Have GSP + gains washed away?
By Babar Ayaz
Love’s Labour Lost! Yes this title of the early Shakespearian comedy explains what happened to years of hard labour by the Pakistan government and private sector to finally get the Generalized System of Preferences Plus (GSP) from the European Union last year. Under GSP Plus status which was implemented with effect from January 1, 2014 Pakistani exports to 27 EU countries where given exemption from the import duty which ranged from 3 to 10 percent. Jubilant exporters and government high-ups congratulated each other profusely.
But six months down the year exporters are unanimous that GSP Plus status benefits have been completely wiped out by the around 9 percent appreciation of rupee value and rise in energy cost. “The latest nail in our coffin was imposition of Rs150 per mmbtu GIDC in the budget,” a jilted exporter lamented.
Before moving on with what and how the benefits of GSP Plus were lost by the domestic economic policies, let’s revisit what GSP is and how Pakistan had to labour to get this special status to make our exports competitive with the exports from the least developed countries such as Bangladesh. GSP was introduced by UNCTAD in 1968 to help the exports of ‘vulnerable countries’ to developed states through tariff preferences.
EU countries developed their own system which is called ‘GSP Plus’ because it allows imports on zero percent duty from the countries which are given the vulnerable or least developed status. Pakistan graduated to middle income status many years ago. Bangladesh is still in the least developed country bracket which entitles it to GSP status not only in EU but in the US also. Today Bangladesh, a country that does not produce cotton, has exports worth $30 billion of which 80 percent is textiles—mainly garments. Being a low income country it has an abundance of cheap labour and most of them are women. In Pakistan cost of doing business is much higher than Bangladesh. But labour is still cheaper than other competitors like India and China.
Pakistan case for GSP Plus status was unfortunately based on the negative feature—the country is fighting terrorism and hence its economy is vulnerable and unemployment may nourish the terrorist organisation. Sad but true. If the developed world would not assist us wouldn’t we be fighting the bloody menace of terrorism?
One of the EU conditions was that only those countries be given GSP Plus status whose textile export was not over one percent of the total textile imports of the member countries.
Well-known textile magnate Dr. Ikhtiar Baig says that he worked hard to convince the EU officials to raise the bar from one percent to two percent. Other hurdles which Pakistan had to remove were getting enough votes in the EU parliament, where led by France 12 EU countries were opposing to give GSP Plus to it and India was also lobbying against us. But with strong diplomatic lobbying by the previous government it managed to get support of enough votes in EU and convince India not to oppose Pakistan on this issue.
Getting GSP Plus status was important for Pakistan because EU is the market for 40 percent of the total textile exports. Ninety percent of Pakistan exports to the EU consist of textile and clothing and leather apparel. Our major competitors are: Turkey, Morocco, Tunisia, and Bangladesh and 80 percent of Pakistan’s exports are directed to seven EU member countries Germany, UK, Italy, Belgium, Netherlands, Spain and France.
Having done all that and when the time came for harvesting the gains, TDAP Chairman S. M. Muneer says “these gains have been wiped out by rupee appreciation and high cost of energy.” “I am going to present the industry’s case soon to the PM and inform him that it would be difficult to meet the exports target in the current fiscal year,” he disclosed.
Most of the textile exporters think that the expected surge of $1 to 1.5 billion in exports to EU countries as a result of the GSP Plus advantage will remain a piped-dream. No doubt rupee appreciation has its own advantages such as reduction in debt servicing which swallows the major chunk of the government revenue, reduces cost of import and consequently inflation.
“But the benefit of cheaper import of oil has not been passed on to the consumers,” argues APTMA Chairman Yasin Siddik. “On the contrary,” he says “Rs200 per mmbtu GIDC will have substantial impact on the industry conversion cost.” But the government officials’ view is that the cost of energy in the total cost of production is at an average 10 percent only. Because of shortage of electricity textile industry is mostly using captive power for which gas is not available and diesel or furnace oil prices have not come down in spite of 9 percent appreciation of rupee.
Leading textile exporter Bashir Alimohammad’s forecast is that textile exports are likely to shrink as cost of production has gone up, GSP Plus gains washed out by artificial rupee appreciation and the competitors like India and Bangladesh are giving overt and covert subsidies to their textile industry. “Most of us made losses when the rupee appreciated but because we have long term orders locked in,” he explained. To top it consumer buying in Europe has dipped lately.
“Some European and the US buyers had started to come back to Pakistan last year from Bangladesh because of political instability but now attacks on airports and higher cost of production may shift them to other more stable markets, Vietnam is on the top of their list,” Bedwear Exporters Association Chairman Shabir Ahmed explained. He was also critical of the Finance Minister Ishaq Dar for not supporting exports. “The Commerce Minister,” he says “is weak and has not contested exporters’ case vigorously with the all powerful Finance Minister.”
However eloquent Commerce Minister Khurram Dastgir is happy that in the last 11 months of financial year 2013-14 cumulative textile exports have increase by about 6 percent, but he did not mention the last two lean months. The Ministry is also not paying adequate attention to implementation of 27 conventions which it has signed with EU as a pre-condition to get GSP Plus status. WTO cell in the Ministry of Commerce is supposed to be overseeing implementation of these conventions as it needs coordination between many ministries and all the provincial governments.
Talking to a broad spectrum of industrialists one draws the conclusion that the government is directionless. It has no integrated industrial policy which needs to be developed taking all the stakeholders on board. Each sector has its own problems and needs solutions in which both provincial and federal governments have to be on board in policy making. Will the sleepy Ministry of Industries wake up and take lead? No harm in hoping!