By Zara Salman
In December of 2013, Pakistan acquired the GSP plus status from the European Union, granting member states duty-free access to 96 percent of Pakistani exports to the EU. Pakistan was the second country in all of South and Southeast Asia to receive the trade advantage, giving it a 10 to 14 percent duty advantage over major regional competitors including China, India, Vietnam, Thailand, and Indonesia.
Between 2013 and 2015, Pakistan’s most important export industry – garments – increased exports by 10 percent. But Bangladesh and India increased their garments exports in the same period by 13 percent and 17 percent, respectively. This shows that Pakistan has not yet fully exploited the benefits of the GSP plus status.
The garments sector has the potential to drive Pakistan’s export-led growth due to high value addition of exported products, high labor intensity, and low energy requirement. In 2015, garments accounted for over 20 percent of total exports. Once GSP plus status was obtained, the garments sector was expected to grow considerably from increased exports and other associated economic benefits. But has that really happened? What needs to be done to fully exploit the potential benefit of the GSP plus status?
A recent study by the International Growth Centre provides evidence to answer these questions.
Impact of GSP plus in numbers
The most recent data confirms that the GSP plus status has positively impacted Pakistan’s garments exports to the EU compared to its exports to the rest of the world (Figure 1). In the first two years of GSP plus, garments exports to the EU grew much faster (at 11 percent per year) than garments exports to the rest of the world (1.5 percent per year).. Between 2013 and 2015, the EU’s share in Pakistan’s total garment exports has also increased from 50 to 54 percent. However, the benefits are probably less than initially projected.
Figure 1: Pakistan’s Garments Exports (2013-2015)
Source: UN Comtrade
Analyzing specific garment categories, exports of knitwear to the EU expanded faster (at 6 percent per year) than of woven (at 5 percent per year) after GSP plus status.  Yet, this pace of growth is only visible for the EU, as knitwear exports to the rest of the world grew slower than woven garments exports (6 percent per year versus 7.5 percent per year, respectively).
Figure 2: Pakistan Garments Exports by Categories
Source: UN Comtrade
What is holding back gains from GSP plus?
Despite some evident growth in garments exports, the private sector does not seem too optimistic about realizing the full potential of GSP plus and has vocally expressed frustration at the challenges that remain.
Their biggest concern is the continued energy shortfall. In the last few years the industry has operated below 70 percent of full capacity due to this deficit. Production costs have also increased as firms employ alternate measures to ensure regular energy supplies. The energy crisis is expected to lessen in the coming years as investments on energy projects planned under CPEC materialize. But in the interim, industry continues to struggle with meeting production targets.
Pakistan’s adverse business climate hinders investments in export manufacturing particularly by new EU-based clients. International buyers prefer suppliers from less risky countries, especially where physical engagement with firms is possible. Maplecroft, an international agency that ranks countries according to their investment climate, places Pakistan in the high-risk category. Pakistan fares much worse than Bangladesh on most categories (Table 1). Without a coherent strategy to improve the business environment, the gains of GSP plus will not be fully availed.
Table 1: Risk Rating for Pakistan and Bangladesh
|Adjusted Country Risk Score||8.26||7.88|
|Overall Risk Rating||Extreme||Extreme|
Note: The agency analyzes countries at different risk levels on a scale of 1 to 10 (1= Best and 10= Worst).
An important challenge faced by the industry is the tax regime and custom clearance procedures. The industry is subjected to a higher duty on raw materials compared to other countries, which makes the final product more expensive. Due to cumbersome customs procedures and high duties on the import of artificial fibers and PTA (a raw material for the manufacture of polyester), the garments industry has been unable to move from the existing cotton concentrated 80:20 mix to the globally demanded 50:50 mix in its exports.
On the bright side, GSP plus status has allowed the garments industry to maintain its export shares – even improve them slightly – despite the many challenges. The new incentive package for exporters, announced by the Prime Minister in January 2017, may ease some of the tax constraints.  There is also some progress towards solving the energy crisis and lowering the tax burden.
But the desired benefit of the GSP plus status – substantially higher exports – will be realized only when the energy, tax and customs challenges are addressed comprehensively. Improving Pakistan’s business environment will also be key to attracting foreign clients including Chinese investors, given that the Chinese garment industry is relocating to lower-cost developing countries and Pakistan offers the additional advantage of easy access to European markets.
Zara Salman is a senior research associate at the Consortium for Development Policy Research.
 World Trade Organization
 Nabi, I & Hamid, N. (2016). Implementing Policies for Competitive Garments Manufacturing.
 Knitwear held a greater share of total world exports (at 53 percent) compared to share of EU exports (39 percent) back in 2013
 Includes labour and safety laws and human rights.
 Includes power, roads, climate change and disaster management
 The government, in response to the demands of the spinning industry, has imposed a duty on imported cotton yarn ranging from 5 to 15 percent, which makes products more expensive than that of competitors. Furthermore, taxes paid by exporters on local raw materials are eligible for refund but significant delays and costs are involved in the refund process. Although zero-rated tax regime has been introduced, billions of rupees pending with the FBR for earlier cases remain to be refunded.
 Firms face the problem of having to first pay import duties on small items such as tags, zips and other trimmings used in manufacturing of garments and then getting their refund, which is a hassle for them. Moreover, a 24/7 custom clearance facility is officially available, but staff is commonly absent and collectors are available only five days a week, which delays shipments and may lead to loss of clients.
 The package includes removal of both customs duty and sales tax on the import of cotton, of customs duty on man-made fibres other than polyester and of sales tax on the import of textile machine. In addition, garments exports will be eligible for duty drawbacks at 7 percent. However, exporters will get these incentives only if they increase exports by 5 percent from January to June 2017 and then by a further 10 percent during FY 2017-18.
[…] to the European union, Pakistan was awarded the GSP plus status in December 2013. As a result, Pakistan’s garments exports to the EU grew much faster (11 percent annually) than exports to the rest of the world (1.5 percent). Progress is also […]
Surely the good Pakistanis will save themselves from the disasters of the Indian SEZ policy
In the COVID and POST-COVID world,when the USA and the EU govtt and private entities,are looking to relocate their supply chains,to India and South East Asia, and insulating themselves from supply chain and logistics shocks,in each host nation – what value can the Indian SEZs provide ?
The Indian SEZ Policy is doomed ! dindooohindoo
• How can an investor invest in a SEZ in India,unless it is benchmarked with the world and with Indian SEZs, on operations, costs,efficiencies,tax.FDI/FX,Power Cost,Infra facilities,Port Faciliies,DTA Risk,Political Risk,Geo Political Risk (as in Chabhar) etc
• How can a SEZ be sure that, it is getting the maximum profits,lowest costs, nil fraud and providing the maximum efficiencies to its units – unless there is a comprehensive audit of all aspecrs of operations,as stated in the RTI Application requirement ?
• If a Pharma exporter in the PRC wishes to relocate to an Indian SEZ – he would want to know the best SEZ for the same and the reasons for the same.
o Besides benchmarking,if the SEZ or the GOI does not have this basic information – in terms of broad SEZ financials – why will the investors come to India to invest in SEZs
• If the SEZ has no records of the financial performance of the SEZ units – how will the SEZ and the developers etc., innovate to improve the performance,efficiency and profitability of the SEZs
• If the SEZ or the GOI has no data on Raids or Criminal Prosecutions of Units – how will an overseas investor be convinced, that he is entering into a safe regulatory environ.In addition,how will the public be satisfied,that sufficient supervision,regulation and control is being exercised,on the SEZ units,by the State ?
• If the SEZ of the GOI, is not aware of the profits and financials of the developers of the SEZs,and if the developers are making losses – it would mean that the State has no clue of the nature,extent and reasons of the said losses.
o In such an event – HOW WILL THE GOI ATTRACT FOREIGN DEVELOPERS AND FOREIGN INVESTORS, IN SEZs AND SEZ UNITS ?
o IF A DEVELOPER IS MAKING LOSSES OR NOT MAKING A FAIR PROFIT – WHAT SERVICE WILL BE PROVIDED TO THE SEZ UNITS – and will an entity invest in any UNIT, in such a SEZ ?
• Why are there non-Operational SEZ units in a SEZ ? Why does the SEZ not have this data ?
o How can the SEZ or the State be sure that, it has the right policies and rules and incentives, unless it had the said data, and the reasons for the said units.
o A Non-Operational unit is a failure of GOI Policy,loss of national resources,loss of bank funds,defaults in EU and violation of indemnities and guarantees by the SEZ units
• Why does the SEZ or the GOI,not have the data w.r.t SEZ units in terms of service supporters,such as Hotels,Banks and other facilities in a SEZ ?
o Why will any overseas investor,invest in such facilities – unless he has that data ?
o If the GOI does not have the said data – how can the GOI be sure,that their policies and incentives are working,as also, to innovate to improve the peformance of these service supporters ?
• How will India attract investments and COVID SUPPLY CHAIN RELOCATIONS INTO ASIA AND INDIA – if the PRC/Nippon/ Korea/Malaysia/GCC or other EU nations,invest in SEZs as developers in LDCs – which also provide Duty Free Access into USA/EU, from those LDC-SEZs,which will be staffed and operated across the SEZ value chain by Chinese//Nipponese/Koreans/ Malaysians ?
o Take the example of CPEC by PRC in Pakistan,an LDC,as an example.
o Why will any supply chain relocate to India, in an export led venture, if such BASIC DATA IS NOT IN THE PUBLIC DOMAIN.
o NO ONE HAS THE TIME OR MONEY TO WASTE ON CONSULTANTS , OR VISITS TO HOST NATIONS, TO ACCESS THE ABOVESAID INFORMATION.
o There is not a single link on the SEZ portal,as to why an investment in a SECTOR ,IN A UNIT IN THEIR SEZ , FOR EXPORT TO A PARTICULAR GEOOGRAPHY , IS THE BEST ,IF INVESTED AND EXPORTED, VIA THE SEZ – ALONGWITH SUCCESS STORIES.
o WHO WILL RISK AN INVESTMENT,IN SUCH A PROJECT OR A NATION
• IF MAHARASHTRA HAS 10 MILLION CASES,OF COVID BY FEBRUARY 2021 – WHAT IS THE PLAN OF THE GOI FOR THE LOGISTICS RISK FOR SUPPLIES FROM DTA TO THE SEEPZ (IGNORING SUPPLIES FROM SEEPZ TO THE DTA) ?
• ASSUMING A COAL POWER PLANT FEEDING THE SEEPZ – IF IMPORTED COAL IS STOPPED POST COVID FROM LOAD PORTS – WHAT IS THE ALTERNATIVE TO SUPPLY POWER TO THE PORT AND THE SEZs.
o If such Risk assessment is STILL not on the SEZ portals – why will any one invest in any Indian SEZ ?
• IF THE SEZ DOES NOT HAVE THE ABOVESAID INFORMATION,DOES NO ANALYSIS TO IMPROVE THE EFFICIENCY AND PERFORMANCE OF THE SEZ UNITS,DEVELOPERS,SERVICE SUPPORTERS,INFRA FACILITATORS ETC., AND IS ALSO, NOT INVESTED, IN THE VALUE CHAIN – THEN WHAT IS THE STAKE OF THE GOI OR SEZ , IN THE SAID FACILITY,AND WHY WILL ANY FOREIGN ENTITY, INVEST IN SUCH A SEZ ,AND WHY WILL ANY SUPPLY CHAIN, RELOCATE TO SUCH AN SEZ ?