Export growth

12 June 2024

Published in: Business Recorder

The unstated economic policy is to keep the current account deficit close to zero. For that, the trade deficit must be managed.

There are two ways to do it – one is to increase exports and the other to curb imports. Unfortunately, the reliance is on the latter as present economic conditions are not conducive for growth in exports – especially in manufactured or value-added goods despite massive adjustments in the currency in the last two years.

The goods exports are up 19 percent in May 24 from the previous month to stand at $2.7 billion and the 11MFY24 increased level stands at 11 percent to $28.1 billion.

However, the detailed data (available for 10MFY24) depicts a story of growing food exports while manufactured or value-added exports are stagnating. In July-April, the food exports are up by 46 percent while textile exports growth is flat and the other manufactured goods exports are up by a mere 1 percent.

This is counterintuitive, with massive currency adjustment and domestic demand slowdown and the focus of even domestically focused industries is on exploring exports. Within textiles, the domestic industry slowdown is pushing players to concentrate on exports.

The story is similar in agriculture where apart from a one-time rice bonanza new avenues of exports are in the making. The rice exports are up by 80 percent in 10MFY24 to $3.3 billion due to export ban by India and bumper crop at home. There are significant increases in other heads which are still modest, but growth is promising.

The question is why is the export of manufactured goods, including textiles, not growing? The prime reason is falling competitiveness due to significant increase in electricity and gas prices, and almost no interest rate subsidy in times of high interest rates – not very long ago, the exporters was getting working capital loan below 5 percent and now the rate is close to 20 percent.

These factors have jolted the textile and other manufacturing sectors catering to both local and export markets. Interest rates may come down with the passage of time as inflation is declining – down from 38 percent in May 23 to 11.8 percent in May 24. It is expected that the export industry may get better interest rates subsidy once the newly formed EXIM bank is properly operationalized.

However, the energy quagmire is yet to be resolved, and that is dragging the manufacturing sector down. Exporters may get temporary relief through further depreciation of the currency, as that would improve the margins for the time being but you should factor in rupee depreciation in determining power and fuel tariff.

So, in due course, the energy prices – primarily linked to dollar and international interest rates, will catch up. The capacity payment is about 70 percent of last year’s reference pricing, and it’s likely to grow in FY25 even at today’s dollar rate as new plants are coming online.

The increase in energy pricing is creating a loop. First, adjust currency to support external account, and later pass it on to the energy prices to further lower the demand, and that will further increase the proportion of capacity payments and set off another round of price hike.

Thus, currency depreciation can become counterproductive without solving the energy puzzle. Lowering the energy cost is imperative for growing exports and to realise the potential due to currency adjustment.

For that, the capacity debt payments of nuclear plants and CPEC (China Pakistan Economic Corridor) projects are to be restructured. The useful life of projects is from 25-40 years and the loan is to be repaid in 10 years, which hinders the creation of economic value by these capacity additions.

That imbroglio must be resolved before the objective of boosting of exports and overall economic growth becomes a real possibility.