Increasing Imports, Declining Exports & Premature Deindustrialization

Transcription

1 2017 Increasing Imports, Declining Exports & Premature Deindustrialization

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3 Increasing Imports, Declining Exports & Premature Deindustrialization December 2017 i

4 Acknowledgements: Team Leader: Samir S. Amir Lead Researcher: Salik Saeed Disclaimer: The findings, interpretations, and conclusions expressed herein are those of author(s) and do not necessarily reflect the views of the Board of Directors and Members of the Pakistan Business Council or the companies they represent. Any conclusions or analysis based on ITC, UNCTSD, PBS, WTO and IMF are the responsibility of the author(s) and do not necessarily represent the opinion of the ITC, UNCTSD, PBS, WTO and IMF. Although every effort has been made to cross check and verify the authenticity of the data used, the Pakistan Business Council does not guarantee the data included in this work. All data statistics are correct as of 15th September, 2017 and may be subject to change. ii For any further inquiries, please contact Samir S. Amir at and Salik Saeed at

5 List of Contents SECTION I 1 About PBC 3 The PBC s Member Companies 6 Members Contribution to the Economy 8 Represented Sectors of the Economy 9 Members Profile 10 Key Engagements and Interventions 11 PBC s Research Contribution 12 PBC s Centre of Excellence in Responsible Business (CERB) 14 SECTION II 15 Background 17 Composition of Imports Imports Breakdown - Financial Year 2017 Vs. Financial Year Exports 29 Exports Breakdown - Financial Year 2017 Vs. Financial Year Pakistan s Share in World Exports 34 Pakistan s Export Concentration Index 37 Share of Industrial Sector in the Economy 38 Pakistan Deindustrializing Prematurely 39 Pakistan s Free Trade Agreements 40 GDP Growth - Consumption Driven with Low Levels of Investment 42 Growing Middle Class 45 Low Agricultural Productivity 47 An Overvalued Currency 49 Higher Input Cost for Export Industries 50 A Tax Regime Skewed in Favour of the Undocumented Sector 51 PBC s Position on CPEC 53 SECTION III 55 Pakistan Sri Lanka FTA 57 Pakistan China FTA 62 Pakistan Malaysia FTA 68 Pakistan Indonesia PTA 73 Pakistan Mauritius PTA 78 SECTION IV 83 The European Union 85 Central Asian Republics 91 SECTION V 93 Regional Trade 93 Trade Prospects within the Region 95 Pakistan India Bilateral Trade 98 Trade with Afghanistan 105 Trade with Iran 109 SECTION VI 115 Comparison of Pakistan s Reported Trade Figures Versus Figures Reported by its Trading Partners for Pakistan India Trade Figure Discrepancy 118 Pakistan China Trade Figures Discrepancy 119 SECTION VII 123 Paper & Paperboard 125 Electric Motors 126 Tea 127 Footwear 128 Tyres 129 Fertilizers 130 Sugar 131 Cement 132 Ceramic Tiles 133 Cars 134 iii

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7 Pixabay SECTION I PBC and its Role in the Economy

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9 About PBC (PBC) is a business policy advocacy forum, representing private-sector businesses that have substantial investments in Pakistan s economy. It was formed in 2005 by 14 (now 66) of Pakistan s largest enterprises, including multinationals, to allow businesses to meaningfully interact with government and other stakeholders. is a pan-industry advocacy group. It is not a trade body nor does it advocate for any specific business sector. Rather, its key advocacy thrust is on easing barriers to allow Pakistani businesses to compete in regional and global markets. The PBC works closely with relevant government departments, ministries, regulators and institutions, as well as other stakeholders including professional bodies, to develop consensus on major issues which impact the conduct of business in and from Pakistan. The PBC has submitted key position papers and recommendations to the government on legislation and other government policies affecting businesses. It also serves / has served on various taskforces and committees of the Government of Pakistan as well as those of the State Bank, the SECP, the FBR and other regulators with the objective to provide policy assistance on new initiatives and reforms. PBC membership has grown over the last decade to include most of the leading private sector businesses within multiple sectors in Pakistan. The entry threshold, however, is kept high to maintain focus and quality. A company, in order to be eligible to become a member of the PBC has to be of a certain size and has to enjoy good reputation in the industry. The PBC conducts research and holds conferences and seminars to facilitate the flow of relevant information to all stakeholders in order to help create an informed view on the major issues faced by Pakistan. The PBC s Founding Objectives: To provide for the formation and exchange of views on any question connected with the conduct of businesses in and from Pakistan. To conduct, organize, set up, administer and manage campaigns, surveys, focus groups, workshops, seminars and field works for carrying out research and raising awareness in regard to matters affecting businesses in Pakistan. To acquire, collect, compile, analyse, publish and provide statistics, data analysis and other information relating to businesses of any kind, nature or description and on opportunities for such businesses within and outside Pakistan. 3

10 To promote and facilitate the integration of businesses in Pakistan into the world economy and to encourage the development and growth of Pakistani multinationals.to interact with Governments in the economic development of Pakistan and to facilitate, foster and further the economic, social and human resource development of Pakistan. The PBC is a Section 42 not-for-profit Company Limited by Guarantee. Its working is overseen by a Board of Directors elected every three years by the Membership with the Board being headed by a Non-Executive Chairman. The day-to-day operations of the PBC are run by a professional secretariat headed by a full-time, paid CEO. More information on the PBC, its members, and its workings, can be found on its website: 4

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12 The PBC s Member Companies 6

13 The PBC s Member Companies 7

14 Members Contribution to the Economy The PBC member companies have a significant impact on the economy. As of 2015, the collective output of the members of the PBC represent every 9 th Rupee of the country s GDP, every 5 th Rupee of taxes collected and every 5 th Rupee of exports. Moreover, the member companies directly employ 400,000 people, and in the extended value chain, employ in excess of 2,000,000 people. As of 15 th June 2017, the aggregate value of the listed member companies was around Rs. 8.4 trillion. However, this valuation is only for 45 of the 66 members who are listed. Particulars Unit Value Contribution to GDP % 11.1 Contribution in Total Taxes % 20.0 Contribution in Total Exports % 20.0 Direct Employment No. 400,000 Indirect Employment No. > 2,000,000 Listed Member Companies Aggregate Value PKR 8,434,351,528,329 8

15 Represented Sectors of the Economy PBC is an advocacy group, and not a sector specific trade body. The 66-member companies are diverse in nature and belong to multiple industries in both the manufacturing and service sector. All in all, the members belong to 14 sectors of the economy. Large Scale Manufacturing 1. Agro-industries 2. Cement 3. Chemicals/Fertilizer 4. Energy 5. Engineering 6. Fast Moving Consumer Goods 7. Packaging Material 8. Pharmaceuticals and Healthcare 9. Textiles Services 1. Engineering services 2. Financial services 3. Utility 4. Logistics/courier 5. Hospitality 9

16 Members Profile The PBC members include 26 of the largest MNC s from 12 countries. USA Netherland UAE Bahrain UK France Japan South Korea Switzerland Germany Sweden Hong Kong 10 PBC not only benefits from global best practice, it is able to take a holistic approach to promoting investment, both foreign and domestic. There are very few bodies that can speak for both foreign and local investment.

17 Key Engagements and Interventions PBC has been involved with key stakeholders on multiple forums and has been engaged in various legislative initiatives. Some of the key engagements of the PBC since 2007 include: The Holding Company Law The Law on Large Import Houses 2007 The Housing Advisory Group of the SBP The Real Estate Investment Trust Law 2008 The Special Economic Zone Act For negotiating the Afghanistan Pakistan Transit Trade Agreement The revised Code of Corporate Governance for Listed Companies The Takeover Code The Corporate Law Reform Commission to 2012 The Law on Private Equity & Venture Capital (Work in progress) The Corporate Rehabilitation Act (Work in Progress) Corporate Governance Rules (2013) For Public Sector Companies Serves as Secretariat for the Pakistan India Joint Business Forum (PIJBF) Serves as Secretariat for the Afghanistan Pakistan Joint Business Council (APJBC) The Taskforce negotiating the Pakistan Turkey FTA (Work in Progress) Task force to plan post-brexit trade with the UK 11

18 PBC s Research Contribution PBC has done considerable research on Pakistan s existing and potential trade agreements. The key publications include: Post Brexit: Feasibility of a Pakistan-UK Free Trade Agreement 2017 Pakistan India Bilateral Trade The case for balanced trade normalization 2017 Study on the feasibility of the Proposed Pakistan South Korea Free Trade Agreement 2016 Second Review of the Feasibility of a Free Trade Agreement between Pakistan and Thailand Third Review of the Pakistan-China FTA and Recommendations for Phase 2 Negotiations Afghan Transit Trade through Pakistan and Pakistan Afghanistan Bilateral Trade Second Review of the Feasibility of a Free Trade Agreement between Pakistan and Turkey 2016 Selected Trade and Manufacturing Data for Pakistan A Brief Analysis nd Review of the Pak-China FTA 2015 Review of Pak Sri Lanka FTA 2015 Afghanistan s International Trade Patterns Post-APTTA st Year Review of Pakistan s GSP Plus Review of Pakistan s PTA with Mauritius 2015 Review of Pakistan s FTA with Malaysia 2015 Review of Pakistan s PTA with Indonesia 2015 Pakistan India Trade Normalization A Word of Caution 2015 A detailed Study on the Proposed Pakistan Thailand FTA 2015

19 Moreover, PBC has also published country profiles including: Country Series Republic of Tajikistan Country Series Kyrgyz Republic Country Series Turkmenistan Country Series Republic of Kazakhstan Country Series Republic of Uzbekistan Country Series Colombia Country Series Argentina Country Series United Mexican States Country Series Chile Country Series Brazil Country Series South Africa Country Series The Russian Federation Country Series Mozambique Country Series Ghana Country Series Nigeria Country Series Ethiopia Country Series Angola Country Series Iran

20 PBC s Centre of Excellence in Responsible Business (CERB) The formation of the Centre of Excellence in Responsible Business (CERB) is the first of many envisaged centres of excellence by the PBC. The aim of the centre is to make PBC more inclusive, relevant and authoritative. CERB is an outreach initiative to build capacity and capability of medium sized businesses. The underlying objectives of CERB are guided by, but not restricted to, the UN Sustainable Development Growth Goals. The vision for the Centre is to make it a multi-sector business coalition assisting Pakistani enterprises to pursue economic, social and environmental value creation in the short, medium and long term The two key pillars are: Ethics, Values and Governance Forum: It promotes responsible practices to strengthen the formal sector in pursuit of sustainable value creation Inclusive and Sustainable Development Forum: This forum focuses on generating livelihoods, promoting women s empowerment and decoupling growth from its impact on the environment The mission for CERB is to engage with businesses and industry leaders and to encourage a transformation towards the conduct of responsible (sustainable and inclusive) business in Pakistan. Moreover, it also wants to leverage private sector growth for inclusive development, poverty reduction and sustainability. 14

21 Flickr SECTION II The State of Pakistan s Economy

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23 Background Pakistan s macroeconomic indicators at the end of the last calendar year (January to December 2016) showed that Pakistan s economy had marginally improved in The foreign exchange reserves stood at $23.2 billion as on December 30 th1, 2016 against $20.8 billion in the previous year, showing an increase of 11.5% year-on-year (YoY). The country witnessed its GDP growing at the fastest rate in at least a decade at 5.7% against 4.4% in the 2015 calendar year. However, both the trading account balance and the current account balance had worsened in the wake of rising imports, declining exports and a slowdown in remittances. As of December 2016, the trading account balance stood as negative $26.5 billion, down by 21% on a YoY basis and the current account showed a deficit of $5 billion. External Balance Scenario Billion US$ Trade Balance Current Account Balance Last working day for the calendar year

24 The following table compares Pakistan s external accounts for the financial year 2017 ending on 30 th June with the financial year 2016: CURRENT ACCOUNT POSITION FY 2017 (US$ Billion) FY 2016 (US$ Billion) % CHANGE Exports Imports Trade Balance Remittances Current Account Balance Pakistan s exports in FY 2017 were the lowest in 6 years while imports were the highest ever recorded in USDs, this led to an account deficit of USD 32.6 billion. Typically, remittances provide significant import cover, however the remittances too have fallen marginally in FY A detailed analysis on Pakistan s exports and imports is provided in the next section. The current account deficit has grown by almost 2.4 times over the previous year which poses a serious challenge to Pakistan s economic health. Prompt structural reforms and the utmost focus by policymakers and stakeholders is required in order to manage the current account, otherwise Pakistan will have to go into another multilateral bailout program. 18

25 Composition of Imports 2016 Others 31% Mineral fuels, mineral oils and products 20% Edible vegetables 2% Oil seeds and oleaginous fruits 2% Machinery, mechanical appliances 12% Animal or vegetable fats and oils 4% Organic chemicals 4% thereof 4% Vehicles other than railway 5% Iron and steel 6% Electrical machinery and equipment 10% The top ten commodities imported in accounted for 69% of the total imports in US Dollar terms; in 2015, their contribution was 67%. The share of oil and gas imports has reduced to 20% as compared to 23% in 2015 and 31% in 2014 of the total import bill. This can be attributed to falling global oil prices over the past two years and a nominal increase in domestic production. Mineral fuels have historically been the biggest drain on Pakistan s foreign reserves and with a reducing oil import bill, the country has been able to save billions. In terms of USD, fuel imports declined by 5% in Overall, Pakistan s imports have increased over the year, without significantly changing the contribution mix. Machinery and equipment have continued to remain the second and third most imported commodities, together making it the biggest import group; however these have increased in US Dollar terms. This can be attributed to the China-Pakistan Economic Corridor (CPEC) related economic activity in the country especially for the energy related projects. 2 Unless explicitly stated, trade data used in this report is based on UN Comtrade which reports data on a calendar year basis. 19

26 Imports Breakdown - Financial Year 2017 Vs. Financial Year 2016 Composition of imports for the Financial Year 2017 vs. composition of imports for the Financial Year 2016 at HS-02 Level is given below: Serial No. HS Code (2 Digit) Description Import Value ( 000 US$) FY FY % of Imports Import Value ( 000 US$) % of Imports % Change Total Imports 53,025,816 44,684, Machinery 11,768, ,572, Petroleum 10,902, ,371, Agricultural & Other Chemicals 7,584, ,225, Food Group 6,138, ,388, Metal 4,407, ,120, Textile 3,353, ,146, Transport 3,307, ,962, Others 5,563, ,896,

27 Imports of Capital Goods The largest increase in imports was observed in capital goods. The following table compares imports of capital goods in FY 2017 with imports of capital goods in FY 2016: PARTICULARS FY FY US$ % Share US$ % Share % Change Total Imports 53,025,816,000 44,684,841, Imports of Machinery 11,768,212, ,572,775, Power Generating Machinery 3,042,742, ,848,122, Textile Machinery 556,837, ,500, Construction & Mining Machinery 498,669, ,689, Agricultural Machinery 115,716, ,094, Other Machinery 3,353,946, ,373,182, As evident from the table, the largest portion of machinery imports is for power generation. Under CPEC, multiple power generation projects costing more than $22 billion are under development and for which power generation machinery is being imported. However, it is expected to reduce in the coming years. The same is the case with construction machinery; extensive infrastructural development is underway for which these machines are being imported. 21

28 Imports of Petroleum Petroleum and its products make up the second largest group of products imported into the country, cumulatively constituting 20.56% of the total import bill for the FY Its bifurcation is provided in the table below: PARTICULARS FY FY US$ % Share US$ % Share % Change Total Imports 53,025,816,000 44,684,841, Imports of Petroleum Group 10,902,522, ,371,390, Petroleum Products 6,827,054, ,337,195, Crude Petroleum 2,547,095, ,295,795, Liquefied Natural Gas 1,312,730, ,081, Liquefied Petroleum Gas 215,286, ,034, Others 357, , With petroleum prices stabilizing in the international market, Pakistan s import of petroleum has sharply increased over the year. The import of petroleum products, which mainly includes refined petroleum, has gone up the most. This is partly due to the introduction of higher octane rating fuel in the country as well as increased usage. Pakistan s local oil refineries lack the capacity to meet domestic demand leading to imports of large quantities of refined petroleum products. The import volume of crude petroleum has gone up by 37% from 5.93 million metric tons to 8.12 million metric tons. On the other hand, the volume of petroleum products has gone up by 46.12% from million metric tons to million metric tons. Moreover, LNG imports have more than doubled during the year. Pakistan s indigenous gas reserves are depleting due to which reliance on imported LNG has increased. Added to it, LNG is also being widely used in the area of power generation which has further increased its demand.

29 Imports of Chemicals PARTICULARS FY FY US$ % Share US$ % Share % Change Total Imports 53,025,816,000 44,684,841, Imports of Agricultural & Other Chemicals 7,584,454, ,225,953, Plastic Materials 1,919,255, ,814,255, Medicinal Products 975,187, ,456, Manufactured Fertilizer 640,698, ,352, Insecticides 159,317, ,505, Others 3,889,997, ,610,385,

30 Imports of Food Items PARTICULARS FY FY US$ % Share US$ % Share % Change Total Imports 53,025,816,000 44,684,841, Imports of Food Group 6,138,857, ,388,608, Palm Oil 1,905,139, ,689,437, Pulses 952,255, ,142, Tea 523,929, ,014, Milk, Cream & Milk Food 258,533, ,797, Dry Fruits & Nuts 180,454, ,929, Spices 138,634, ,339, Soybean Oil 122,785, ,859, All Other Food Items 2,057,128, ,810,091,

31 Imports of Metal Group PARTICULARS FY FY US$ % Share US$ % Share % Change Total Imports 53,025,816,000 44,684,841, Imports of Metals 4,407,577, ,120,824, Iron & Steel 2,121,229, ,005,621, Iron & Steel Scrap 1,115,691, ,087,559, Aluminium Wrought 196,330, ,505, Gold 16,670, ,435, Other Machinery 957,657, ,704,

32 Imports of Textile Group PARTICULARS FY FY US$ % Share US$ % Share % Change Total Imports 53,025,816,000 44,684,841, Imports of Textile Group 3,353,135, ,146,884, Raw Cotton 805,127, ,358, Synthetic & Artificial Silk 634,966, ,561, Synthetic Fibre 484,713, ,987, Worn Clothing 144,788, ,782, Other Textile Items 1,283,541, ,139,196,

33 Imports of Transport Group PARTICULARS FY FY US$ % Share US$ % Share % Change Total Imports 53,025,816,000 44,684,841, Imports of Transport Group 3,307,542, ,962,240, CKD/SKD Vehicle Units 1,029,641, ,289, CBU Vehicle Units 726,010, ,983, Aircrafts, Ships & Boats 501,358, ,910, Parts & Accessories 497,162, ,024, Others 553,371, ,034,

34 Imports of Miscellaneous Items PARTICULARS FY FY US$ % Share US$ % Share % Change Total Imports 53,025,816,000 44,684,841, Imports of Miscellaneous Items 5,563,517, ,896,167, Paper & Paperboard 528,183, ,311, Rubber Tyres & Tubes 350,917, ,900, Rubber Crude including Synthetic 174,691, ,356, Wood & Cork 123,745, ,378, All Other Items 4,385,981, ,818,222,

35 Exports Pakistan s aggregate exports have been on a continuous decline. In the year , total exports fell by around 7% over Textile articles and cotton exports are the major revenue earners which have remained more or less stagnant over the past 5 years while exports of non-textile commodities have significantly reduced. 3 Calendar Year

36 Exports Breakdown - Financial Year 2017 Vs. Financial Year 2016 Composition of exports for the Financial Year 2017 vs. composition of exports for the Financial Year 2016 at HS-02 Level is given below: Serial No. HS Code (2 Digit) Description Export Value ( 000 US$) FY FY % of Exports Export Value ( 000 US$) % of Exports % Change Total Exports 20,447,692 20,786, Textile 12,452, ,447, Food 3,712, ,989, Other Manufacturing 4,092, ,189,

37 Exports of Textiles Group PARTICULARS FY FY US$ % Share US$ % Share % Change Total Exports 20,447,692,000 20,786,510, Exports Textile Group 12,452,532, ,447,286, Knitwear 2,362,007, ,363,622, Readymade Garments 2,316,947, ,195,216, Bed Wear 2,133,974, ,019,918, Cotton Cloth 2,120,321, ,213,859, Cotton Yarn 1,243,515, ,264,922, Towels 786,606, ,966, Made-up Articles 644,709, ,256, Art, Silk & Synthetic Textile 204,272, ,894, Other Textile Materials 640,181, ,633,

38 Exports of Food Group PARTICULARS FY FY US$ % Share US$ % Share % Change Total Exports 20,447,692,000 20,786,510, Exports of Food Items 3,712,428, ,989,195, Rice 1,606,863, ,860,497, Fish & Fish Preparations 394,217, ,869, Fruits 381,705, ,025, Meat & Meat Preparations 221,137, ,092, Vegetables 186,592, ,204, Sugar 161,253, ,284, All Other Food Items 760,661, ,224,

39 Exports of Miscellaneous Items PARTICULARS FY FY US$ % Share US$ % Share % Change Total Exports 20,447,692,000 20,786,510, Exports of Miscellaneous Items 4,282,732, ,350,029, Chemicals & Pharmaceutical Products 878,463, ,372, Leather Manufactures 492,028, ,180, Leather Tanned 345,584, ,752, Surgical Goods & Medical Equipment 339,019, ,768, Sports Goods 307,943, ,738, Cement 237,885, ,210, Engineering Goods 175,312, ,403, All Other Items 1,506,498, ,463,606,

40 Pakistan s Share in World Exports In the graph below, the export trends can be observed for multiple countries relative to world exports. Pakistan s share in world exports has declined over the years. It used to be 0.16% in 2003 which reduced to 0.13% in As a comparison, the share of world exports for competitor countries including Vietnam, India and Bangladesh have all witnessed increases. The highest growth has been witnessed by Vietnam which has seen its aggregate exports touch almost 1.35% or $215 billion in

41 1.60% 1.40% 1.35% Vietnam 8 mes since % 1.00% 0.80% 0.60% 0.48% BD 40% up since 98 BD 140% up since % 0.20% 0.00% 0.16% 0.17% 0.15% 0.14% 0.10% 0.13% Pakistan Viet Nam Bangladesh 0.24% The chart above shows Pakistan s export performance over the years relative to peer countries. While Pakistan s share in world exports has marginally declined, Bangladesh s share has become more significant. However, it is Vietnam which has been able to increase its exports the most relative to world exports; from 0.10% in 1998 to 1.35% in

42 Over the past 19 years, Pakistan s export volume has grown 2.4 times, in the same time period, Bangladesh has increased its exports by 7.3 times and Vietnam by an impressive and significant 24.0 time. 36

43 Pakistan s Export Concentration Index The figure below shows Pakistan s score on the Export Concentration Index versus that for India, Bangladesh and Vietnam. Export Concentration Index is calculated as a sum of squared shares of products constituting a country s exports. It ranges from 0 to 1, where 0 depicts perfect diversification and 1 shows that the exports are concentrated on a single product. Whilst a more concentrated export range is not necessarily bad, it does leave the economy more vulnerable to global demand change. As observable from the table, Pakistan s exports have a low concentration level, however, Vietnam s and India s exports are even more diversified. This is because with changing global demand pattern these economies have ventured into new industries to increase their export base. On the other hand, Bangladesh is twice as concentrated as Pakistan, yet it is known that they have been able to increase their share in world exports. This is because in their core export industry of textiles, Bangladesh has managed to become specialized and gotten more competitive. Concentration is beneficial if the industry outlook is positive and the global demand of those commodities are expected to rise. However, where the industry is dying or maturing, it is better to diversify into new markets. 37

44 Share of Industrial Sector in the Economy 2016 Pakistan India Indonesia Industrial Sector (% of GDP) Manufacturing Industry (% of GDP) The industrial sector typically includes manufacturing, construction, mining & quarrying and electricity, gas, water supply & other utility services. In developing countries, manufacturing is a major contributor to GDP. However, it can be seen that in the case of Pakistan, the share of industries on the whole, and manufacturing particularly are both lower than that for India and Indonesia. Both these countries are economically stronger than Pakistan. There has been a reversal of industrialization, or deindustrialization, in Pakistan over the years. Deindustrialization in Pakistan s case can be attributed to multiple factors including energy shortages, rising cost of energy, poorly negotiated FTAs which have hurt local industry, massive smuggling, under-invoicing, dumping and misuse of the Afghan Transit Trade coupled with a huge informal sector adding to the pressure on the organized domestic manufacturing sector. Because of short-sighted policies, many commodities are exported without much value addition principally to Pakistan s competitor countries who then use Pakistan s raw materials to compete with Pakistan s exporters in international markets. In the absence of intervention by the Government, Pakistan is slowly but surely turning into a nation of traders. 38

45 Pakistan Deindustrializing Prematurely The industrial sector plays a pivotal role in the development of countries; growth in this sector has been the main contributor of development for most advanced nations. Premature deindustrialization is when economies tend to move away from the industrial sector on relatively lower levels of income. Studies show that manufacturing employment has a positive correlation with the richness of an economy. The share of the manufacturing sector in GDP has been on a decline since 2007/08, signalling deindustrialization in the economy. Deindustrialization is a trait that is readily observable in relatively developed and mature economies; Pakistan, on the other hand, is a developing country with a large labour force. As an economy with a GDP per capita of under $1500 and where almost 30% of the population is living below the poverty line, the country cannot afford to offshore jobs. In case Pakistan fails to reverse this trend, the chances of closing the income gap with the developed nations will become less and less likely and there will be widespread income disparity within the country and higher unemployment. 39

46 Pakistan s Free Trade Agreements A Free Trade Agreement (FTA) is an agreement between two or more countries to minimize tariffs, quotas and to provide preferential tariffs on most, if not all, goods and services traded between them. An FTA generally starts off with a reduction in tariffs before eventually eliminating them in a typical period of 5-10 years. Ideally, an FTA leverages relative comparative advantage in each other s value chain and obtains preferential tariff access vs. non-fta/other FTA partners. It enhances value-added and employment generating exports and skews import of raw materials and intermediate goods to add value locally. An FTA should move the trade balance positively with the world, if not with a certain partner. It should strengthen regional connectivity and eventually evolve the partnership into a conduit to third countries. Pakistan has signed three major FTAs and three major Preferential Trade Agreements (PTAs), with another 10 in various stages of negotiations. The FTAs in place are with China, Malaysia and Sri Lanka while the PTAs are with Indonesia, Iran and Mauritius. However, none of the trade agreements that Pakistan has signed has benefited the country except in the case of Sri Lanka. On the contrary, the poorly negotiated FTA s have hurt local industry. There has been an influx of cheap goods from partner countries which has impacted domestic manufacturing while Pakistan has not been able to tap into the partner country s markets. Finally, under-invoicing and misdeclaration of import consignments to take advantage of tariff concessions has further undermined local manufacturing. The following table depicts the impact of the FTAs and PTAs on the external account and as a consequence on domestic industry. It also shows the difference in trade figures for Pakistan and the partner countries. 40

47 Overview of Pakistan s Trade Agreements Country Year Implemented Reporting Country Pakistan's Exports in the Year of Implementation (US$ Million) Pakistan's Trade Balance in the Year of Implementation (US$ Million) Pakistan's Exports in 2016 (US$ Million) Pakistan's Trade Balance in 2016 (US$ Million) Variance in Reported Trade Figures 2016 (US$ Million) Sri Lanka 2005 Pakistan Sri Lanka China 2006 Pakistan 507 (2,408) 1,591 (12,089) China 1,007 (3,232) 1,913 (15,320) (3,231) Malaysia 2008 Pakistan 138 (1,556) 152 (793) Malaysia 126 (1,593) 172 (999) (206) Indonesia 2013 Pakistan 144 (1,064) 128 (1,961) Indonesia 169 (1,247) 157 (1,861) 100 Mauritius 2007 Pakistan Mauritius Iran 2004 Pakistan 102 (168) 36 (287) Iran 88 (35) 36 (287) - Note: Iran has not reported its trade figures for 2016, therefore Pakistan s reported figures have been used. 41

48 GDP Growth - Consumption Driven with Low Levels of Investment Particulars % of GDP Pakistan Sri Lanka Indonesia India Bangladesh Private Consumption 80% 69.4% 36.1% 60.8% 70.3% Government Consumption 11.8% 8.7% 9.5% 11.4% 5.2% Investment 15.2% 29.5% 33.8% 30.6% 31.2% Pakistan, over the years, has become a consumption driven economy. Private and government consumption levels are well above regional peers. In an environment of excessive consumption, there remains little room for savings and investment. Economists suggest that there exists a direct relationship between savings and investment, with higher levels of consumption, savings are reduced and investments are minimal. On the debt side, private sector debt as a percentage of GDP stands at 14% which is well below regional competitors. One of the reasons for low private sector debt is the crowding out of the private sector from the debt market by the government. Banks prefer investing in government debt due to the low risk attached with sovereign debt as compared to the relatively riskier private debt. Moreover, the informal sector is poorly documented which constraints banks from lending to it. Finally, the policy environment in the country is not investment friendly either. Inconsistent government policies and a fragile socio-political environment hampers investor to make long-term investments. 42

49 Private Consumption as a Percentage of GDP % Pakistan India Private Consumption as a percentage of GDP has been increasing over time. As seen in the figure above, in the past 25 years, Pakistan s private consumption has been on a rise which comes at the expense of savings. Savings in an economy determine the level of investments, therefore with lower savings, the investments in an economy go down. Comparing Pakistan s savings rate with India, it can be seen that India s consumption levels have always been lower than that of Pakistan. In 1991, the private consumption rate of India was lower yet closer to Pakistan s level. However, while India s consumption rate declined over the years, Pakistan s consumption rate increased. 43

50 Gross Capital Formation as a Percentage of GDP Pakistan India Gross Capital Formation (GCF) in an economy measures the net increase in physical assets in a period. As evident from the figure above, Pakistan s GCF has been on a decline since This is in line with the increase in level of consumption, an increase in national consumption level has translated into lower investments. On the other hand, India s GCF after having peaked at 41.0% in 2010 has been on a decline, it is however much higher than Pakistan s. Investments, or Gross Capital Formation, in an economy has a multiplier effect on national income. Therefore, it is important that there is sufficient capital formation so as to increase economic activity. 44

51 Growing Middle Class Living Standards Measure (LSM) is an index which was developed to segment the population based on their consumption and spending on multiple commodities and services. Income is not used in this measure to classify segments of the population. Twenty-nine variables are used in this measure including consumer durables such as ownership of a freezer, microwave oven, dishwasher, television, cell phone, air conditioners, cars, bikes, etc. Added to it, services such as running water, electricity, home security services are also included in this composite index. The population is divided into 10 segments where LSM 5 and above are considered middle and upper class. As per the LSM measure, 70 million people in Pakistan can be classified as middle class and this number is expected to continue to grow by almost 2 million per annum. Pakistan s middle class has been growing rapidly coupled with increasing urbanization. This, in turn has, fuelled consumerism. This combination of population growth coupled with rapid urbanization helps explain to some extent the high rate of private consumption in Pakistan where people, in order to improve their living standards, spend more on consumer durables as opposed to saving for the future. The penetration of durables in Pakistan has increased manifolds post 2000 and this penetration has clearly outpaced India s. The following figure depicts the percentage of population in lower and middle-income groups in India and Pakistan: 45

52 Whilst the GDP per capita of India is higher than that of Pakistan, they have a bigger lower income population share than Pakistan. 47% of India s population lies in the LSM 1 category which is the lowest income group in terms of spending on durables. On the other hand, Pakistan has a relatively smaller share of its population living in the lower income group and a larger proportion in the middle class. The figure above shows the penetration rate of consumer durables amongst households in the two countries as of As evident, with the exception of Televisions, a higher percentage of Pakistani households have access to all other consumer durables as compared to India. 46

53 Low Agricultural Productivity CROP Pakistan Crop Yield as a % of Global Best PAKISTAN (Tons/Hectare) WORLD S BEST (Tons/Hectare) PAKISTAN AS A % OF BEST Wheat (France) 38% Cotton (China) 52% Sugar Cane (Egypt) 51% Maize (France) 41% Rice (USA) 29% Agriculture is an important sector in Pakistan s economy. As of 2016, it had a 19.5% share in the country s GDP. The agricultural produce, particularly cotton, is an input to Pakistan s main manufacturing industry. Low agricultural output translates into low industrial output and higher costs. Furthermore, Pakistan exports a number of agricultural products and their value-added items. Sugarcane is used to make sugar and confectionary products that are exported. Rice and maize are also exported from Pakistan. Low crop yields hamper Pakistan s ability to realize its full potential. Pakistan s agricultural productivity ranges between 29% and 52% against the world s best for major commodities. Low productivity also acts as a major barrier to Pakistan becoming a major player in the world processed food industry. Agricultural sector is important to Pakistan s economy as it employs around 42% of the labour force. A thriving and more efficient agricultural sector will help elevate the living conditions of the large number of people it employs and also improve the competitiveness of industry. 47

54 Low Cotton Productivity Hampering Garments Industry Textile products are the biggest export revenue earner for Pakistan and one of the core industries in the country. Cotton, being the input commodity to the industry, holds immense importance. Pakistan s cotton output has been stagnant for at least the last 16 years while India s cotton output has more than doubled in the same time frame. Low cotton output can be accredited to poor quality of seeds, weak irrigation system and inefficient soil management. Low yield of cotton adds to the pressure on the already struggling textile industry as it increases their cost of production. In order for the textile industry to remain competitive internationally, steps must be taken to increase cotton yields. 48

55 An Overvalued Currency Pak Rs. Vs. Destination Market Currencies over the last 5 years The Pakistani Rupee remained unchanged against US Dollar throughout Historically there has been, on an average, a 5% depreciation per annum in the value of the Rupee against the US Dollar, and this had been the trend during the past 20 years at least. Pak Rs. Vs Key Textile Competitor Sourcing Currencies over the last 5 years The Interest Rate Differential Model and the Inflation Rate Differential model suggest that PKR should have witnessed a 7-8% correction against US$ in Effective use of the exchange rate tool allows countries to promote exports. However, in the case of Pakistan, the currency became relatively expensive making Pakistan s exports uncompetitive in the international market and not allowing import substitution in the domestic market. 49

56 Higher Input Cost for Export Industries There exists significant input cost disparity between Pakistan and peer textile exporting countries. Gas Cost in Pakistan as a multiple of Labor Cost in Pakistan as a multiple of Bangladesh 1.9 x 2.0 x India 2.8 x 2.3 x Sri Lanka 2.6 x 1.9 x Vietnam 1.1 x 1.1 x As can be seen from the table above, all the four countries under consideration have lower input costs than Pakistan. 50

57 A Tax Regime Skewed in Favour of the Undocumented Sector Corporate Tax % VAT/GST % Pakistan 38%* 17% Singapore 17% 7% Sri Lanka 15% 12% Bangladesh 25% 15% Vietnam 22% 10% * Includes WWF/WPPF/Super Tax As evident from the table above, corporate tax rates in Pakistan are highest amongst the 5 economies under consideration including Singapore. In addition, the high incidence of indirect taxes in Pakistan adds to the cost of production for the formal sector and makes tax evasion lucrative. More than 70% of Pakistan s tax revenues are raised through indirect taxes, however indirect taxes are an inefficient means of taxation as they are regressive in nature. Pakistan s corporate tax rates are highest in the region and also much higher than the global average. Shareholders of companies pay an effective 47% in income tax which is unreasonable and counterproductive for corporatization. Such high taxes impede corporatization and incentivizes businesses to stay outside the tax net and evade taxes. In addition to the high rates of income tax on corporates, other major fiscal measures impeding corporatization include; changes in the Group Relief Laws, cascading taxes on intercorporate dividends, imposition of super tax, tax on bonus shares and tax on retained reserves all of which are hurting industry. Pakistan s industry suffers from lack of scale, policy measures put in place to promote consolidation and scale have been systematically dismantled in the last four years 51

58 % of GDP % Tax Revenue Agriculture 19.5% <1% Manufacturing 13.5% 58% Retail / Wholesale 18.5% 1% Services Total 59.6% 37% Manufacturing sector, at 13.5% of the GDP, contributes a disproportionately high share of the tax burden at 58% of the tax collection. The retail and wholesale sectors, which contribute 18.5% to the GDP make a contribution of 1% to tax collection. Industry cannot be expected to thrive and grow under the current tax structure. The FBR will need to increase the tax base if the government wants industry to thrive in Pakistan. In addition, the tax system is complicated and complex with up to 47 different types of levies imposed on the tax paying entities in the major cities of the country. This only adds to the cost of doing business for companies. Withholding taxes on non-filers were introduced in Pakistan with the aim of bringing the non-tax compliant individuals and entities into the tax net. However, it has now become more of an additional means of raising tax revenue for the government rather than identifying the non-tax payers and penalizing them. 52

59 PBC s Position on CPEC The PBC welcomes the China Pakistan Economic Corridor (CPEC) initiative of the Chinese and Pakistani governments. Chinese, or for that matter FDI from any country, should be viewed as a positive development given Pakistan s current economic circumstances. It brings the desperately needed investment into the key areas of energy and infrastructure which will help domestic industry grow. Collaboration with China on such a level creates an opportunity for Pakistani businesses to partner with Chinese firms particularly in the area of textile manufacturing. China is the world s largest apparel manufacturer, however with rising labour costs Chinese labour-intensive jobs will have to be relocated in order to retain global competitiveness. Pakistan has the opportunity to capitalize on this and to integrate its local industry into the value chains of the Chinese apparel firms. It is expected that as a result of wage increase in China, up to twenty million jobs will be displaced in the coming years. If Pakistan is able to divert a part of the displaced jobs into the country, it could be beneficial to the domestic economy. However, PBC would like a more critical debate on the impact of CPEC on domestic industry and the economy as a whole in the long-run. Currently, there is a lack of transparency which is creating doubts and concerns. Under CPEC, concessions are being given to Chinese businesses which may potentially undermine domestic industry. Tax exemptions have been offered to businesses which will be established in the Special Economic Zones (SEZs) as part of CPEC and profits have been guaranteed to Chinese businesses in the energy sector. This may affect the domestic manufacturing industry as they may lose their market share to the facilitated foreign investors. PBC identifies three main imperatives for sustainable growth; jobs, taxes and value-added exports. The likely impact of investments under CPEC on these areas needs to be clarified. PBC suggests that the government creates more transparency in this regard. Moreover, the potential impact of CPEC on the external accounts needs to be clarified. Most of the investments in the program are debt investments which will eventually have to be repaid in addition to the profits that will be repatriated to the host country. This will put a lot of added pressure on the already distressed Balance of Payment (BoP). Unless there is a sharp increase in exports, the external account may worsen. It is important that the government and relevant institutions carry out a study to evaluate the impact on Pakistan s current account and BoP in the next 5 years at least. 53

60

61 SECTION III Analysis of Pakistan s FTAs & PTAs

62 56

63 1- Pakistan Sri Lanka FTA - Pakistan s first Free Trade Agreement was with Sri Lanka. - It has been operational since June Total trade between the two countries was $314 million in As part of the FTA, Pakistan got market access at zero duty for 102 products including agricultural goods, rice (with quantity restrictions) and engineering goods. - On the other hand, Sri Lanka got access for 206 products at zero duty including tea (with quantity restrictions), rubber and coconut. - In April 2014, further tariff concessions were given to Sri Lanka on 993 items. This included tariff concession of 50% on the import of herbal cosmetics marketed as Sri Lankan brands, 20% on the import of tiles, cubes and similar articles and 100% tariff concession on the import of black and green tea. 57

64 1.1- Comparison of Key Economic Indicators Pakistan Sri Lanka GDP US$ (Billion) Population Million GDP/Capita US$ 1, , , , GDP Growth % FDI US$ (Billion) FDI % of GDP Trade Account Balance US$ (Billion) Current Account Balance US$ (Billion) Current Account Balance % of GDP

65 1.2- Pakistan Sri Lanka Trade Trends Pakistan - Sri Lanka Trade Overview Million US$ Pakistan's Imports from Sri Lanka Pakisan's Exports to Sri Lanka Sri lanka's Share in Pakistan's World Trade Pakistan's Share in Sri Lanka's World Trade % Share Imports from SL (% of Total Imports) Exports to SL (% of Total Exports) % Share Imports from PK (% of Total Imports) Exports to PK (% of Total Exports) 59

66 1.3- Comparison of Pre- and Post-FTA Trade Figures Imports 2016 (US$ Million) 2015 (US$ Million) Vegetable plaiting materials Oil seeds and oleaginous fruits Edible fruit and nuts Wood and articles of wood Rubber and articles Exports 2016 (US$ Million) 2015 (US$ Million) Cotton Salt; sulphur; earths and stone Pharmaceutical products Edible vegetables and certain roots Articles of iron or steel

67 1.4- Brief Analysis Pakistan has always had a trade surplus with Sri Lanka. The FTA became operational in 2005, and the surplus has increased steadily from $94.5M to $160.5M in In the same time period, exports grew from $153.7M to $237.2M while imports grew from $59.2M to $76.7M. Pakistan s exports to Sri Lanka as a ratio of its total exports to the world has had an increasing trend, however the ratio of imports from Pakistan as a ratio of total imports by Sri Lanka has gone down. This could be explained by the overall decline in Pakistan s exports to the world over the past few years, and is possibly also as a reflection of how Sri Lankan imports from the world have increased. Pakistan s Imports from Sri Lanka relative to its total imports from the world has had a slow declining trend, and the same trend can be observed from the Sri Lankan perspective. While imports from Sri Lanka have increased over the years, Pakistan s imports from the world have increased at a much faster rate. The major exports to Sri Lanka, cotton and salt have been decreasing since Total imports by Pakistan from Sri Lanka have decreased YoY, however the top 5 imports have increased. Pakistani imports of oil seeds and oleaginous fruits have witnessed a fivefold increase compared to Coffee, tea, mate and spices which was the most imported category in 2015 fell to number 7 in 2016, worth $3 million down from $18.5 million in

68 2- Pakistan China FTA Early Harvest Program (EHP) operational from January FTA operational from November st Phase of the FTA completed in 2012 negotiations for 2 nd Phase are currently in progress Bilateral trade between Pakistan and China totalled $15.3 billion in 2016 as per Pakistan s reported data. Bilateral trade between Pakistan and China was worth $19.2 billion as per Chinese reported data Pakistan got market access to China at zero duty for cotton fabrics, bed linen and other home textiles, marble and tiles, leather articles, sports goods, iron & steel products, industrial alcohol and engineering goods. China was granted zero duty market access on commodities required for industrial growth such as industrial machinery, organic and inorganic chemicals and raw materials for various industries including intermediary goods for the engineering sector. 62

69 2.1- Comparison of Key Economic Indicators Pakistan China GDP US$ (Billion) , , Population Million , , GDP/Capita US$ 1, , , , GDP Growth % Foreign Direct Investment US$ (Billion) Foreign Direct Investment % of GDP Trade Account Balance US$ (Billion) Current Account Balance US$ (Billion) Current Account Balance % of GDP

70 2.2- Pakistan China Trade Trends Million US$ 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 - Pakistan - China Trade Overview 13,680 1, Pakistan's Imports from China Pakistan's Exports to China China's Share in Pakistan's World Trade Pakistan's Share in China's World Trade 64 % Share Imports from China (% of Total Imports) Exports to China (% of Total Exports) % Share Imports from PK (% of Total Imports) Exports to PK (% of Total Exports)

71 2.3- Comparison of Pre- and Post-FTA Trade Figures Imports 2016 (US$ Million) 2015 (US$ Million) Electrical machinery and equipment 3, ,566 Machinery, mechanical appliances 2, ,666.3 Iron and steel 1, ,015.5 Organic chemicals Man-made filaments Exports 2016 (US$ Million) 2015 (US$ Million) Cotton Cereals Ores, slag and ash Fish and other aquatic invertebrates Salt; sulphur; earths and stone

72 2.4- FTA Concessions Utilization Of 6,830 Concessional Lines by Pakistan to China Of 7,550 Concessional Lines by China to Pakistan 5% 43% 57% 95% Availed Unavailed Availed Unavailed Although China has granted a higher number of concessional lines for Pakistani products, Pakistan has not been able to make use of the same. A mere 5% of the concessional lines have been utilized out of the total available 7,550 lines. On the other hand, Pakistan offered 6,830 concessional lines of which China has been using 57%. One of the main reasons for Pakistan s under-utilization of the FTA is that a majority of concessional lines provided by China / negotiated by Pakistan s negotiators are irrelevant as they are either not grown/produced in Pakistan or Pakistan does not particularly specialize in them such as coffee, rubber, nuclear reactors, etc. For products and commodities such as rice, jewellery, cotton, shirts and trousers, in which Pakistan specializes, these are not covered by the FTA. 66

73 2.5- Brief Analysis China is Pakistan s largest trading partner. Pakistan has a significant and an ever-increasing trade deficit with China; as of 2016 the trade deficit stood at $12.1 billion as per Pakistan s reported trade figures. This is around 60% of the total trade deficit that Pakistan has with the world. Since 2013, Pakistan s import reliance on China has almost tripled. Pakistan now gets around 30% of its entire imports from China; however, this trend is common to nearly every developing country in the world. For the past 4 years at least, there has been a steady and continual rise in imports from China whereas Pakistan s exports to China have been declining in the same time period. Pakistan s significance in China s overall trade is negligible. Imports for the top 5 commodities have steadily increased over the years. Electrical machinery and mechanical appliances are the most imported products which cumulatively make up almost 53% of Pakistan s total imports from China. On the exports side, cotton is the most exported commodity to China, however exports have been continually declining since 2013, partly due to a fall in cotton prices in international markets and a low cotton harvest in these years. The exports of Beverages, spirits & vinegar have declined YoY. $88 million worth of this category was exported in 2015 as compared to a mere $9 million in Since the signing of the FTA, Pakistan s exports to China have increased by 214% whereas imports from that country have increased by 369%. However, in an effort to arrest the trade gap, Pakistan has imposed regulatory duties on certain Chinese products in recent years. Duties have been placed on imports of mobile phones and telecommunication equipment, electro-thermic domestic appliances, and alloy steel. 67

74 3- Pakistan Malaysia FTA - Early Harvest Program became operational from January, The Free Trade Agreement was signed in November 2007 and came into force in January In 2016, the total bilateral trade amounted to $1.1 billion. - Pakistan was allowed duty free market access for cotton yarns and fabrics, jewellery and fruits. - Malaysia was granted preferential market access for palm oil & basic raw materials for industry, intermediate goods and machinery. 68

75 3.1- Comparison of Key Economic Indicators Pakistan Malaysia GDP US$ (Billion) Population Million GDP/Capita US$ 1, , , , GDP Growth % FDI US$ (Billion) FDI % of GDP Trade Account Balance US$ (Billion) Current Account Balance US$ (Billion) Current Account Balance % of GDP

76 3.2- Pakistan Malaysia Trade Trends 70

77 3.3- Comparison of Pre- and Post-FTA Trade Figures Imports 2016 (US$ Million) 2015 (US$ Million) Animal or vegetable fats and oils Mineral fuels, oils and products Machinery, mechanical appliances Organic chemicals Plastics and articles thereof Exports 2016 (US$ Million) 2015 (US$ Million) Cereals Made-up textile articles Fish and aquatic invertebrates Cotton Edible vegetables and roots

78 3.4- Brief Analysis - As of 2016, the export and import figures with Malaysia stand at almost the same level as 2006 before the FTA became operational. - Bilateral trade between Pakistan and Malaysia has decreased since The imports peaked in 2011 at $2.73 billion against import of just $0.94 billion in The drop in subsequent years reflects the signing of a PTA with Indonesia which diverted Palm Oil imports from Malaysia to Indonesia - The exports to Malaysia never took off. There has been relatively little increase in exports. - Malaysia is a very small trading partner for Pakistan. Pakistan s exports to Malaysia make up just 0.74% of Pakistan s total exports. On the other hand, Pakistan s share in Malaysia s trade is even smaller. - Animal and vegetable fat oils were the most imported commodity in In 2016 as well, this was the biggest import from Malaysia; however, the volume of imports fell from $2.2 billion to $386 million. - Cereals have been the biggest export to Malaysia, however trade levels for the product have been fluctuating. In 2016, a YoY fall can be observed for cereals. - Cotton exports to Malaysia have gradually declined and in 2016 it was the 4 th largest export by Pakistan to Malaysia. 72

79 4- Pakistan Indonesia PTA - Pakistan s Preferential Trade Agreement with Indonesia became operational in September Bilateral trade amounted to $2.22 billion in Indonesia agreed to offer market access to Pakistan on 216 tariff lines on preferential tariffs and for oranges at zero duty. - Pakistan offered market access to Indonesia on 287 tariff lines. - Pakistan has preferential access for fresh fruits, cotton yarn & fabrics, ready-made garments, fans, sports goods, leather goods and industrial products. - Pakistan extended a 15% Margin of preference (MoP) over the standard MFN tariff rates to Indonesian palm oil products, similar to what was extended to Malaysian palm oil products under the Pakistan Malaysia FTA. 73

80 4.1- Comparison of Key Economic Indicators Pakistan Indonesia GDP US$ (Billion) Population Million GDP/Capita US$ 1, , , , GDP Growth % FDI US$ (Billion) FDI % of GDP Trade Account Balance US$ (Billion) Current Account Balance US$ (Billion) Current Account Balance % of GDP

81 4.2- Pakistan Indonesia Trade Trends Pakistan - Indonesia Trade Overview Billion US$ [VALUE] Imports from Indonesia Exports to Indonesia Indonesia's Share in Pakistan's World Trade Pakistan's Share in Indonesia's World Trade % Share Imports from Indonesia (% of Total Imports) Exports to Indonesia (% of Total Exports) % Share Imports from PK (% of Total Imports) Exports to PK (% of Total Exports) 75

82 4.3- Comparison of Pre- and Post-PTA Trade Figures Imports 2016 (US$ Million) 2015 (US$ Million) Animal or vegetable fats and oils Edible fruit and nuts Mineral fuels, oils and products Man-made staple fibres Paper and paperboard; articles Exports 2016 (US$ Million) 2015 (US$ Million) Cereals Cotton Paper and paperboard; articles Edible fruit and nuts Raw hides and skins and leather

83 4.4- Brief Analysis The trade deficit with Indonesia has widened, particularly after the implementation of the PTA. Imports from Indonesia have almost doubled since 2013, while exports on the other hand have marginally decreased. Indonesia has been an important import partner of Pakistan, with more than 4% of Pakistan s total imports coming from that country. Pakistan s share in Indonesia s total trade has also been increasing. Indonesia is the largest producer, and therefore the largest exporter of palm oil. Animal, vegetable fats and oils is the biggest import from Indonesia. Palm oil makes up about 99% of this category and 65% of Pakistan s total imports from Indonesia. Cotton and Cereals are the main exports of Pakistan to Indonesia; however, there has been a decline in the export value for both the commodities. There has been a noticeable increase in the exports of Paperboard articles to Indonesia. The paperboard articles with HS-06 label of carrying title Paper & paperboard, coated/impregnated/covered with plastics was the main export in the category. 77

84 5- Pakistan Mauritius PTA The Preferential Trade Agreement between Pakistan and Mauritius was signed on 30 th July The Pakistani cabinet ratified the agreement on 30 th October 2007 and it became operational on 30 th November Total bilateral trade amounted to $21.37 million in Pakistan has preferential tariff access for cereals, microwave ovens, fresh fruits, plants, carpets and other floor coverings, made-up textile articles and leather goods, tobacco items, salt and limestone and cement. On the other hand, Pakistan has extended about 25% Margin of Preference (MoP) over the standard MFN tariff rate to Mauritian textile and clothing items. Other items on the preferential list include plants, black tea, fish such as tuna, mixes and doughs for the preparation of bakers wares, and organic surface-active products and preparations for washing skin. 78

85 5.1- Comparison of Key Economic Indicators Pakistan Mauritius GDP US$ (Billion) Population Million GDP/Capita US$ 1, , , , GDP Growth % FDI US$ (Billion) FDI % of GDP Trade Account Balance US$ (Billion) Current Account Balance US$ (Billion) Current Account Balance % of GDP

86 5.2- Pakistan Mauritius Trade Trends Pakistan - Mauritius Trade Overview Million US$ Imports from Mauritius Exports to Mauritius Mauritius' Share in Pakistan's World Trade Pakistan's Share in Mauritius' World Trade % Share Imports from Mauritius (% of Total Imports) Exports to Mauritius (% of Total Exports) % Share Imports from PK (% of Total Imports) Exports to PK (% of Total Exports)

87 5.3- Comparison of Pre- and Post-PTA Import Figures Imports 2016 (US$ Million) 2015 (US$ Million) Ships, boats and floating structures Soap and washing preparations Iron and steel Pulp of wood or other fibrous material Made-up textile articles Exports 2016 (US$ Million) 2015 (US$ Million) Cereals Cotton Made-up textile articles Raw hides and skins and leather Preparations of cereals, flour or milk

88 5.4- Brief Analysis Pakistan has a trade surplus with Mauritius. In 2016 the surplus amounted to almost $13 million. In 2015, there was a trade deficit with Mauritius but it was due to unusally high imports of Ships, boats and floating structures. Mauritius is a very small economy, and therefore not a very prominent trading partner of Pakistan. Since the implementation of the PTA in 2007, exports have had a declining trend, as can be seen from exports to Mauritius as a share in Pakistan s total exports. On the other hand, imports from Mauritius have picked up slightly. Ships, boats and floating structures was the most imported commodity, however there was a surge in the import of this item between the years and then imports dropped again in On the exports side, cotton exports dropped YoY by almost 56% making it the second biggest export as compared to the leading export in The exports of cereals to Mauritius have been fluctuating; but they have been on a negative trend since

89 Pixabay SECTION IV Export Potential With Selected Trading Partners

90 84

91 1- The European Union The European Union consists of 28-member countries. Total imports of the EU 28 in 2016 were around $5.22 trillion. Of this, total Pakistani exports to the EU were $6.92 billion. Clothing and textiles exports amounted to more than 78% of total exports to the EU. If considered as a single market, EU is Pakistan s most important export market accounting for 33.7% of the country s exports to the world. Despite GSP Plus status since 2014, Pakistan has been unable to improve its penetration into the European market while other competitors increased their share in EU trade. For instance, Bangladesh s exports to the EU have risen by 200% from $7.65 billion in 2006 to $22.87 billion in On the contrary, Pakistan in the same time period increased its exports by around 50% in 11 years. The GSP+ status allows 70% of Pakistan s exports to enter EU market at preferential rates while 20% are at zero tariff. 85

92 1.1- Total EU Imports from Pakistan and its Competitors Other than Sri Lanka, Pakistan s export competitors which all started from a comparable base have seen large increases in their exports to the EU in the last 15 years. India and Vietnam have been able to increase their exports to the bloc the most. Vietnam has increased its exports by more than 6 times since 2003, and India by almost 2.4 times. Pakistan on the other hand has not been able to achieve similar growth numbers. Since 2013, a 10% growth in exports has been achieved by Pakistan as compared a 27% growth by Bangladesh. 86

93 1.2- Share of Selected Countries in EU s Trade with the World 87

94 1.3- GSP+ and its Workings The GSP+ is a special incentive arrangement for sustainable development and good governance. It offers enhanced preferences for countries eligible for GSP that ratify and effectively implement 27 specified international conventions in the fields of core human and labour rights, environment and good governance. The main advantage of GSP+ over GSP is that it offers additional tariff preference, including duty-free preferences, for the same products plus 70 additional tariff lines. The first 10 GSP+ countries are Armenia, Bolivia, Cape Verde, Costa Rica, Ecuador, Georgia, Mongolia, Paraguay, Pakistan and Peru. China, Colombia, Indonesia, Thailand and Vietnam are not eligible for GSP+ status. The scheme will initially apply for a 10-year period; after 5 years of enforcement, EU will assess the need to renew the scheme. 88

95 1.4- Benefits of GSP+ to Pakistan The Common Customs Tariff ad valorem duties on majority of products exported to the EU by Pakistan have been suspended or reduced. In the textiles sector, the major export sector of Pakistan, GSP+ status has resulted in a preferential margin between GSP and GSP+ of 5% for cotton and fabrics, and 9% for apparel and made- up textiles. Example: COMMODITY EU-28 TARIFF GENERAL TARIFF GSP TARIFF GSP+ TARIFF LDC TARIFF Bed Linen, knitted or crocheted (Designated Sensitive Item by the EU) 12% 20% 9.6% 0% 0% 89

96 1.5- Conditions to Qualify for GSP+ Status Pakistan meets the GSP+ criteria of being a lower middle-income country with a non-diversified economy. Pakistan s exports to the EU constitute a 0.13% share in EU s world imports, therefore meeting the criteria of being less than 2% of EU s global GSP imports. Pakistan s seven largest sectors of products make up 87.5% of its exports to the EU, hence meeting the seven largest sectors of products contribute more than 75% of exports to the EU criteria. However, Pakistan may find it difficult to maintain GSP+ status unless it is able to show compliance to the 27 agreements mostly relating to labour and human rights o Example: CRITERIA Effectively ratify and implement 27 conventions pertaining to the areas of human and labour rights, environment and good governance. Accept biennial monitoring (every two years) and reporting requirements imposed by each convention. PAKISTAN S STANDING Pakistan may face difficulties in ratifying and implementing certain laws particularly in the areas of human and labour rights due to devolution of these to the provincial level. Pakistan lacks the capacity for monitoring and reporting, which needs to be developed in order to retain the GSP+ status. 90

97 2- Central Asian Republics The land-locked Central Asian Republics (CAR) consist of five countries of the former Soviet Union. These are Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan and Uzbekistan. Pakistan can access CAR via three land routes; Afghanistan, Iran or China. In July 2012, Pakistan and Afghanistan agreed to extend Afghanistan Pakistan Transit Trade Agreement (APTTA) to Tajikistan. In 2016, Pakistan s trade with CAR accounted for a mere 0.13% of the country s trade with the world. Trade with CAR is faced with numerous impediments that include, but are not limited to, regional insecurity, terrorism, narcotics production trafficking, poor infrastructure and the resultant cost due to weak legal and regulatory systems, restrictive trade policies, poor border management, lack of banking arrangements and the absence of effective transport facilities. The CAR markets are mainly dominated by Chinese, Indian, Iranian, Russian and Turkish products. 91

98 2.1- Limited Potential of CAR CAR economies are small in size and a realistic potential of the markets in these 5 countries needs to be made. GDP 2016 (US$ Billion) Per Capita Income 2016 (US$) Population 2016 (Million) Kazakhstan , Kyrgyzstan 6.6 7, Tajikistan Turkmenistan , Uzbekistan , Total , Pakistan , Kazakhstan and Uzbekistan are the larger of the five countries in terms of both population and the size of their economies. While Kyrgyzstan and Turkmenistan are not big enough in terms of geographical size and population base, the purchasing power of the citizens is relatively high. However, it should be taken into account that the cumulative population of CAR is barely 36% of Pakistan s population and the total size of the economies of the five countries combined is equivalent to 88% of Pakistan s economy. The PBC in 2017 has done a Central Asia Country Series in which the 5 Central Asian countries have been covered in greater detail.

99 SECTION V Regional Trade

100 94

101 1- Trade Prospects within the Region The SAARC region conducted world trade of around $810 billion in 2016 Despite this, a mere 5.6% or $45.1 billion of the total SAARC trade was between SAARC member countries; significantly lower than other regional trade blocs. The primary reason for this under-utilization are the still active historical political disputes and the non-tariff barriers which hamper trade between the two largest economies in the region; Pakistan and India. If trade between the two countries is normalized in an equitable and acceptable manner, it could result in a significant increase in trade volumes which would in turn benefit the economies and consumers in both the countries. 95

102 1.1- Under-Utilization of SAFTA % Share Inter-ASEAN Trade as a % of Its World Trade Inter-SAARC Trade as a % of Its World Trade Inter-MERCOSUR Trade as a % of Its World Trade 96

103 1.2- Pakistan India Trade as a Percentage of their Inter-SAARC Trade Pakistan s trade with India as a % of its SAARC trade is almost 42% depicting the dominance of India in the SAARC region and Pakistan s limited trade with other SAARC countries. On the other hand, Pakistan has an almost 11% share in India s SAARC trade which shows the relatively weak position that Pakistan has in India s trade within the region. 97

104 2- Pakistan India Bilateral Trade In 2016, bilateral trade between Pakistan and India was almost $2 billion, with Pakistan having a trade deficit of around $1.3 billion. However, this deficit has been narrowing over the years. 98

105 2.1- Pakistan India Bilateral Trade s Share in Their World Trade Both India and Pakistan have low trade activity with each other, with Pakistan constituting a meagre 0.33% share in India s world trade while India holds a relatively larger yet not much higher 2.95% share in Pakistan s total trade. The internationally accepted Gravity Model suggests that countries which are geographically close usually have higher trade reliance on each other. However, that doesn t hold true for India and Pakistan because of the active tensions between the two states which has hampered economic ties developing between the two. 99

106 2.2- Pakistan s Top 5 Imports from India Cotton imports have been declining since they peaked in 2013; in 2016, they fell by almost 28% over However, despite the fall in its imports, it still continues to be the top import of Pakistan from India. On the other hand, imports of organic chemicals, edible vegetables and dyeing extracts have picked up relative to

107 2.3- Pakistan s Top 5 Exports to India The exports of salt; sulphur; limestone was the most exported commodity in 2016 with a YoY increase of 71%. Edible fruits exports also increased relative to the last 4 years, while cotton exports declined. Cotton exports have been on a downward trend since the last 2 years with a YoY decrease of 41% in Medical & surgical instruments exports marginally increased, however it barely made up 4% of Pakistan s entire exports to India in

108 2.4- Trade Potential between Pakistan and India Pakistan s Top 10 Potential Exports to India HS Code Particulars Actual in 2016 (US$ Million) Potential in 2016 (US$ Million) Total for 10 Potential Exports Medical, surgical instruments Polyethylene terephthalate Men's or boys' trousers Medicaments Footwear Tubes, pipes and hollow profiles Paper and paperboard, coloured Articles for sport and outdoor games Medicaments Waste and scrap of copper

109 Pakistan s Top 10 Potential Imports from India HS Code Particulars Actual in 2016 (US$ Million) Potential in 2016 (US$ Million) Total for 10 Potential Imports , Black fermented tea Motor vehicles - Small Cotton, not carded or combed Motor vehicles - Medium Medicaments Polypropylene, in primary forms Flat-rolled products of iron or nonalloy steel Telephones for cellular networks New pneumatic tyres used for busses and lorries Motor vehicles - Large

110 2.5- PBC s Position on Trade with India supports trade with India as it believes that regional trade promises to be the next growth opportunity for Pakistan. PBC however would like the Government of Pakistan to ensure that Pakistani businesses have a level playing field in India, especially in areas where Pakistan has a competitive advantage, for example cement, textiles and some agricultural products. Since 2013, the Pakistan Business Council has been tracking trade patterns between Pakistan and India and has noted with concern that though India granted Pakistan MFN status in 1996, there has been no significant increase in Pakistan s exports to India. One of the major reasons identified by the PBC is the web of elaborate Non-Tariff Barriers (NTBs) that India has in place for defending its domestic industry. PBC was officially notified as the Secretariat in Pakistan for the Pakistan India Joint Business Forum (PIJBF) in June The PIJBF, setup by the governments of Pakistan and India, comprises of 15 prominent businessmen from each country. The PIJBF has met 6 times since its inception, the last time in Delhi in 2015, and has formed sector specific task forces to address the impediments in India Pakistan trade normalization. Progress has mostly been slow reflecting perhaps the overall lack of improvement in India Pakistan relations. 104

111 3- Trade with Afghanistan The first Afghan Transit Trade Agreement (ATTA) came into force on March 02, 1965, essentially as a bilateral arrangement between Afghanistan and Pakistan. Pakistan granted this transit facility to Afghanistan in line with its commitment to the UN Convention on law of the sea which makes special provisions for granting landlocked countries access to international seas. Later, Afghan Pakistan Transit Trade Agreement (APTTA) superseded ATTA. It was signed on 28 th July 2010 and became fully operational in June Under the APTTA, Afghan trucks are permitted to carry export goods to India till Wagah, and also to deliver and collect Afghan export and import consignments from the ports of Karachi & Gawadar. Afghanistan and Pakistan have mutually agreed to boost trade to $5 billion in the coming years. Moreover, a revised draft of APTTA was to be exchanged; however, no progress has been made on this front due to persistent border tensions between the two states. A Peshawar-Kabul motorway has been planned which aims at boosting trade ties between the two neighbours and aims to increase people-topeople interactions. Although no timeline or terms have been formalised regarding this, but when executed it will enhance economic integration. Pakistan and Afghanistan have in principal agreed that provisions of TIR Convention, a Convention on International Transport of Goods under cover of TIR Carnets, will be adopted and implemented to the maximum extent. The Convention provides that Customs secure containers and vehicles to be used for transport of goods. An internationally valid guarantee is used to cover risk of duties and taxes that are expected to occur throughout the journey. Pakistan Railways is developing Azakhel Dry Port in Nowshera which is expected to be completed and handed over to Pakistan Customs by December This will enable transit trade via railways. The volatile relationship between Pakistan and Afghanistan deeply hamper and undermine trade relations between the two. Moreover, Iran s exports to Afghanistan s have increased greatly over the past 5 years making Iran the biggest exporter to Afghanistan. Pakistan s exports to Afghanistan fell to less than $1.4 billion in 2016 from almost $2.7 billion in 2012, while Iran s exports to Afghanistan were recorded at $1.8 billion in 2016 against $0.92 billion in

112 3.1- Afghan Pakistan Trade Trends 106 % Share Million US$ Afghanistan's Share in Pakistan's World Trade % Share in Total Exports from World % Share in Total Imports from World Pakistan - Afghanistan Trade Overview 3,000 2,660 2,500 2,000 1,722 1,500 1,370 1, Exports to Afghanistan Imports from Afghanistan Exports to Afghanistan have been on a constant decline since 2011, partly due to volatile relations between the countries and partly due to a decline in the Afghan economy post scaling down of donor funded operations. From a peak of almost $2.7 billion in 2011, exports have dropped to around $1.4 billion while imports have marginally picked up in the same time period. The bilateral trade in 2016 was $1.7 billion while the trade surplus has reduced to $1 billion from $2.5 billion in Afghanistan is an important trading partner for Pakistan, where 6.7% of last year s exports of Pakistan went to the bordering country, despite the decline. It should be taken into account that a lot of trade that happens between the two countries is not captured in official data due to high levels of smuggling. Porous international borders and transit trade allows the free movement of goods to take place. However, steps are being taken to curb this untracked trade. Scanners have been installed at the dry ports and the border with Afghanistan is being fenced by the Pakistan Army which is expected to be completed by 2019.

113 3.2- Pakistan s Top 5 Imports from Afghanistan In 2016 the imports of fruits reached their historical high at $131 million, grapes and apples were the most imported fruits. Cotton imports have declined by almost 30% YoY in Pakistan imports raw cotton, neither combed or carded, from Afghanistan to meet its local industry demand. 107

114 3.3- Pakistan s Top 5 Exports to Afghanistan Across all 5 categories of exports, a decline can be observed. The borders were closed for around 2 months in 2016 which hampered Pakistan s exports. These top 5 categories cumulatively made up around 50% of Pakistan s total exports to Afghanistan which shows their relative importance. Afghanistan has the potential to grow wheat and meet its domestic demand but the poor quality of seeds, an outdated irrigation system and low precipitation impedes production due to which it has to import flour. Kazakhstan exported around $286 million worth of wheat to Afghanistan while Pakistan exported wheat worth $130 million in

115 4- Trade with Iran Pakistan s trade with Iran has witnessed an overall declining trend over the past 10 years at least. Exports have reduced from a high of $426 million in 2008 to less than $36 million in On the other hand, Pakistan s imports from Iran have been volatile. The imports peaked in 2009 to almost a billion dollars, but as of 2016 they stood at $323 million. Pakistan has a Preferential Trade Agreement with Iran which became operational in September Under the PTA, Iran gave concessions on 309 tariff lines, while Pakistan offered concession to Iran on 338 tariff lines. Until 2010, crude oil was the biggest import from Iran; however, Pakistan minimized its import of crude oil from the country post Milled rice has been the biggest export of Pakistan to Iran until 2012, however, the import volume has been reducing YoY. The overall import of milled rice, HS , by Iran has not shrunk, but imports from Pakistan have reduced drastically. Iran now buys rice from India instead. Pakistan has historically not been a very important trading partner with Iran despite being neighbouring countries. The share of Pakistan in Iran s international trade was 0.60% in 2006 which has marginally reduced to 0.55% in Iran s imports from the world reduced by almost 59% while imports from Pakistan reduced by more than 80% between 2006 and

116 4.1- Iran Pakistan Trade Trends Million US$ 1,200 1, Pakistan - Iran Trade Overview Pakistan's Imports from Iran Pakistan's Exports to Iran Share in World Trade Pakistan has always had a trade deficit with Iran except in 2012 when imports from Iran dropped sharply. Both the exports to and imports from Iran have reduced over the period under observation; however, exports to Iran have taken a bigger hit due to the fall in rice exports. Iran, despite being a neighbouring country, is not a very prominent trade partner of Pakistan. Although Iran is a relatively more open economy due to low industrial base, yet it does not involve greatly in trading activities with Pakistan. The economic relations between the two countries are frugal due to the diplomatic relations between the two countries. Frequent border management issues and sectarian differences hamper the two countries from developing a stable economic relationship. However, they are not as unstable as Pakistan s relations with Afghanistan. 110 % Share Pakistan's Share in Iran's Trade Iran's Share in Pakistan's Trade Moreover, Pakistan s border with Iran is highly porous. Pakistan s province of Baluchistan borders with Iran s province of Sistan-Baluchistan and there is a lot of free unregulated movement of goods across the borders. Iranian smuggled consumer products and fuel is readily available in the bordering areas of Pakistan. Therefore, the reported trade figures do not show the actual trade that takes place between the two countries. Note: Iran s Global Import Figures were unavailable for the years

117 4.2- Pakistan s Top 5 Imports from Iran The import of electrical energy has substantially risen over the past 5 years at least, replacing fuel as the most imported commodity from Iran. Electricity is imported from Iran to power parts of Baluchistan which are not connected to the national grid. Almost 32% of Pakistan s entire imports from Iran in 2016 was electrical energy. Crude oil has been one of Pakistan s major imports from Iran historically; peaking at $635 million in However, Pakistan has not imported crude oil at all from Iran post

118 4.3- Pakistan s Top 5 Exports to Iran Until 2012, Pakistan s biggest export to Iran was rice. However, rice exports shrunk after that reducing the overall exports of Pakistan to Iran. The exports of Paper and paperboard with HS-06 code picked up from 2013 onwards touching almost $19 million in 2016 which constituted around 53% of Pakistan s entire exports to Iran in the year. 112

119 4.4- The Decline of Pakistan s Rice Exports to Iran As can be seen from the figure above, Pakistan had a dominant share in Iran s rice market; however, the share has sharply declined, particularly after 2008 when India s rice penetrated into Iran s market. In 2003, Pakistan s rice exports to Iran constituted around 16.5% of Iran s entire rice imports which steadily increased until 2008, after which it dropped sharply to less than 1% in India, on the other hand, had negligible rice exports to Iran until In 2016, India exported in excess of $500 million worth of rice making up 55% share in Iran s rice market. Note: Iran s rice import data for the years 2007, 2008 & 2009 are not available. 113

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121 Pixabay SECTION VI Misreporting and Trade Data Discrepancy

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123 Comparison of Pakistan s Reported Trade Figures Versus Figures Reported by its Trading Partners for 2016 This chart depicts the difference between imports reported by Pakistan and the exports reported by a partner country for the top 10 exporting countries to Pakistan. Marginal discrepancy is possible due to difference between FOB and CIF prices; however, this chart shows a high degree of variance between the two figures. Variance in some cases of up to 30% exist for In the case of China, there is a discrepancy of almost 26% which in nominal terms is equivalent to $3.5 billion. UAE, Saudi Arabia, Kuwait and Qatar have not been included in the table because of non-availability of information. Saudi Arabia does not report its oil and gas exports while UAE, Kuwait and Qatar have not reported their trade figures to UN COMTRADE for

124 Pakistan India Trade Figure Discrepancy Typically, Pakistan s reported import figures from India has been higher than India s reported export figures to Pakistan. However, the year 2016 was an anomaly as the import figures reported by Pakistan were lower than export figures reported by India. In the years 2015 and earlier, the discrepancy had been very high which may be explained by possible under-invoicing and/or misdeclaration of products or source country. 118

125 Pakistan China Trade Figures Discrepancy The import value variation has reduced over the last year from $5.46 billion to $3.5 billion. However, even $3.5 billion is a significant number. There has been a constant difference between the two countries reported figures for at least the last 14 years. 119

126 Apparel Import from China In the year 2016, textile imports under HS-61 & 62 from China as reported by Pakistan were $60 million against $329 million reported by China as exports to Pakistan. This implies that there is massive under invoicing and misdeclaration in imports at Pakistan s end. Textile articles are entering the country without paying the full duty. This is hurting the local textile industry. The same trend can be observed in volume declaration by the partner countries. Chinese figures are almost 5 times higher than Pakistan s reported volume. 120

127 Synthetic Fibres & Garments Import from China There is an urgent need for Pakistan to upgrade its reporting mechanism so as to curb the problem of misdeclaration of imports. The chart depicts vast discrepancy in import figures. Pakistan s reported imports of synthetic fibres from China are just 36% of the figures reported by China as exports to Pakistan. However, the difference has reduced in In 2015, the discrepancy was even higher. Pakistan s reported figures were less than 23% of China s reported figures for synthetic fabric exports. While exports reported by China to Pakistan for synthetic fibres and garments have been reducing since 2014, imports reported by Pakistan have been on a rise which is potentially a movement towards reconciliation of the two figures in the coming years. 121

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129 Pixabay SECTION VII Analysis of Production Data for Selected Industries