GOP UNVEILS NEW THREE-YEAR TRADE POLICY

UNCLAS SECTION 01 OF 02 ISLAMABAD 001901

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ECON EFIN EINV ETRD PGOV PREL PK
SUBJECT: GOP UNVEILS NEW THREE-YEAR TRADE POLICY


1. (SBU) Summary: The Government of Pakistan (GOP) unveiled its
2009-2012 trade policy with the primary goal of growing exports by
29 percent over the next three years. The policy focuses on making
Pakistan more competitive both internationally and domestically, but
covers incentives for only non-textile exports (46 percent of total
exports); a separate policy for textiles was released August 13.
Despite assurances by Commerce Secretary Suleiman Ghani that the
budget contains adequate means to finance these new incentives, it
is unclear how much priority funding the USD 430 million policy
initiative will get in light of Pakistan's competing budgetary
demands. End Summary.

Focus on Competitiveness
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2. (SBU) The Ministry of Commerce introduced on August 2 the
2009-2012 trade policy. This three-year policy is intended to serve
as a "medium-term road map" and is focused on enhancing the
country's competitiveness. Secretary Commerce Suleiman Ghani told
Econ Counselor and visiting Senior Economist on August 3 that one of
the program's main aims is to reduce the cost of doing business in
Pakistan. Other goals are to promote small and medium enterprises
(SMEs); add value and sophistication to Pakistani products,
particularly in non-traditional sectors; and promote agricultural
development through exports. Specifically, the GOP hopes to improve
Pakistan's competitiveness ranking on the World Economic Forum's
Global Competitiveness Report from 101 to 75; to increase the share
of engineering exports from 1.5 to 5 percent; and to expand regional
trade from 17 percent to 25 percent. The policy sets a target to
increase exports by 29 percent over the next three years, with an
export growth rate target for 2009-10 of 6 percent, and 10 percent
and 13 percent for each of the successive years.

The Context
--------------


3. (SBU) The policy highlights the challenges affecting business and
trade: a massive electricity deficit; poor infrastructure; low labor
productivity; low levels of value-added manufacturing; little
foreign direct investment in manufacturing and exportable sectors;
increasing costs of production; lack of product diversification in
exports; and an absence of economies of scale in the production
processes, especially in the small and medium enterprise sector,
which accounts for the vast majority of the businesses in the
country. In light of the difficult economic environment, Ghani was
particularly proud that the Ministry had resisted persistent efforts
by business to insert protectionist measures, and had also held the
line against pleas for additional subsidies and bailouts.


4. (SBU) In FY 2008-09, consumption decreased in the developed world
and shrinking of global trade decreased Pakistan's exports 6.7
percent to USD 17.8 billion. Imports fell by 13 percent to USD 34.9
billion. Although non-textile exports have surged globally,
Pakistan's share of the market in non-textile manufactured goods has
dropped to USD 3.12 billion in 2008-09 or 17.32 percent of total
exports. Pakistan's neighbors, however, have significantly enhanced
their share of the market of non-textile goods. Ghani stressed that
Pakistan's goal is to regain market share lost to countries in the
region, while recognizing that the GOP must provide some assistance
for domestic industries in distress.

The Plan
--------------


5. (SBU) The policy calls for the creation of five separate funds to
handle the different components of trade in Pakistan. The first
fund will focus on product development and marketing in the light
engineering sector at a cost of USD 30.5 million. The second fund,
in collaboration with the Ministry of Finance and the SBP, will
hedge interest rate fluctuations in an effort to provide stability
on short- to medium-term bases. The third will aim to upgrade the
technology, skills and management capacity at a cost of USD 36.6
million to support research and development and training activities.
The Export Development Fund will provide assistance to Pakistani

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service exporters in tendering or negotiating international projects
and for conducting pre-feasibility or feasibility studies. Finally,
the Export Investment Support Fund is a catch all that can be used
to do everything from compensate inland freight costs of non-textile
goods exporters to establishing research and development centers and
centers of excellence.


6. (SBU) Commerce Secretary Ghani told Econ Counselor August 3 that
the GOP has taken account of these new financial obligations in the
budget, including use of a USD 732 million "industrial
revitalization" Ghani said was approved in the FY 2009-2010 budget
(Comment: ECON has not been able to find such a line item in the
budget, but this could be a long-term fund over several years. End
Comment). While perhaps not specifically outlined in the budget,
the Commerce Ministry clearly intends to take advantage of different
resources from the different divisions and ministries for a more
holistic approach.

COMMENT
--------------


7. (SBU) The ambitious agenda set forth by the Commerce Ministry
highlights some important issues such as the effect of the
electricity shortage and the focus on boosting the value-added of
Pakistan's exports and incentives to promote better use of new
technologies. However, the export growth targets, especially those
set for years two and three, seem optimistic in light of lagging
technology in many sectors, the absence of diversified markets and
FDI in the non-oil commodity sector -- all compounded by the global
economic slowdown. The lack of dedicated funding for the policy
also strikes us as a serious potential pitfall, since competing
demands on an already optimistic budget may in the end give short
shrift to this new effort. But if this effort by the Commerce
Ministry can help to streamline government processes and focus
government support on profitable, yet under-appreciated sectors of
the productive economy, it is a step in the right direction. End
Comment.

PATTERSON