ADB has suggested Pakistan, in a new study released on Monday, to make structural reforms for improving exports so that the economic growth rate of above 3.8% could be achieved. The study “Why Pakistan’s Economic Growth Continues to be Balance of Payments Constrained” says the growth needs an upgrade in the international specialization of country’s profile.
“A more diversified economy results in more diverse exports”
This is therefore required to acquire the wider set of productive capabilities that is needed to export goods with a higher level of sophistication. As first step for improvement; export diversification should be achieved for identifying reasons of decline in export value in important industries e.g. stone & glass, mineral products, chemicals and plastic. Another step is to explore options for exporting new products which need the same productive capabilities that are required for existing export products, but having a higher level of erudition within the product space.
Another move is to take steps for generating a favorable environment for export (export insurance, terms of trade, trade agreements and export promotion; preparing a strategy for garment industry, including an assessment of current products;, accreditation, & international standard certification; establishing a national single window for exports; and improving the availability of trade finance for exporters.
For implementing these steps, it is needed that design of policy, coordination & implementation for facilitating attempts by the private sector for acquiring capabilities in dormant but more sophisticated products, as well as to encourage meaningful strategies for developing new capabilities in the remote products.
Pakistan has lost its global market share by 1.45% per annum on average, during the last decade
Foreign exchange reserves on the other hand have been declined to $7.3 billion from $9.8 billion during the fiscal year 2019. This amount is only sufficient for financing 1.4 months of imports. That is why the most structural challenge for alleviating the balance of payments is to improve the global market share. Since the balance of payment situation is the constraint to sustained economic growth.
Another problem for balance of payment is the composition of imports. 40% electricity production of Pakistan is oil based while 25% is gas based. Reason for more and more oil consumption is the subsidies offered to the energy sector. This is also driving the composition of imports. Study says, CPEC and other investments in the power generation capacity of country can change the energy mix and this can move the country away from the dependence on the energy supplied based on oil. This will also lower down the energy imports and shift the use to domestic coal reserves.
IMF predicts that these investments would result in a diversification of Pakistan’s energy mix between 2016 & 2024. Hydro-power will be shifted from 36% to 40%, natural gas will be shifted from 28% to 22%, furnace oil from 30% to 8%, coal from zero % to 18%, solar & wind power from 4% to 3%, and nuclear energy from 3% to 9%.
Accelerating energy sector reforms to decrease and rationalize oil-based generation subsidies, incentives for energy generation from other sources, and reduction in losses are important structural reforms on the balance of payments.