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Increasing trade deficit needs immediate attention

The balance of trade is the difference between the monetary value of the country’s export and import over a certain period. If a country exports a greater value than its imports, it has a trade surplus, and conversely, if a country imports a greater value than its exports, it has a trade deficit or trade gap. In simple words, the trade deficit is the amount of a country’s import exceeds the value of its exports. The following are some factors that can affect the balance of trade:

  1. The cost and availability of raw materials, intermediate goods and other inputs.
  2. The cost of production in the exporting economy as compared to that in the importing economy.
  3. Different types of taxes and duties (multilateral, bilateral and unilateral taxes), restrictions on trade, government duties etc.
  4. The availability of adequate foreign exchange.

Pakistan’s trade deficit has increased to $18 billion in first six months of the current fiscal year 2017-18. The trade deficit is 24.5% higher than that of last fiscal year. During first six months of last fiscal year, it was recorded as $ 14.4 billion.

The country’s exports have grown by 11.2% and reported as $11 billion during the July-Dec 2017. While imports surged to $29 billion recording an increase of 19% as compared to the same period of last fiscal year.

The increase of the trade deficit is the biggest concern for the country. The increasing trade deficit means that the country is losing the foreign exchange reserves quickly. In addition to the trade deficit, the other biggest threat to the foreign reserves is the repayment of foreign loans that is expected to increase $6 billion in this financial year. The reduction in foreign currency reserves can be managed mainly by (a) increase in foreign remittance by overseas Pakistanis, (b) Foreign Direct investment, (c) Taking new foreign loans, (d) Recovery of money earned by corruption of Pakistani’s available in foreign banks and (e) reducing the trade deficit.

The major reason for the increase in the trade deficit is the increasing global fuel prices. It is surprising to know that despite of having all the local resources in the country, the government decided to install the new power plants on the imported LNG and coal. The government has installed the four imported LNG fuel fired power plants of approximately 5,000MW near Lahore. Similarly, long term Power Purchase Agreements have been signed for approximately 4,000MW power plants on imported coal. These power plants have all foreign financing and the repayment of loans will put a severe impact on the country’s foreign exchange in the coming years.

On the other hand, the government has rescinded the power policy for the renewable and indigenous fuel power plants. Beside of producing the cheap and clean electricity, these small power plants take loans from the local financial institutions and have no impact on the foreign debt repayment. The withdrawal of this power policy has left many investors in difficult positions as many plants are ready to provide the electricity to the national grid under this policy.

It is difficult to understand that why the government is not focusing on reducing the trade deficit. Now the government should ban the installation of new power plants on imported fuel and increase reliance on local coal and environmentally clean renewable resources (solar, wind, biomass etc.).

 

The below are some other options to increase the exports to convert the trade deficit to trade surplus:

Vegetable and Fruit:

Pakistan has really good quality of fruits and vegetables available; there is great potential to increase the export by selling processed foods to international markets. It is important to mention that a very good quality apple and mango are available in Pakistan, but unfortunately no treatment plant for their preservation was established. The country also produces good quality cherry, grapes, peach, almonds, and pomegranate; similarly potatoes, garlic, onion, and chilies are among potential vegetable exports. The taste and quality of the Pakistani vegetable and fruit are best across the world. The export of vegetable and fruit in bulk quantity is profitable and can generate lots of foreign exchange, but the production of processed fruits and their selling in tin packing can generate even more.

The private sector should also be encouraged to establish the latest technological vegetable and fruit farms; the government should provide them with tax incentives and loans at less interest rate to encourage the investment in this sector of great export potential.

Milk:

Pakistan is world fourth largest milk producer. The cows and buffaloes in developed countries are giving 3~4 times more milk than Pakistani cows and buffaloes. The country can easily triple its milk production by applying the latest technologies. It is important to follow the globally accepted practices to increase the production of milk rather than using locally developed unsafe methods. The Supreme Court has announced the big decision to stop the use of unsafe medicine to increase the milk production.

Basmati Rice:

Another important commodity is the basmati rice that has the potential to become the highest value export for the country. The Pakistani rice is one of the best in the world, during a visit to China a year back; we had seen the quality of Chinese rice. It is proud to state that our rice is far better than Chinese rice and we can explore the market over there and take the advantage of the CPEC.

The increase in the trade deficit is worrisome for the economy of the country. The government should take immediate actions to control the trade deficit. Pakistan is blessed with huge natural resources. The trade deficit can be changed to trade surplus by the honesty of the government in just five years. We hope the present and upcoming government will pay attention to this and very soon the numbers will change from negative to positive.

Muhammad Farhan is an engineer by profession and has been working in the Power sector since 2007. http://www.twitter.com/farhan6309902

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