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TMCNet:  Services trade diversification is a good growth strategy

[December 30, 2013]

Services trade diversification is a good growth strategy

(Express Tribune (Pakistan) Via Acquire Media NewsEdge) Service providers in Pakistan lack export orientation and are unaware of the immense export potential that exists in the sector.

Just like international trade in goods, the international trade in services profile of Pakistan is also very much concentrated in a few sectors and markets. Therefore, there is a need to explore ways to tap its comparative advantage by exploring new sectors and markets.

Just like previous years, the contribution to the economy is dominated by the services sector, which contributes 59.61% to the overall economic growth. The existing higher growth of the services sector can give a new dimension of stability to the country’s growth process.

A recent World Bank study concluded that services is the largest and fastest growing sector in the world economy, accounting for the biggest share in total output and employment in most developed countries. The share of services in total GDP is 47% in low-income countries, 53% in middle-income countries and 73% in high-income countries.

Pakistan being a developing country has gained a foothold in the global market for services but in terms of orientation and growth, it is lagging behind the peers. India is emerging as one of the major exporters of IT services. There are expectations that this could grow to $50 billion.

Pakistan, Bangladesh and even the Maldives have the potential to have a share in the fast growing IT market but due to lack of orientation and awareness they do not get the advantage.

Despite its immense economic growth potential, Pakistan has been unable to achieve a balanced high growth. A high growth and competitive economy has now become a matter of national security as it is imperative for sustained job creation, income generation and poverty alleviation.

In this situation, a dynamic services sector can contribute to the quest for more inclusive growth, by bringing broader population into the economic growth process and spreading more widely the fruits of growth.

According to data compiled by the State Bank of Pakistan (SBP), the services sector recorded a growth of 3.7% in 2012-13. This was mainly contributed by finance and insurance services at 6.6%, general government services 5.6%, housing services 4%, other private services 4%, transport, storage and communications 3.4% and wholesale and retail trade 2.5%.

In addition to concentration in a few sectors, the services export base is also quite narrow and limited to 7-10 foreign markets. Major export destinations are USA (29.69%), UK (8.82%), UAE (7.23%) and Saudi Arabia (5.56%).

In order to avoid a crisis, Pakistan needs to diversify its service exports across markets and sectors to reduce the vulnerability of the export portfolio to partner-specific shocks and to extreme volatility in export prices.

In the current scenario setting up of the National Steering Committee by the Ministry of Finance to devise a long-term strategy for significantly improving exports of services and introduction of a new long-term financing facility for the services sector by the SBP for adoption of new technologies and enhancement of capacities are small steps in the right direction.

Another dilemma on the government side is that it has not focused on professional services in terms of incentivising them for exports. Fiscal incentives are not the only and most effective pushing factors for increase in exports, there may be some other incentives in the form of use of foreign exchange for duty-free import of inputs, etc. The incentive schemes may be designed after consultations with the industry and taking into consideration their needs.

In order to enhance services exports, professional foreign service providers should be encouraged so that the market becomes competitive and learns from such providers in terms of knowledge and business techniques.

An effort to enter into bilateral arrangements with major markets such as the US and EU would prove very beneficial for the industry. India, for example, has many bilateral arrangements, both at the government and industry levels, with the US and has preferential access to their markets.

Pakistani service exporters would also benefit from economically priced and quality service inputs as well as more transparent regulatory environment. Although the investment environment is generally open at the national level, carefully crafted service commitments could be used to attract foreign investment.

Overcoming trade constraints through negotiations can improve the ability of services firms to grow and compete globally.

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