Daily Times

The World Bank has said Pakistan’s services sector’s relevance in exports is likely to be underestimated in the available data as approximately $1.5 billion of exports (roughly 50pc of total services exports) are not reported.

“This is because some of the exporters are small freelancers who register their receipts as remittances for taxation reasons,” the World Bank’s recent report “Pakistan Development Update: Reviving Exports,” said. It said the export quality upgrading was notable in Pakistan’s services sector.

During the past decade, services exports have been stagnant in the vicinity of $6 billion. However, within services, knowledge-intensive sectors such as computer and professional business services have grown relatively fast, at rates above 10 percent annually.

A composition of export growth of the different sub-sectors within services shows knowledge-intensive services accounting for almost all the growth, compensating for the contraction of transport and other services exports, the report said adding that the global trend of internationalization of business services facilitated this transformation, as Pakistani freelancers and Small and Medium Enterprises (SMEs) embraced it.

The trend has been amplified by an increase in remote working, fueled by the COVID-19 pandemic. The share of knowledge-intensive services exports in total services exports grew from 10 percent in 2010 to 50 percent in 2020. The sector’s current exports receipts are almost equal to those of Pakistan’s vegetable sectors combined.

Moreover, the sector’s relevance in exports is likely to be underestimated in the available data. Further, given that Pakistani firms face challenges transferring foreign currency to another country (often needed to pay foreign suppliers), some firms choose to hold accounts in foreign banks and receive the payments in those accounts instead of within Pakistan.

Meanwhile, the report recommended Pakistani exporters expand their size coupled with enhancing competitiveness saying that countries do not export, firms do. Therefore, it said analyzing exporter-level data is crucial to better understand export competitiveness patterns in Pakistan. To this end, the Bank analyzed Pakistan’s exporter-level data for the three latest available years (FY15-17) and the results benchmarked against relevant comparators. Two related questions are examined: (1) how large are Pakistani exporters? and (2) what are the dynamics of entry and exit?

Pakistani exporters are relatively small. On average, they export $1.4 million per year, almost one-third of the average Bangladeshi exporter. The comparison with Bangladesh is particularly informative since the sectoral composition of Bangladesh’s merchandise export bundle is similar to Pakistan’s.

The fact that exporters are small is also consistent with a feature of Pakistan’s private sector: firms struggle to grow. An alternative explanation is that entering export markets for Pakistan is relatively easy and therefore, even small firms can succeed at it, the report added.

However, it said if that were the case, we would expect to see many exporters, something that is not observed for Pakistan.

There are approximately 14,000 active exporters in Pakistan, which, normalized by population, places Pakistan at low levels, almost on par with Bangladesh and Nepal. Rather, the prevalence of small exporters is more likely to be related to frictions that prevent firms from scaling up.