Pakistan gets GSP Plus status

Published in PIQUE January, 2014 http://pique.pk/economy/03-Jan-2014/pakistan-gets-gsp-plus-status

Pakistan gets GSP Plus status

Good news for the economy

Economic revival has been at the top of Prime Minister Nawaz Sharif’s government’s priorities and it was evident that despite several problems faced by the economy, and people expecting a relief package, the 2013-14 Budget was pro economic revival. The major challenges to the government are overcoming the crippling electricity shortages, abolition of the circular debt, reduction of fiscal deficit and public debt and an increase in the total tax revenues.

For a revival of the emaciated economy, the government needs to provide basic infrastructure such as energy, availability of raw materials, machinery etc. Moreover, the government should also facilitate industries and agriculture to get market access at lower cost. Lower cost can be achieved by giving incentives or introducing reforms in such a way that it facilitates businesses, increases competition and provides full information of markets they are dealing with.

Due to increase in imports — and partly due to increase in oil prices— our trade deficit is creeping up. Our exporters have been asking for several incentives as well as market access to several countries, including the European countries. Specifically, GSP+ status was continuously raised at various forums during the formation of the trade policy. Finally, Europe has given us GSP Plus status and the government has portrayed it as a triumph.

What is GSP Plus?

GSP stands for Generalised System of Preferences. It gives special treatment to Least Developed Countries, LDCs, and developing countries to export their products at a lower tariff rate compared to Most Favoured Nation tariff rates. However, GSP is different from GSP Plus. GSP arrangement reduces tariff  substantially whereas GSP Plus is a complete waiver on the exports of specific products, which are agreed in the agreement with a condition that standard of living and working conditions of the labor will be improved and not exploited at any cost. In short, GSP Plus is a special incentive arrangement, focusing on sustainable development and good governance. Any country that gets GSP Plus status must implement international convention of human and labor rights, good governance and environment.

The long-awaited GSP Plus status has been given to Pakistan with 409 to 182 votes by the EU Parliament, which will be effective from 1st January 2014. Prior to this development, Pakistan exporters enjoyed concessionary access to European markets from 2002 till 2005. The current GSP Plus status gives Pakistan free trade access on zero duty to the European market for the next four years. Nonetheless, not all products are included in this agreement. Pakistan has been able to finalise 75 products which will be allowed a duty-free access to the European markets on one condition that it will not exceed 6% of total imports of EU.

Advantages of GSP Plus

GSP Plus has already been granted to Bangladesh, Sri Lanka and India. All the three countries are Pakistani competitors, especially in textile exports. Thus, Pakistani exports were at a massive disadvantage for the last many years because Pakistani exporters had to pay significant percentage of duty for sending their products to European markets. Therefore, after the GSP Plus status, it is expected that Pakistani exports will increase by $1 billion to  $2 billion.

Although, only 75 products are finalised in the agreement of GSP Plus, but it will also benefit other industries due to externality effect. Moreover, it will generate employment in both upstream and downstream industries. According to Khurram Dastgir Khan, the state minister for commerce and textile industry, about 100,000 people will get employment opportunities. It might be an ambitious figure but even if half of it is achieved, it will indeed be good news.

Potential Disadvantages

The agreement of GSP Plus has lots of constraints attached to it. These constraints in a way are non-tariff barriers. Nevertheless, since Pakistan will get preferential treatment, the Europeans may be inclined to put certain restriction on us. Consequently, the European Union (EU) will be closely watching Pakistan’s human and labor rights laws, governance and environment protection laws.

If any of the 27 conditions is violated, the GSP Plus status can be suspended. For example, GSP status of Bangladesh was suspended by US this year when labourers died due to fire incidents in several Bangladesh factories. According to U.S., Bangladesh has not taken enough steps to give its workers the internationally recognised labor law rights. Therefore, the government as well as industrialists who are exporting their products under the GSP Plus program have greater responsibility to ensure the enforcement of international standard of human & labor rights in the country to improve working conditions of labor, including income, health and safety of the workers besides, environmental protection at all levels. Otherwise, there is a possibility that in case of any untoward event, the GSP Plus status can be revoked.

What to Expect

Although it is encouraging that Pakistan has been granted GSP Plus status but a critical question is whether can we produce and then export goods, given that there are energy shortages and lack of available exports surpluses.

The energy shortages, specially, pose a key problem and it needs to be addressed immediately. It was reported that industries who will export to European countries will get  an uninterrupted supply of energy. However, the finance minister announced in the second week of December that people should brace for more power shortages. This has caused a lot of trepidation amongst the industrialists.

Moreover, we have a very narrow base of exports to European countries. We are only exporting leather garments, textiles and carpets to Europe and need to expand our export base. There are good chances that GSP Plus can help bring foreign investment to Pakistan. If both FDI and exports go up then current account deficit may decline. On the other hand, if money supply is increased and investment is not done with equity financing then inflation will increase as well.

In conclusion, GSP Plus status is indeed an achievement and Pakistan needs to exploit it to full potential. We, however, also need to think long term and devise an alternate strategy if GSP Plus is not renewed after four years.

For clean and renewable energy

The Article is Published in Money Matters on Monday January 6, 2014

Energy is an essential component of an economy, which drives the growth of manufacturing and services sectors and helps run tube wells for the agriculture sector. Hence, it is one of the most vital inputs to boost a country’s GDP growth.

The last six years’ export data reveals that the country’s exports increased from $17 billion in 2006-07 to $24.8 billion in 2010-11. Nevertheless, exports declined to a certain extent in 2011-12.

In today’s age of globalisation, it is critical for countries to open up their markets to global players and for export-oriented sectors to adopt innovative methods of production to increase the country’s exports.

The energy shortages will have an adverse impact on exports if the technology we are using in our production sector demands more energy for more production.

Here is a research question for us that can we associate our exports performance in the last six years to technical effect or government was able to divert sufficient resources to exports-oriented industries.

Muhammad Shahbaz from Comsats has similar findings in his research paper, presented at the conference. He emphasised on the use of lower energy-intensive technology for production, which has lower CO2 emissions as well as lower cost of production.

Since the oil prices are creeping up and we are dependent on the use of furnace oil and thermal energy, it is difficult to control the prices of energy in the long run. Although the energy prices are administered prices and the prime minister can ask for energy prices not to be increased, that may have adverse impact on the overall economy. Since the government needs to give subsidies if it doesn’t increase prices and later on borrow the same amount either from the schedule banks or the State Bank of Pakistan. Therefore, inflation is inevitable either way. It can be stopped or mitigated for a short period but eventually it will go up.

More alarmingly, since the negative consequences of BP oil spills remain, cost of oil exploration will be higher in future. Thus, we may not experienced a decline in oil prices due to decline in production. Instead, the prices of oil will increase. There is a need for energy mix to avoid the humungous oil import bill in future which further dampens the problem of balance of payments and then asking for short-term loans from IMF to correct the balance of payments problems.

Another frightening situation may arise if we do not change the prevailing energy-mix situation. Even though the share of thermal energy will decrease in the overall energy mix, overall production remains the same. We may experience an increase in the oil import bill. I U Mangla and Jamshed Uppal, foreign professors from Western Michigan University, USA, and Catholic University, USA, estimated that if dependence on oil to produce electricity continues, by 2024-25 we may need $20-$24 billion just to cover the expenses of the oil import bill, which currently stands at $15 billion. Therefore, as suggested by Shahbaz we need to import energy efficient plants to reduce energy intensity. Moreover, as Mangla and Uppal suggested, we need to increase our exports to earn more foreign exchange. Export earnings can be increased through value-addition of our products. One way of value addition is branding which I have discussed in my article in Money Matters a few weeks ago. Vision 2025 has also emphasised on the exports promotion through value-addition. Nevertheless these policies have failed in the past due to lack of available infrastructure, especially energy supply, in the last few years.

Energy mix, in a nutshell, is necessary to mitigate the adverse impact of increase in oil prices. Increase in exports earnings is inevitable for the country to cope the problem of increase oil import bill. This implies that the importance of energy will be the focus of research for the next few years since everyone is talking about energy shortages, climate change and clean energy. More importantly, clean energy is the topic of future research projects since the world is moving towards clean and renewable energy and Minister for Planning Development and Reforms Ahsan Iqbal has also emphasised the use of clean and renewable energy projects at the PIDE 2013 AGM. The current government is looking forward to setting up plants to produce clean and renewable energy in Pakistan, such as usage of clean coal, wind power, and solar power. Therefore, we can expect that the problem of energy shortage will be overcome and the dependence on thermal energy will be lessened.