Home remittances and money sent back by Pakistanis working abroad have financed the bulk of Pakistan’s trade deficit for the last many years. Remittance inflows, however substantial, continue to fall. Worker remittances have shown some unexpected improvement, and in the first 6 months of fiscal year 2018, increased by 8.72% from the same period in fiscal year 2017. If this rebound can be sustained for the rest of fiscal year 2018, it may ameliorate the external sector. As for year-end remittance numbers, the central bank expects full year FY18 remittance to range between $19.5 and $20.5 billion; the Planning Commission forecast is $20.2 billion. If inflows in February 2018 end up being lower-than-expected, and March doesn’t grow as much as 20 percent, then we may be looking at a full year number less than $20 billion. Moderate remittance growth is expected to continue in FY18 on account of Saudization, falling number of migrant workers going to the GCC, de-risking and the pound sterling’s depreciation against the US dollar.
The pace of increase in exports and remittances is likely to be slower compared to increase in imports. The government has taken a number of measures including levying regulatory duties on hundreds of tariff lines and more importantly, devaluing the rupee by over 5% against the US dollar. After trading in the tight range of 104-105 per dollar since December 2015, the rupee plunged to as low as 112 per dollar to settle around 110 per dollar. Economists and businesses have been urging the government to devalue the rupee, saying it was hurting exports and contributing to the depletion of Pakistan’s foreign currency reserves. A weaker rupee would help the economy grow and ease balance of payments pressures. The recent devaluation will help exportable products become competitive in the international market. The government had no choice as the trade deficit has crossed all limits. (Pakistan had closed the last fiscal year at a record $32.4-billion deficit). While on one hand, devaluation reduces our purchasing power parity, on the other hand, it will increase inflation and swell our debt per capita.
Despite taking several measures to correct the imbalance, Pakistan’s trade deficit widened to almost $18 billion during the first half of the current fiscal year as against the annual target of $25.7 billion. Exports in July-December increased by 11.24% to over $11 billion but these were only equal to 47.6% of the annual export target of $23.1 billion. In absolute terms, export receipts were up by $1.1 billion during the first six months. The value of imports stood at $29 billon, which was 19.1% or $4.7 billion higher than the import bill booked during the first six months of the last fiscal year. The six-month import bill is 59.4% of the annual target. For the current fiscal year 2017-18, the government has a target to increase the exports to $23.1 billion, which requires 13.2% growth over the last year’s total exports of $20.5 billion. The government is aiming to curtail the import bill to $48.8 billion, which seems impossible.
The reasons why Pakistan’s exports have declined by 20 percent since last five years include a number of structural factors and wrong policies. Unlike East Asia, Pakistan has historically followed a policy of import substitution rather than export promotion. Consequently, there has been little emphasis on broadening the export base that has remained over-reliant on textiles as the principal export. Even now, exports of cotton yarn, cloth and value-added textiles constitute almost 60 percent of our total exports. Unfortunately, exports from agriculture and SME sectors have been neglected through over taxation of inputs, lack of access to infrastructure, especially electricity and gas, and restricted availability of credit from commercial banks.
Extraordinary skills of Pakistani craftsmen, therefore, have remained largely unrealized. Export of precious gem stones and jewelry alone could enable Pakistan to earn more than half of the present total export earnings of Pakistan.
Explaining the rapid growth in imports it is normally stated that this is largely due to the upsurge in machinery imports, especially for projects related to the China-Pakistan Economic Corridor (CPEC). This is only partially true as up to FY17, the rise in the CPEC linked imports accounted for 38 percent of the total increase in imports. Other major contributors to the increase are food, petroleum, automobiles and other intermediate goods. In the case of imports, imposition of regulatory duties could lead to under-invoicing. A more effective policy to cut imports could be to introduce a regime of minimum import price on a number of items, as has been done in the case of sugar. Also, import tariff could be doubled if a particular commodity is imported by more than a pre-specified level. This will also help in avoiding speculation by importers.
Pakistan must also more actively exploit the openings created by the GSP+ status granted by the European Union as well as the opportunities offered by China-Pakistan Free Trade Agreement and the South Asia Free Trade Area (SAFTA) agreement. New markets need to be developed especially in Central Asia, Iran and Turkey. There is a risk of growing protectionism and a rising wave of anti-globalization. Exports could become even more difficult to increase within this looming scenario. It is essential that the trade gap be brought down over the next three years by almost $10 billion through a strategic and vigorous trade policy.