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Review of structural problems of economy in six months

The country remained unsuccessful to overcome challenges on the external front where import figure continued moving upward where as the exports stayed behind as calculation in the six months of this fiscal year shows that Pakistan’s trade deficit rose to $18 billion. The Ministry of Finance and the State Bank of the country were optimistic that the country would soon be able to overcome challenges on the external front, however, results of the first quarter have hit these expectations as imports are still growing at double the pace of export growth.

The latest figures showed, the trade imbalance had recorded an increase of 24.5 percent due to continuous faster growth in imports as against exports of the country, while exports had registered at $11 billion during July-December of the year 2017-18 as compared to $9.9 billion of the corresponding period of the last year showing a growth of 11.24 percent. The imports had shown an increase by 19.11 percent and recorded at $29 billion during first six months of the current financial year as against $24.3 billion of the same period last year.

Pakistan’s foreign exchange reserves are eroding due to repayment against previous loans and financing current account deficit (CAD). Pakistan’s foreign exchange reserves are around $20 billion, in which State Bank of Pakistan held reserves are $14 billion. Pakistan’s foreign exchange reserves have dropped by over $4.5 billion in the past one year due to fast drying up of foreign currency inflows.

Pakistan’s current account deficit is sharply increasing due to massive growth in imports as against exports and remittances. Current account deficit almost doubled to $6.430 billion in the first five months of the current fiscal year of 2017-18 as a widening trade gap offset growth in external inflows on account of foreign direct investment and remittances.

Pakistan faces an external financing gap of around $12 billion in the current fiscal year. Pakistan’s gross external financing requirements are around $20 billion including a projected $14-billion current account deficit and $5.9-billion foreign debt repayment.

The government has taken several measures to contain the financing gap. The measures include imposition of regulatory duties on non-essential imports, provision of un-interrupted energy to the export-oriented industries, the export package worth Rs180 billion.

These measures, together with the recent market-driven adjustment in the exchange rate would help in narrowing the current account deficit, thereby reducing the gross financing.

According to the latest data of Pakistan Bureau of Statistics, Pakistan’s exports have enhanced by 14.81 percent to $1.98 billion in December 2017 from $1.72 billion of December 2016. The imports recorded a growth of 10.09 percent and reached $4.9 billion in December 2017 from $4.5 billion in the same period of the last year. The trade deficit was recorded at $2.9 billion in December 2017 as against $2.7 billion of December 2016, showing an increase of 7.12 percent. Pakistan’s trade deficit has hit a record level of 30 billion US dollars in the first 11 months of 2016-17, showing a jump of 42 per cent as compared to the same period in the previous financial year.

Exports have declined by three per cent to 18.5 billion US dollars while imports have gone up by 21 per cent to 48.5 billion US dollars. Never before in the country’s history have imports been over two-and-a-half times of exports. The government attributes the decline in exports to the stagnant volume of world trade and low commodity prices in global markets. Exports have been falling since 2013-14 (after attaining the peak level of 25 billion US dollars a year earlier) much before world trade slowed down and commodity prices fell.

 

Additionally, non-oil commodity prices have partially recovered after falling towards the end of 2015 and the year 2016 has witnessed a 12 percent increase in the value of global trade. Some other countries, such as Bangladesh and Vietnam, have performed well in this improved global trade environment.

Pakistan has historically followed a policy of import substitution rather than export promotion. There has been little emphasis on broadening the export base that has remained over-reliant on textiles as the principal export. Exports of cotton yarn, cloth and value-added textiles constitute almost 60 per cent of our total exports. Many of these exports are from the agricultural sector or by small and medium enterprises.

These 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 craftsperson, therefore, have remained largely unrealized.

In India, on the other hand, exports of precious stones and jewellery lone now earn more than twice the total export earnings of Pakistan. As regards the rapid growth in imports in 2016-17, the government has stated that this is largely due to the upsurge in machinery imports, especially for projects related to the China-Pakistan Economic Corridor (CPEC).

Home remittances and money sent back by Pakistanis working abroad have financed the bulk of Pakistan’s trade deficit for the last many years. The principal factor is the relative cheapness of imports due to currency being overvalued by over 20 percent. Many import-substituting industries within Pakistan have been unable to compete and the volume of major imports has gone up by anywhere between 18 and 56 percent for different items. Such big increases are unprecedented for many imports.

Home remittances and money sent back by Pakistanis working abroad have financed the bulk of Pakistan’s trade deficit for the last many years. In 2016-17, the substantial widening of the deficit and lack of growth in remittances together has decreased the extent of this financing to 50 per cent of the deficit. If trade deficit is not contained then Pakistan could face a financial crisis over the next 18 months. This may necessitate a return to the International Monetary Fund (IMF) for help and will probably require a number of drastic prior actions, including a substantial devaluation of rupee. This is what happened when Pakistan sought the IMF’s assistance last time.

A gradual depreciation of rupee is the right path to follow. This will also help Pakistan avoid a big cut in the currency price later, which may fuel inflation to possibly reach double-digit levels. Various structural factors and now a possible oil price shock are combining to result in a burgeoning of the current account deficit. The former include loss of competitiveness of our exports and continuing rise in imports.

Excessive past borrowing to shore up reserves and artificially preserve the rupee’s value leading to big growth in repayment obligations, with an ongoing oil price shock in excess of 15 percent expected to impact of these negative factors.

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