energy, fiscal policies, education, health, infrastructure (both physical and digital), roads and transport networks, agricultural productivity, and human resource development with both basic and technical skills.

Dutch Disease

At the same time, Dr Usama Ehsan Khan Head of Research at Policy Research and Advisory Council (PRAC) termed the current economic scenario a Dutch Disease wherein a significant increase in economic activity in one sector leads to an appreciation of the national currency which can adversely affect Pakistan’s export competitiveness.

Speaking to Mettis Global on the topic, he said, Pakistan's growing dependence on remittances can offer both advantages and challenges for its economic landscape. Remittances bolster household incomes and strengthen foreign exchange reserves, playing a pivotal role in stabilizing the economy. However, an overreliance on these inflows can precipitate economic vulnerabilities.

To mitigate these risks and simultaneously boost export performance, Pakistan should consider innovative strategies to channel remittances into productive economic sectors.

“One approach is the issuance of bonds offering attractive returns specifically targeted at investment in export-oriented industries. This redirection of funds can catalyse the development of these sectors, enhancing their global competitiveness,” Usama said.

Moreover, Pakistan should proactively seek to expand its market reach by forging trade agreements with non-traditional markets such as African countries and the Central Asian Republics (CARs).

Additionally, leveraging the Export Development Fund (EDF) to effectively overcome non-tariff barriers can further facilitate Pakistani exporters in overcoming international trade hurdles, he added.

About exporters' concerns, he was of the view that despite initial promises by the Prime Minister to alleviate some of these pressures by reducing industrial tariffs, these measures were retracted due to conditions imposed by the International Monetary Fund (IMF).

In response, the government could consider revising the Prime Minister's relief package for industries, including a rollback of fixed charges to previous year levels.

Such reductions in electricity tariffs for industries would likely decrease production costs, invigorate industrial activity, and improve the competitiveness of Pakistani products on a global scale, he noted.

Additionally, reducing energy costs could stimulate further investments in the industrial sector, promoting development, expansion, and substantial employment opportunities, thereby making the cost of doing business in Pakistan more competitive internationally.

By implementing these strategies, Pakistan can better balance the economic influx from remittances with sustainable growth in its export industries, securing a more resilient economic future.

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