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Soaring trade deficit remains a concern

Pakistan’s trade deficit widened in just four months due to increasing imports of the country putting further pressure on the foreign exchange reserves. Trade deficit had recorded $12.1 billion during first four months (July to October) of the ongoing financial year as against $9.2 billion of the corresponding period of the last year showing an increase of 31.24 percent. Pakistan’s exports had registered at $7.1 billion during July-October of 2017-18 as compared to $6.4 billion of the corresponding period of the last year showing a growth of 10.04 percent. The imports had also shown an increase of 22.55 percent and recorded at $19.2 billion during first four months of the current financial year as against $15.7 billion of the same period last year.

The government seems to fail in controlling soaring trade deficit of the country despite announcing measures to reduce imports and increasing exports. The Economic Coordination Committee (ECC) of the Cabinet had imposed and enhanced Regulatory Duty (RD) on around 731 items in a bid to discourage the surge in import bill. The ECC had also approved measures to boost the exports. The ECC approved a proposal that 50 percent of the export package incentive for eligible textile and non-textile sectors.

Prime Minister’s Export Package, be provided on the same terms as for the period January to June 2017 without condition of increment. Remaining 50 percent of the rate of incentive would be provided if the exporter achieves an increase of 10 percent or more in exports as compared to the corresponding period of the last year.

The World Bank in its recent report stated that wide current account deficit is expected to remain a concern and pressure on international reserves is likely to persist. The pressure on the current account is expected to continue as the trade deficit will persist during fiscal year 2018 and fiscal year 2019. This situation could potentially become untenable in the absence of timely corrective policy measures.

It has projected a 4 percent current account deficit against the official target of 2.6 percent of the GDP. This would mean there will be more pressure on already sliding foreign currency reserves. The World Bank said that Pakistani rupee is overvalued. Such arrangement can contribute to the buildup of external account pressures and a loss in export competitiveness, leading to a decline in exports.

The World Bank said that risk to sudden devaluation of up to 30 percent of the Pakistani rupee against the US dollar is an increase of almost 10 percent in the public debt ratio over the projection horizon. In the medium term, this would support the external balance through improved competitiveness.

 

In a bid to curb imports in the face of a wide external account, the government has recently levied regulatory duty on import of around 300 ‘non-essential’ items. Mainly vehicles, tyres, footwear, cosmetics, nuts and fruits — in addition to 430 items already subject to regulatory duty.

The first four months of the current financial year have added $9.2 billion on the fiscal year 2017 deficit of $32.6 billion. The deficit had remained around 80 per cent of exports till 2013-14 but has gradually climbed to 94 percent, 115 percent and 159 percent during the last three years.

Imports had remained stable at around $45-46 billion from fiscal year 2012 to fiscal year 2016, but swelled in fiscal year 2017 by $8.3 billion, out of which the increase in import of machinery, petroleum and food products has jointly contributed $6.5 billion. The major contributors to the import increase are the investment-driven import of machinery, industrial raw materials and intermediate goods, 12 percent additional consumption of petroleum products due to 19 percent price decline, 13 percent increase in import value of palm oil due to 17 percent hike in price, and increase in import of pulses and cotton by 60 percent and 7 percent respectively owing to shortfall in domestic production.

Imports which have climbed mainly during the last year, the destruction in exports has taken place during the last three years due to multiple challenges. The 19 percent decline in Pakistan’s exports since fiscal year 2014 has coincided with 16 percent contraction of the global market from $19 trillion in 2014 to $15.9 trillion in 2016.

The annual production deficit of nearly 5 million bales of cotton has compounded the impact of global price crunch of major export commodities. Cotton (18 percent), non-basmati rice (17 percent), basmati rice (42 percent) and leather (30 percent). The 20 percent overvaluation of Pakistani currency (according to IMF estimates) has been effectively taxing exports and subsidizing imports by the same percentage points.

During the last three years, there have been ‘competitive devaluations’ by all major competitors; the Pakistani rupee has appreciated. The competitiveness of the Pakistani export sector has gradually worn down due to high energy costs, ever-increasing wages, increasing import tariffs on critical inputs and liquidity crunch due to held-up refunds.

Besides the reliance on textiles, lack of product sophistication, outdated technologies and lack of research and development, low labour productivity, and management inefficiencies.

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