INTERNATIONAL BUSINESS

Assignment TRADE POLICY WITH REPECT TO AGRICUTURE SECTOR OF PAKISTAN

Submitted To:Mam Aqsa Akbar

Submitted By:Ahmad Mustafa Warda Ghafoor Hassan Ahmad Sonia Latif Iram Fatima

Dated:-22-03-13

Agriculture:
The agriculture sector continues to be an essential component of Pakistans economy. It currently contributes 21 percent to GDP. Agriculture generates productive employment opportunities for 45 percent of the countrys labor force and 60 percent of the rural population depends upon this sector for its livelihood. It has a vital role in ensuring food security, generating overall economic growth, reducing poverty and the transforming towards industrialization. The present Government is determined to improve the quality of life of the people and to banish hunger and malnutrition from the country by making agriculture an efficient, productive and profitable sector of the economy. Till early 1980s, indirectly affected by manufacturing trade reforms and currency devaluations WTO establishment in 1995 Pakistan agreed and started to reform agri. trade all tariff barriers transformed into non-tariff barriers B/w 1996-97 and 2008 average applied most favored nation (MFN) tariff in agriculture

sector from 65% to 15.4% Figure 1 Tariff structure in Pakistan and other selected countries.

Simple average MFN applied tariff in 60

49.0 34.4 46.7

66.4

30
15.8 16.9

30.1

28.9

2. Trade-related Intellectual Property Rights (TRIPS) Agreement

Balance in benefits historically, technology imitation Cost of technology transfer difficult to adopt modern technology for human development. Technological development has not been compatible with geographic requirements. Enhanced the cost of seeds and cultivations Reduced biodiversity as a result of the use of genetically modified (GM) technologies, promotion of uniform varieties and neglect of preservation of plant varieties

3. Technical Barriers to Trade (TBT) and Sanitary and Phitosanitary (SPS) Agreements
Required to base standards/regulations a/c to international standards Easy for developed countries but difficult for developing countries served as non-tariff barriers Pakistan is unable to meet the requirements of these agreements due to:

a) Shortage of financial resources and technical support needed to upgrade the quality and standard of agricultural sector b) Limited technical, legal and scientific resources to challenge such rules Developed countries promise to support developing countries by providing US$1 billion per annum

From the perspective of International Trade Rules:

1. TRIPS Agreement should focus on spreading the benefits of agricultural innovations as widely as possible. The role of international agricultural research centers be strengthened for providing quality seeds to farmers. They should be supported to offer financial, technical and scientific support to upgrade the quality and standard of agricultural products. 2. Pakistan has its own home grown system of property rights. It needs to be strengthened more. 3. South Asia needs to harmonize the standards of commodities within the region. 4. The Doha Round gaps between applied and bound tariff rates policy flexibility (in presence of domestic constraints + international volatility of commodity prices) vulnerability of agricultural sector . Pakistan needs to have access to instruments like SSM and SPs. 5. Should be careful in further liberalizing not a commercial activity but a way to secure subsistence and livelihood for farmers

From the perspective of Domestic Policies:1. Small farmers must be focused. The major problems of small farmers should be solved first. 2. Provision of latest machinery, pesticides, insecticides and fertilizers to such farmers must be ensured at subsidized prices. 3. Consumer friendly policies must be formulated e.g they must be provided with accessible loans from banks 4. Productivity enhancement programs must be constituted to adjust and support prices.

5. Different Agricultural zones should be introduced. As Multan is famous for its Mangoes and citrus fruits so it must be made Mango, citrus zone through which perishable products should be exported. Pakistan Agricultural storage & Services Corporation needs to take steps in this regard. 6. Corporate farming like giving lands to Mitchells, Nestle and Multinational companies is also a good idea that will also help those who own a large area of fertile land but can't manage it. 7. Surplus vegetables and fruits must be exported. A scheme worth Rs.39 million has been approved for the current fiscal year for establishment of agro export processing zone for fruits, vegetables and flowers. This will also help in commercializing agriculture. 8. Latest machinery should be provided to the farmers at considerable prices to increase the per acre yield. This provision should be on easy installments so that the farmers can avoid the burden of loans. Subsidies should be given by the government for modern machinery.

SUBSIDIES:Pakistan has a history of subsidizing agricultural inputs. Although none of the agricultural inputs were subsidized during the early 1950s, the process was initiated in the second half of the decade by subsidizing chemical fertilizers in order to popularize their use Niaz (1984)]. The list of subsidized inputs and the rate structure of the subsidies were expanded considerably throughout the Sixties. Towards the end of the Sixties, it was noted that almost all the agricultural inputs including fertilizers, insecticides, seeds, irrigation water, tube well installations, and the operation and purchase of tractors and tractorrelated equipment were subsidized in one form or another Aresvik (1967) and Kuhnen (1989)]. In the 1970s, some curtailment of subsidies occurred as a result of input price increases which followed the worldwide recession, a major oil shock, the credit crunch, the war with India, and the consequent steep devaluation of Pakistani Rupee [Chaudhry (1982)]. Although the subsidies had survived the onslaught of the Seventies and tended to persist on most inputs, the government became totally committed to their removal beginning with the 1980s, under pressures from the IMF and the World Bank [Government of Pakistan (1980)]. As a consequence, there was a total withdrawal of subsidy from seeds, insecticides, tube wells, and tractors. A phased-out withdrawal of fertilizer subsidy, culminating in 1984-85 in the case of nitrogenous fertilizers and in 1989-90 in the case of phosphate and potash fertilizers, was also to be undertaken [World Bank (1986)]. The purpose of it, is to highlight the progress of withdrawal of input subsidies in Pakistan. State Bank of Pakistan (SBP) former Governor Shahid Kardar pointed out that agricultural sector is not being taxed in country due to the political reasons despite the fact that huge amount in term of subsidies has been given to this sector (2012).

Import Quota and Export Constraints:The 2007-08 food crisis, the price spikes of 2010-11 and the projections of tight food markets and the likelihood of recurring spikes for years to come are indications of a fundamental shift in the world food markets. The experience of 2007-10 shows that export restrictions did play a significant role in fuelling the price spikes. Accordingly, there are growing calls for the multilateral trade rules to address the issues of high and volatile food prices. It is in this context that this paper sought to contribute some ideas towards disciplining export restrictive Measures on foodstuffs through the Doha Round. As building blocks to that discussion on

trade rules, the paper also reviewed the experience on food export restrictions during 200710, covering the incidence of restrictive practices, policy instruments used and studies undertaken on the impact and consequences. Pakistan needs structural reforms in agriculture to raise the per hectare yields. High quality seeds, fertilizer and farm mechanization could totally revolutionize agriculture and become an export powerhouse. A lot of agricultural products are lost in the supply chain from the field to the supermarket creating food shortages and increase in prices. According to some estimates more than 20% of Pakistani agricultural goods are lost in the archaic Indus Valley era supply chain. Refrigerated cargo trucks could ship vegetables and fruits to refrigerated ships to their destinations in Europe and America. Pakistan could ship roses, and flowers kept at almost zero degree temperature and get Billions of Dollars during Valentines Day: More specifically; the agricultural sector plays an important part in Pakistan's economy by: contributing 24 percent towards GDP; providing food to about 130 million people; earning about 60 percent of the country's total export earnings; providing employment to 47 percent of the total work force; providing the main source of livelihood for the rural population of Pakistan; providing raw materials for many industries and a market for many locally produced industrial products.

ENGRO CORPORATIONS:
COMPANY PROFILE:
Engro Corporation Limited is one of Pakistan's largest conglomerates with businesses ranging from fertilizers to power generation. In the interest of better managing and overseeing businesses of subsidiaries and affiliates that are currently part of Engro's capital investments, Engro Chemical Pakistan Limited converted into a holding company structure. As part of this process, two major changes occurred with effect from January 1, 2010; Engro Chemical was renamed as Engro Corporation Limited and it demerged and transferred its fertilizer business into a separate wholly owned subsidiary, Engro Fertilizers Limited. Currently Engro Corporation's portfolio consists of seven businesses which include chemical fertilizers, PVC resin, a bulk liquid chemical terminal, industrial automation, foods, power generation and commodity trade. Besides providing the long-term vision for the company and overseeing performance of the subsidiaries and affiliates, Engro Corporation Limited is also responsible for allocation of capital, management of talent, leadership development, HR guiding policies, leadership role in public relations and CSR activities, control structures, legal and IT support. From its inception as Esso Pakistan Fertilizer Limited in 1965 to Engro Corporation Limited in 2010, Engro has come a long way and will continue working towards its vision of becoming a premier Pakistani company with a global reach.

OVERVIEW OF INDIVIDUAL BUSINESSES

Engro Fertilizers contributed 23.28 percent of the overall consolidated five percent growth in Engro Corporation's top line. Declining farm economics coupled with poor liquidity of the average farmer and the anticipation of price reduction badly affected demand and caused a significant shrinkage in the overall industry. The industry, and Engro Fertilizer, was further damaged by gas supply limitations (only 33 days worth of gas in the first six months of CY12), untimely rains putting a strain on the already faltering water efficiency system of Pakistan, and a 30 billion rupees' subsidy on imported fertilizer posing significant price challenges to the industry. At 55 percent capacity utilization, urea production for Engro Fertilizers remained at its all time quarter lowest. Engro Foods outstripped Engro Fertilizer for the first time with a 35.44 percent contribution to Engro Corp's top line. This came at the heel of a 38 percent increase in sales revenues primarily fuelled by higher dairy business volumes. The dairy and juice segments grew by 40 percent over the corresponding nine-month period of 2011. Tarang maintained its leadership as the largest volumetric contributor to the sales of Engro Corp. The ice-cream segment was the only one to post a decline - measuring in at one percent from the corresponding previous period - and reported net losses as a result of continued investments in product development and cold chain infrastructures coupled with extraneous external factors. Engro Polymer contributed 18.75 percent to Engro Corp's top line. International PVC prices gained upward momentum during the nine months of CY12 on the back of higher demand in the region, coupled with cost-push inflation from increasing feedstock prices precipitating from geo-political unrest in the Middle East. Improved operating levels following the planned annual turnaround also contributed to the growth. Engro Power Gen grew to a healthy 10.31 percent contribution to the group's overall sales. The company dispatched 1,316 GwH to the national grid with a stellar load factor of 93.5 percent - impressive compared to the industrial average which was constrained by the issues of circular debt and rising fuel prices. The plant also demonstrated a billable availability of 100.3 percent during the first nine months of CY12. Overdue receivables continued to weigh down on the balance sheet amounting to Rs 4,374 million from Pepco, while total receivables were Rs 6,355 million. Engro Eximp and Engro Vopak both posted healthy bottom line returns with a group top line contribution of 11.16 percent and 2.1 percent respectively.

PERFORMANCE SNAPSHOT 9MFY12

For the period under review, the shareholder-based DuPont Analysis showed a disappointing downward trend in return on equity (ROE) from 4.34 percent in 9MFY11 to 3.75 percent in 9MFY12 despite an increasing financial leverage position (a ratio of total assets to total equity) from 1.27 to 1.29. The reduction was attributable to a downward trend in the holding company's return on total assets (ROA) from 3.4 percent to 2.9 percent. The 50 basis points down-shot came at the heels of a decreasing net profit margin from 130.57 percent to 72.11 percent - a decrease that is largely explained by a 47.44 increase in finance costs (which also contributes to an augmented risk profile in which the interest cover ratio of the company fell from 3.4 times in 9MFY11 to 2.42 times in 9MFY12) on the company's income statement, coupled with a 10.31 percent increase in operating expenses which reduced operating margins from 203.83 percent to 134.89 percent. The counter-intuitive operating margin of over 100 percent is explained by the fact that the "Other Income" (largely a reflection of the investments of surplus capital in Engro Corp) weighed in at 73.2 percent of gross income (from dividends from subsidiaries and royalty incomes)

in 9MFY11 and 34.47 percent in 9MFY12. In both years, consequently, operating profits were actually greater than the gross income of the company. The other key indicator of health and contribution to absolute shareholder value is the bottom line. A reduction of 12.61 percent in the bottom line was further troubling from a shareholder's perspective. In terms of liquidity, short-term borrowings to fund working capital requirements were a high 21.18 percent of total assets, thus explaining the increasing finance cost referred to earlier in this report. The reason that short-term borrowings had to be expanded by 14 percent over the corresponding period under study from last year is the worrisome liquidity position of the company, which troubled managers. The current ratio fell from an abysmal 0.38 to 0.36, while the acid test ratio fell from 0.35 to 0.06. All of these factors put a question mark on Engro Corp's ability to meet short-term obligations as they fall due. At the same time, net operating cash flows remained negative and decreased by 55 percent compared to 9MFY11's negative Rs 252,923,000. Net operating cash flows to current liabilities therefore fell to -0.05 times from -0.04 and the ratio of net operating cash flows to net income fell to -0.39 times from -0.22 times in9MFY11. Price performance of Engro Corporations share on the Karachi Stock Exchange was also disappointing. Prices fell from Rs 143.49 at the close of 9MFY11 period to Rs 106.77 at the close of 9MFY12. The price-to-book ratio fell from Rs 27.93 to Rs 20.64 thus showing a reduced market-value addition by the company; and despite the nearly 13 percent reduction in EPS, the price-to-earnings ratio fell from RS 64.59 to RS 55.04

FUTURE OUTLOOK The two largest subsidiaries (in terms of top line contributions to the group) are Engro Fertilizers and Engro Foods. Engro Foods promises to continue steady growth as the new products gain traction and old investments come to fruition in subsequent periods. With regards to Engro Fertilizers, several positive indicators are present in terms of the future outlook. Urea sales are expected to pick up in CY2013. The company has been working on securing off-network sources of gas and the Government has agreed in-principle to provide network based plants from dedicated fields. Specific gas allocation proposals for short- and longterm solutions in this regard are under consideration by various government bodies. With
continuing strong operational performances in the other subsidiaries, Engro Corporation seems well positioned for the coming periods.

Policy recommendations
From domestic policy perspective:
1. Governance is the main issue for negative impact of agricultural trade openness in Pakistan. 2. Need for a Food Security Strategy to address the issue of food insecurity. 3. Land reforms a) transfer of tenancy rights into either ownership or permanent tenancy, b) computerization of land records to ensure proper taxation, c) and transfer of uncultivated and state owned land to the poor, marginalized and landless farmers 4. Improvement in the provision of agricultural credit and agricultural insurance systems to benefit the small farmers 5. correct inequities in access to water and improve water management 6. Agricultural marketing system must be run more efficiently to reduce post-harvest losses and price differentials

7. Establish a strong link b/w agricultural education, R&D and extension services. System of public and private partnership is needed to resolve financial constraints in the agricultural knowledge system