ISLAMABAD, 29 July — The government feels upbeat about new package of tax incentives, freight subsidies, and free export and trade zones. Exporters, industry, business and investors however display a mixed reaction.

The objective of the recently announced foreign trade policy 2003 (FTP) covering the fiscal year 2003, also hopes to break the stagnation in exports over the last few years. That reduced imports, largely industrial raw materials and capital goods. Political uncertainty and lack of economic buoyancy has discouraged fresh investment, and upgrading of industrial capacity. More than 4,000 industrial units remain closed.

The new FTP has several positive features and incentives. Business and industry was expecting better than this and explains the pessimism in their comments. They call it “routine, and containing “nothing innovative or imaginative.” Commerce Minister Abdul Razzak Dawood is brimming with hope about the FTP, approved by the Cabinet.

There are hopeful signs for foreign exporters to Pakistan as the FTP has raised the level of imports a fractionally. Imports will include capital goods, industrial raw materials and consumer goods totaling $ 11.1 billion — or 7.4 percent — up from $10.335 billion in fiscal 2002.

The FTP sets an export target of $10.4 billion for the current fiscal 2003. It is 13.4 percent higher than the actual exports in fiscal 2002 of $9.125 billion, $100 million less than the target of $9.2 billion.

The target, itself had been cut from $10 billion acknowledging the international recession accentuated by the events of Sept. 11. With exports projected at $10.4 billion and imports at $11.1 billion, the trade gap is expected to narrow to $700 million, down from $1.21 billion in fiscal 2002.

In order to drive exports — and keep its imports and debt repayment costs manageable — Pakistan will have to operate its exchange rate mechanism skillfully. Already, doubts surround the fact that dollar has depreciated eight percent against the rupee, since July 1, 2002, making Pakistani exports more expensive. The latest difficulty is the rise of the euro that exceeded parity with the dollar for the first time during the third week of July. At that point, the euro rose to Rs.59.85/59.65, while the dollar lagged at Rs.59.20/59.10.

The euro in the interbank market was Rs.59.65/59.85, while the dollar was Rs.59.53/59.57. Over the weekend dollar was Rs.59.65/59.55 and euro 59.60/59.40, and as such running almost neck to neck, in the kerb.

A stable exchange rate will be the key ingredient to keep exports moving on a large scale. This is why exporters are demanding that the State Bank of Pakistan (SBP), the central bank, keep the dollar steady at around Rs.60. A stronger rupee will erode exports.

The SBP will also have to adopt an export- beneficial policy in relation to rupee-euro parity.

Exporters are unhappy, because the new FTP eliminates some subsidies. Unit prices of several of Pakistani exports are down between 12 to 20 percent. Thus, even a 20 percent increase in volume in fiscal 2002 could not shore up exports beyond $9.125 billion. Simultaneously, it discouraged both domestic and Foreign Direct Investment (FDI) inflows into Pakistan.

The economy is also suffering because of the high prices of state-supplied energy and utility services. It has been roundly condemned by all sections of the society because it increases both cost of production and cost of living. Bank interest, reduced from a historic high of 23 percent to 13 percent in four years, remains nonviable as it increases production costs. This reduction hit savers and depositors. Their annual profit rates sank as low as 4 to 5 percent — a further disincentive to saving.

The FTP hopes are based on availability of greater market access, continuation of the inventory buildup in United States and EU, and the startup of new machinery installed by textile industry over the past three years. The government hopes, 2003 will see stable raw cotton prices internationally, more subsidized export finance and a stable exchange rate.