NationalVOLUME 16 ISSUE # 15

Rising trade deficit hampers economic growth

According to the Pakistan Bureau of Statistics, during the eight months of 2020-21, the country’s trade deficit posted double-digit growth, as it widened by 10.64 per cent to $17.54 billion as compared to $15.85b over the corresponding period last year.

The trade gap has been widening since December 2020. In February, it swelled by 23.93pc to $2.52b against $2.03b over the corresponding month of last year. However, it declined by 5.87pc on a month-on-month basis.

The rise in the trade deficit has been caused by growth in imports and a decline in exports in February 2021. Pakistan’s merchandise trade deficit in January swelled to $2.67 billion, showing an increase of 24.4 per cent over January 2020.

It is relevant to add here that the cumulative trade deficit in the first seven months of this fiscal year totalled $15b — or 8.7pc higher than the deficit in the same period last year. However, home remittances in the seven months grew by 24.1pc year-on-year to about $16.48b. It more than made up for the loss due to the larger trade deficit.

A special point of concern is that merchandise export earnings that constitute less than 50pc of imports are increasing slowly, while import expenses are growing fast. Needless to say, sustainable gains in exports are impossible to attain without revving up and achieving economies of scale in export industries. There is an urgent need for a new, comprehensive policy to boost exports and contain the import bill. Merchandise exports are hobbled by structural issues. However, imports cannot be controlled under the existing conditions.

Structural issues of the export sector are many and varied which call for developing long-term and coordinated policy measures, based on surveys of various segments of the international market. Similarly, there is a need to develop a new import management strategy tailored to gradually deepen the linkages between growth in imports and wide-ranging industrial development.

An overriding need is to reduce our growing dependence on remittances which complicates our external sector problems. As repeatedly emphasized by experts, we should use the inflows to finance growth of human capital required for developing the national economy on modern lines in keeping with the international trend. The merchandise trade deficit, on the other hand, should be managed by more volumetric gains in merchandise export earnings.

For the purpose, a new strategic framework is needed, based on foreign trade directions and destinations. An analysis of available figures shows that Pakistan’s trade deficit with China contributes significantly to the overall deficit. In 2019-20, Pakistan’s Chinese merchandise imports totalled $9.55b, whereas its exports to China fetched a paltry $1.66b. This creates a huge trade deficit of $7.89b. Obviously, all imports from China are not industrial or agricultural raw materials or intermediate goods that Pakistan can use for producing more value-added finished exportable items. Pakistan also imports lots of Chinese consumer goods.

This is an area where some import rationalisation can be applied. On the other hand, Pakistan must seek from China more tariff and non-tariff concessions to boost its exports to Chinese markets. A concomitant need is to train and prepare our exporters to meet the requirements of the Chinese and other markets. The example of Pakistan running a very huge trade deficit with one particular partner shows the vulnerability of our entire foreign trade regime. Serious efforts must be made for renegotiating and securing more favourable trade deals with our partner countries. All unnecessary imports should be curtailed to restore the balance of trade.

A serious issue is the failure of Pakistani exporters to penetrate deeper into foreign markets and compete successfully with other countries. It calls for employing better trade diplomacy and improving the quality of our export products. Competitive pricing is another area where more attention needs to be given. The Ministry of Commerce, Trade Development Authority of Pakistan, our commercial counsellors abroad and exporters’ lobbies must get together and identify the reasons for the poor performance of key export sectors.

It goes without saying that export industries must attain economies of scale in order to carve their place in a highly competitive world. Towards the end, new fiscal and monetary support packages should be announced for export industries so that they can improve the quality of their products.

It is also the time we became part of the new technique of split-up value chains to increase our share in export markets. Countries are increasingly positioning themselves to carry out some particular activities from amongst the many involved in the production and marketing of goods. Textiles and leather are doing this to some extent but other industries should also participate in the activity.

The problem of trade deficit cannot be solved unless we improve the low per-unit export prices of Pakistan’s export products, especially food items. The average export price of our Basmati rice, for example, is around $1,000 per-tonne or just $1 per kg which is much lower than charged by other countries. Pakistan’s exports to its immediate neighbours — Afghanistan, China, India and Iran — constitute just 11.5pc of its total exports. Promotion of regional commercial exchanges can be a useful way to reduce the trade deficit.