NationalVOLUME 17 ISSUE # 3

Need to stabilise external trade sector

The recent increase in Pakistan’s trade deficit has raised questions about the stability of its balance-of-payments position. At the same time, the current account deficit is also gradually rising up. According to the latest data, the second month of the current financial year saw a rise of 133 per cent in the trade deficit due to an almost triple increase in the country’s imports compared to exports.

Observers have noted the reverse trend in the trade deficit for the second consecutive month as the merchandise trade deficit reached $4.05 billion in August against $1.740b over the corresponding month last year. It is feared that the trade deficit might put pressure on the external side, but an increase in remittances, growth in export proceeds and the Roshan Digital Account will help mitigate the burden to a large extent.

Initial estimates show that the rising import bill might push the current account deficit to $10b in FY22. The deficit had reached an all-time high of $37.7b in FY18. However, the government’s measures led to a drop to $31.8b in FY19 and $23.183b in FY20. The trend reversed and the trade deficit was recorded at $30.796b in FY21.

However, the trade gap has been widening since December last year, mainly due to an exponential growth in imports and comparatively slow growth in exports. The import bill in August rose by 89.9pc to $6.313b against $3.324b over the corresponding month of last year. On the month-on-month basis, the import bill increased by 12.7pc. In the outgoing fiscal year (FY21), the import bill surged by 25.8pc to $56.091b from $44.574b the previous year.

Adviser on Commerce and Investment Abdul Razak Dawood recently told the media that he was analyzing rising imports. He said maximum imports comprised raw materials and capital goods because industries were working on full capacity. According to him, the government has carried out maximum tariff rationalisation on raw materials and capital goods during the past two years to spur industrialisation in the country. “This will be a game-changer,” the adviser said, adding that this was a silent revolution in the country’s history because of cheaper imports.

As per the State Bank of Pakistan’s statistics, around 628 businesses have acquired concessionary bank loans worth Rs435.7b for setting up new businesses and/or expanding their existing production lines in Pakistan under the Temporary Economic Refinance Facility. Encouragingly, most expenditure has been made on the import of machinery related to textiles, leather, chemicals, etc.

In the meantime, oil prices have increased substantially, which have pushed up the import bill because of high demand for energy in the domestic market. On the other hand, the increase in the import bill also helped the Federal Board of Revenue (FBR) post substantial growth in revenue collection at the import stage. It is clear from a robust growth of 67pc posted in customs collection alone in August from a year ago. The FBR also collects sales tax and withholding tax at the import stage, which made a hefty growth mainly because of rising imports.

Exports posted a growth year-on-year by 42.5pc to $2.257b in August against $1.584b over the corresponding month of last year. On a month-on-month basis, exports of merchandise dipped by 3.54pc. The average monthly exports had stagnated at around Rs2.2b for the past few years. An announcement by the commerce ministry said that growth in exports was affected by shipments’ delays due to heavy rains. The exports for August were short by $143 million of the monthly target of $2.4b, it said.

Export proceeds went up by 18.2pc to $25.294b in FY21 from $21.394b over the last year. The commerce ministry has set an export target of $38.7b for the current financial year. The export target of commodities for FY22 is $31.2b and that of services it is $7.5b. In the opinion of economic experts, if the trade balance deteriorates further on the back of a stronger build-up in imports to support the ongoing consumption-based economic recovery going forward, the current account deficit for the full fiscal year would likely breach the State Bank of Pakistan’s estimate of 2-3pc of GDP during FY22 by a big margin.

This is a cause of concern for the country’s economic managers. The 10pc depreciation in the value of the home currency in the last three and a half months and a slow rise in exports have spawned suggestions about imposing an export emergency and curbs on luxury imports. No doubt, the enhanced import of machinery and raw materials reflects ongoing investments by businesses in capacity expansion and new projects in the textiles, leather, chemicals and other sectors is a welcome development, but the government should prepare alternative plans to sustain the pressure on the external sector.

The accumulation of the highest ever foreign exchange reserves in the last couple of years and remittances by Pakistanis abroad may not keep the pressure off the external sector for long. The uncertainties over the International Monetary Fund (IMF) programme, exchange rate volatility, the drying up of foreign direct investment (FDI), etc. are pointers the government cannot ignore. The long-term solution to our economic woes lies in pushing exports and curtailing the consumption of unessential import-based luxuries.