191206 Pakistan economy
Key export sectors will receive an immediate boost from upcoming tax cuts in Pakistan. File picture shows a worker arrange freshly cut wood on a truck in Charsadda near Peshawar. Image Credit: Reuters

Dubai: By easing taxes on some its main exports, Pakistan hopes to give the economy a timely boost and narrow the trade deficit. At the same time, any such tax cuts will definitely improve trade ties with its key Gulf partners, the UAE and Saudi Arabia.

Pakistan, the second largest economy in South Asia, expects generate more outbound trade from categories other than textiles. The country exported $984 million in goods to the UAE during 2018, according to the United Nations’ trade database, with $8.7 billion being imports.

The rapidly growing market, with a population of over 200 million, has a proven affinity for UAE funding, products and brands. Like other developing nations, exports gets Pakistan much needed foreign currency with which they can buy products that they are not able to make, mine, or grow at home.

However, trade took a hit after the Imran Khan-led government came under severe pressure in recent months due to volatility in the Pakistani rupee, a concomitant rise in inflation, growing debt and sluggish economic growth. But matters have stabilised to an extent on higher inflow of funds from the UAE, Saudi Arabia and the IMF.

Momentum shifting move

Pakistan Prime Minister’s adviser for commerce and investment Abdul Razak Dawood told Bloomberg in an interview earlier that the export policy revealing reduced tariffs will be announced next month.

Dawood hinted that the tax breaks would last three to four years, with engineering, chemicals, technology and footwear among the 20 sectors identified for the concession. Outbound shipments will grow to $24.5 billion to $25 billion this fiscal year ending June, up from $23 billion last year, Dawood said.

“This is great news because we need to grow all export sectors and support the existing ones like textiles and this policy will definitely increase our exports if quality is maintained,” said Mir Mohammad AliKhan, formerly a Wall Street-rooted investment banker.

Break boom-and-bust cycle

Any move now to offer tax benefits to its export sector is perceived by market watchers as an end to the “chronic boom-and-bust cycle” seen in the South Asian country. After taxes were slashed from 23.1 per cent in 2000 to 8.9 per cent in 2014, exports spiked from $9.2 billion to $25.1 billion.

But five years ago, exports fell to $23 billion from $25 billion after tariffs were hiked to 11.6 per cent from 8.9 per cent.

Deficit trimming

Pakistan’s trade deficit, which is when imports exceed the value of exports and represents an outflow of domestic currency to foreign markets, narrowed 33 per cent to $9.7 billion in the five months to November, according to the latest government numbers. Imports plunged 18 per cent during the same period, while exports rose 5 per cent.

When there is an imbalance between a country’s exports and imports, there is relatively more supply or demand for the local currency, which influences the price of that rupee on the currency markets. If a country exports more than it imports, there is higher demand for its goods, and thus, for its currency.

Plus, there are the remittances sent in expats, which remain a big source of Pakistan’s foreign earnings and are used to specifically finance imports and debt repayments, according to a government website.

The Pakistani rupee has been strengthening of late and is at a five-month high against the dollar - and the dirham - after a higher flow of foreign funds and positive macroeconomic news from the country. As of Tuesday, the exchange rate of Dh1 had reduced to 42.1 Pakistani rupee, when compared to 44.58 rupees nearly six months ago.