FeaturedNationalVOLUME 17 ISSUE # 16

The problem of widening export-import gap

Pakistan’s external trade sector is currently marked by the twin phenomenon of rising exports on the one hand, and swelling imports on the other. While deriving satisfaction from the improving export performance, the government is also worried by the surge in imports. The positive impact of a double-digit increase in exports is being offset by the rise in imports.

In the fiscal year 2018-19, when the current PTI government came to power, Pakistan recorded exports of $22.96 billion, which denoted a drop of 1.1% from 2017-18. Exports fell again to $21.39 billion in the following year but climbed to the record high of $25.3 billion in 2020-21.

It is now estimated that exports may rise further to another all-time high of more than $30 billion in the current fiscal year. For the first seven months of FY22, the Pakistan Bureau of Statistics has reported exports of $17.67 billion, showing a strong growth of nearly 24% from $14.26 billion in the same period a year earlier. The seven-month export number translates into an annualised figure of $30.3 billion.

But the import data shows a hefty rise in the trade deficit. Imports for the first seven months totaled $46.47 billion, depicting a massive growth of 59% year-on-year. That is, the rise in imports has outpaced the increase in exports by a wide margin.

The swelling import bill is a matter of concern for the country’s economic managers. In absolute terms, the trade deficit has now gone up to $28.8 billion, nearly twice as large as the deficit of $15 billion reported in the first seven months of the previous fiscal year.

The widening trade deficit has negatively impacted the value of the Pakistani rupee. Currency devaluation and high energy prices have been the two main reasons for inflation, with the Consumer Price Index (CPI) at 13% in January 2022 – the highest in two years.

An analysis of import data reveals that high commodity prices and their strong demand worldwide are behind the swelling import bill. For instance, petroleum group imports increased by 113% in the first six months of the ongoing fiscal year to $10.18 billion from $4.77 billion in the first half of the last year. Also, demand for energy products like petrol, diesel and LNG rose as business activities climbed. In volume terms, imports of petroleum products went up by 29% to 9.2 million tonnes.

As the petroleum prices are trending upwards, it is high time the government used all resources at its disposal to increase domestic production of oil, gas and refined petroleum products. This will help bring down the import bill and reduce the trade deficit.

The domestic energy sector – particularly the exploration and production (E&P) industry that extracts hydrocarbons and the oil refining industry that turns crude oil into petrol, diesel and other refined products – has been neglected by successive governments. Unlike other sectors such as textile and agriculture, the E&P and oil refining industries have received little support from the authorities concerned.

There is no long-term policy to stimulate growth in the petroleum sector. As a result, both E&P and oil refining industries have been languishing. Needless to say, had these industries been running at optimal levels, they could have reduced the need to import high quantities of crude oil and petroleum products.

Experts say that oil refineries, including companies such as Byco Petroleum and Parco, can together process up to 19.4 million tons of crude oil annually. They can satisfy a large part of the country’s demand for refined products. However, the refineries have been operating below capacity, with the utilisation rate of just around 60%. As a result, the domestic production of petrol and diesel has remained low, which forces the country to import expensive fuels.

According to available figures, state-owned OGDCL, the country’s largest E&P company, produced 36,892 barrels of oil and 870 million cubic feet of gas on a daily basis in the previous financial year. By comparison, 10 years ago, the company’s daily oil and gas production was higher at 37,370 barrels and 1,013 million cubic feet respectively.

The country does not have sufficient oil and gas reserves to meet all of its demand, but still the performance of the state-backed E&P companies would have been better if the government had focused on this area.

It is not yet too late in the day for the government to take necessary steps to improve the performance of oil refineries and E&P companies and raise domestic oil, gas and refined products’ output.

A new policy package should be devised without delay to incentivise oil and gas exploration work and expansion of oil refineries. Oil refineries, in particular, can quickly ramp up petrol and diesel production if policymakers find a way to increase furnace oil consumption since the low utilisation rate was primarily due to weak demand for furnace oil. This can be done by linking 10% to 15% of power generation with furnace oil consumption. At the same time, the refineries should be encouraged to modernise their plants and phase out furnace oil from their production chain.