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Ballooning trade deficit

Pakistan’s trade deficit rose to $23.38 billion during the first nine months (July-March 2017) of the current fiscal year, up by 38.80 percent from $16.84 billion for the same period a year before. Provisional trade data released by the Pakistan Bureau of Statistics (PBS) showed a decline of 3.6 percent in exports during July-March 2017 with exports contracting to $15.119 billion in the first nine months of the current fiscal year as compared to $15.597 billion for the same period of the last fiscal year.

Imports increased to $38.504 billion in July-March 2017 as compared to $32.445 billion for the same period of last fiscal year, showing an increase of 18.67 per cent. The government’s Rs 180 billion incentive package announced three months ago to increase exports, however, failed to yield desired results and push the country’s exports to the expected level as foreign trade figures for the period under review showed that exports have declined by 3.9 per cent during July-March 2017.

Widening in trade gap would have serious consequences on current account deficit as well as foreign exchange reserves.

The International Monetary Fund (IMF) in a statement at the completion of the Article-IV Consultations had said that Pakistan’s current account deficit is expected to reach 2.9 percent of GDP in the fiscal year 2016-17 owing to a higher trade balance in part reflecting increased imports of capital goods and energy and stagnant remittances.

Trade deficit increased to $3.208 billion in March 2017, up by 77.34 per cent from $1.809 billion for the same month a year ago.

An increase of 3.62 percent was noted in the exports in March 2017 as compared with the corresponding period of a year ago while increase in imports was substantially higher, at 41.22 percent.

Exports increased to $1.801 billion in March 2017 from $1.738 billion for the same month a year ago while imports have increased to $5.009 billion from $3.547 billion a year ago.

Trade deficit in March 2017 was recorded at $3.208 billion, which was 15.35 percent higher from $2.781 billion for the previous month of February 2017. An increase of 9.95 percent in exports and 13.55 percent in imports was recorded in March 2017 over the previous month.

Exports increased to $1.801 billion in March 2017 over $1.638 billion in February 2017 while imports have soared to $5.009 billion as compared to $4.419 billion during the aforementioned period.

The government’s earnings are declining and cannot support the balance of payment position, the sources said, adding an increase in exports and foreign direct investment (FDI) is critical to supporting the balance of payment and meet the financial requirements of the country.

The current account deficit is projected to widen to equal 2.1 percent of GDP in fiscal year 2017. The deficit increased to $4.7 billion in the first seven months of fiscal year 2017, almost double the $2.5 billion deficit in the same period of fiscal year 2016.

Services and income account deficits worsened as receipts under the Coalition Support Fund were delayed.

“The workers’ remittances that critically offset the large trade deficit fell for the first time in 10 years, by 1.9 percent to $10.9 billion, because of declining expenditures and income in oil-dependent Gulf economies,” the Asian Development Bank (ADB) observed in its recent report. It further noted that the current account balance will likely deteriorate further in fiscal year 2018 to 2.5 percent of GDP with somewhat higher global oil prices and accelerating infrastructure investments connected with CPEC (China-Pakistan Economic Corridor).

A significant increase in the current account deficit could pose a risk to official exchange reserves, which peaked at $18.9 billion in October 2016 and then slid by $1.3 billion by February 2017.

Pakistan’s exports were continuously declining from last several months. A third consecutive year of falling exports reflects weak global demand and low international commodity prices but also domestic structural issues such as power outages, scant investment in modernization and currency appreciation in real effective terms, all of which hamper competitiveness” the ADB report noted.

Experts and economist says that if this trend continues, deficit will reach $30 billion by the end of June this year, which will be the highest-ever trade deficit in the country’s history.

The government claims that the nature of imports showed an increase in investment and industry. Thus they term it as a positive sign.

Contrary to the government’s claims, economists are of the view that this was a dangerous development on the country’s external balance of payment side. If this trend continues, Pakistan’s imports would exceed $50 billion for the first time in its history. Exports were hovering around $20 billion and the trade gap was expected to touch $30billion.

The prime minister should have called an emergency cabinet meeting to review not only the balance of payment but also the entire economy.

Exports of garments and other value-added products to Europe have started picking up under the GSP+ preferential tariff scheme.

Under a three-year Strategic Trade Policy unveiled last year, the government set an annual export target of $35 billion by 2018. However, the policy announced in April last year has yet to attract exporters because of its cumbersome procedures.

Under the 2015-18 policy, the Ministry of Commerce notified five cash support schemes to improve product design, encourage innovation, and facilitate branding and certification, upgrade technology for new machinery and plants, provide cash support for plant and machinery for agro processing and give duty drawbacks on local taxes.

To minimize the chances of corruption, the government decided to disburse the subsidy through the State Bank of Pakistan.

Exports can only be increased by state intervention at the institutional, policy and entrepreneurial levels. The performance of the government is dismal at all levels.

The government has yet to initiate reforms in trade-related departments as policy formulation is still awaited in many areas.

The only area in which the government has intervened to gain political mileage is the award of subsides to entrepreneurs.

In this regard, the prime minister announced Rs180 billion subsidy package for textile, clothing, sports, surgical, leather and carpet sectors. The package will be applicable until June 30, 2018, when the incumbent government will go into the next election.

Under the policy the commerce ministry notified five cash support schemes that were to be disbursed through the central bank. To date not a single application has been received over the last nine months. Given that the scheme involves direct funding this speaks volumes about the difficulties associated with accessing it.

Though it is possible to enhance exports from the country by helpful government intervention at the business, institutional and policy levels yet positive steps and comprehensive policy formulation is missing rather lagging far behind.

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