Pakistan pursuing preferential trade with Gulf countries
Since 2006, Pakistan has been pursuing a free trade agreement (FTA) with Gulf Cooperation Council – which includes as its members, Bahrian, Oman, Qatar, Kuwait, Saudi Arabia, and United Arab Emirates. The last known talks with actionable way forward were completed in 2008 after which this subject has not come to light.
During the visit of Saudi Crown Prince Mohammed bin Salman in 2019 this matter was discussed. After this visit, GCC secretariat in Riyadh did reach out to the Pakistani embassy for putting in place an arrangement to resume FTA talks with Pakistan. Such a move was expected to significantly lower the taxes and duties faced by Pakistani exporters of goods and services in GCC region. Even this process went cold due to COVID-19 and fast changing political dynamics in the region.
As per the Ministry of Commerce, Islamabad now wishes to pursue bilateral FTAs with the Gulf states who would be willing to reap mutual gains. This process is only an intent at this moment and may only get kickstarted after a year or so. The official view was that these bilateral FTAs will be pursued with Saudi Arabia, the UAE and Oman, however a concrete committee to move on these lines has yet to be heard officially from these countries. Expo 2020 in Dubai is being seen as an opportunity where the Ministry of Commerce may try to secure such a commitment.
While pursuing trade cooperation is the need of the hour, it is equally important to evaluate if past FTAs with large economies like China and Malaysia or economies in the region, for example, Sri Lanka, have been a success or not. Many believe that the envisaged gains from these deals could not be achieved due to the missing complimentary policies which were required to increase the utilization of allowances under FTAs.
For FTAs to be a success, attracting new investment and technology in export sectors is a must!
Dr. Vaqar Ahmed
Since the first FTA with China was signed, Pakistan saw a wide array of challenges in the electricity and gas sector, thereby increasing utilities’ prices for the industrial sector. This has seen Pakistani firms becoming uncompetitive over time in Asia and the Pacific. Not only did the firms face rising energy costs but there was uncertainty in supplies of energy which led to closure of small and medium sized exporters during the period 2009 and 2012. Relocation of firms in several exporting sectors of Pakistan to destinations outside the country was a norm during this period.
FTAs were not accompanied by a forward-looking industrial policy. By industrial policy we are not implying a regime of government support and subsidies which overtime strengthens monopolies, but a policy which guides innovation and sustainability across productive sectors.
Instead, what the country embarked toward were select policies for blue-eyed sectors. The auto sector policy and its gaps are a classic example of what has happened over time and how a lack of productivity even in sectors having dedicated policy continues to persist. A move to strengthen competition policy and its implementation could have helped raise efficiency and ensured higher consumer confidence from home and abroad.
FTAs were also not accompanied by a predictable fiscal policy. Both small and large firms have seen tax code changing in turn leading to difficulties in making longer term business decisions. In fact, very recently, during 2018, the tax policy was changed thrice in 12 months, ultimately leading to foreign investors keeping away for a long time. The tax policy is also not reflective of a level playing field as there are several cases in the past and present where tax exemptions have been provided to sectors, products, and sometimes individual entities by name. The Special Economic Zones (SEZs) envisaged to be a beacon of export success are slow to take off (except for the exception of Faisalabad perhaps) with local business community demanding same incentives for operating outside of SEZs – a key complaint which we often hear from the private enterprises in Sialkot.
For FTAs to be a success, attracting new investment and technology in export sectors is a must! We have however seen that even in the case of textile — the largest export sector, the intent of foreign investors to engage is weak. They often cite reasons which include a lack of macroeconomic stability, weak long-term productivity, and a fast changing business regulatory regime.
At a time when the Ministry of Commerce wants to convince large GCC economies for entering into FTA with Pakistan, it is discouraging to note that Strategic Trade Policy Framework (STPF) could not be approved by the Cabinet since 2018. The country is missing a longer term vision and plan for trade competitiveness.
- Dr. Vaqar Ahmed is an economist and former civil servant. He tweets @vaqarahmed