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Trade Deficit At All-Time High

Pakistan’s trade deficit rose to all-time high nearly $34 billion in the first 11 months of the current fiscal year. This was a grievous problem for the government to impede rising current account deficit. The deficit widened to about 13.3 percent during the July-May period of the current fiscal year, according to official figures. It rose to $3.76 billion in May, an 8.6 percent year-on-year increase.

Trade deficit had been one of the most serious challenges for the government of Nawaz Sharif in the last year of its five-year term which completed on May 31. The last financial year saw the trade deficit rise to an all-time high of $32.58 billion, representing year-on-year growth of 37 percent.

When the government came to power in 2013, the Pakistan’s annual trade deficit was $20.44 billion. It has been continuously on the rise since then. The import bill recorded a growth of 14 percent to $55.3 billion in July-May period of 2017-18 from $48.54 billion over the corresponding period of last year. On a monthly basis, the import bill recorded a growth of 15 percent to $5.9 billion from $5.09 billion over the preceding month.

According to the Commerce Ministry, the imports for the month showed an increase of 15 percent mainly due to continuously high oil price and increased volumes of imports of fuels and machinery to overcome energy deficit. The overall increase in imports for the eleven months period remained at 14 percent as compared the previous fiscal year.

The import bill is escalating due to an increase in the arrival of capital goods, petroleum products and food products. Exports continued to show a rebound that began early in 2017. The growth pattern in exports was seen since then with few exceptions. Exports continue to post the figures above $2 billion for the third consecutive month since March 2018.

The month of May witnessed a growth of 32 percent year-on-year compared to same month last year. In dollar terms, the highest ever month-on-month growth was recorded in export in May 2017, which shows the stability at higher levels being, reflected in the export figures.

In terms of annual export growth, the figures have improved from 14 percent in July-April to 15 percent in July-May. The overall exports in the first eleven months have already reached $21.32 billion, which is almost $1 billion higher than the annual figures of 2016-17. It can be safely concluded that the exports for the current year will surpass $23.4 billion, bringing in an additional foreign exchange of around $3 billion.

 

The merchandise exports for the month of May earned Rs247.5 billion as compared to Rs169.7 billion earned in May last year. This shows additional revenues of around Rs80 billion for exporters in the May. The rise in exports is the outcome of improvement in energy supply, partially releasing of refunds and cash subsidies under the Prime Minister Export Package.

The government had also imposed additional regulatory duties on luxury items besides restrictions on imports of certain goods to curtail flows of imports. The interim caretakers are not approaching the International Monetary Fund (IMF) for a bailout and no decision has yet been taken to return to the Fund’s fold to ease external sector pressures. The caretaker government of Prime Minister Nasirul Mulk has very challenging tasks for its limited tenure.

Pakistan’s external front vulnerabilities are worsening, as the current account deficit widens and foreign exchange reserves deplete to critical levels. The reserves, according to the SBP, registered at around $10 billion at the start of this month. The total foreign exchange reserves are $16.4 billion that includes $6.3 billion held by commercial banks.

The caretaker government has very challenging tasks for its limited tenure. Besides holding elections it will have to revitalize the economy to ensure future stability. Despite some growth in imports and an increase in exports, the reserves continued to decline due to the import bill and loan repayment obligations.

The business community does not favour IMF bailout. Mohammad Ali Tabba, CEO Lucky Cement and Chairman Pakistan Business Council (PBC), was brief in his response. “The IMF should be the last resort”.

The government should try to stimulate export growth to reduce the current account deficit. The caretaker government said it would hold routine Article-IV consultations with the International Monetary Fund (IMF) by end of June, but ruled out all speculation that it was in touch with the fund for a bailout programme.

Every country that is a member of the fund is supposed to undergo one every year. Pakistan’s last Article IV consultation report was released in June last year. Prior to that, they were released at two year intervals.

The IMF staff presents a report to the Executive Board for discussion. The board’s views on the report are then transmitted to the country’s authorities who conclude the process. Some experts prefer a multilateral lending institution instead of bailout package from IMF. It has been hinted that China has been projected by some circles as a better alternate to the IMF. The fund may also be collected from Saudi Arabia and UAE States.

Given the macroeconomic situation here in Pakistan no option should be ruled out. It is the federal government, to take a firm decision.

Dr Hafiz Pasha, an eminent economist and a former finance minister, found the current situation precarious. “The resentment of the private sector towards the IMF is perfectly justified. This segment is disproportionately burdened with taxes. The high cost of doing business has made them uncompetitive in the world market.

Under the IMF program the government will be forced to focus again on stabilization. As the will to broaden the tax net is lacking, tax rates will be jacked up and the government may suspend the disbursement of refunds to meet imposed spending limits. The rising oil prices are already driving up the price of gasoline and energy rates.

The IMF may precondition the devaluation of the rupee to start engagement. This would discourage imports but increase the cost of foreign loan repayments. They will also demand details of Pakistan’s engagement with China under the CPEC, complete with terms and repayments schedules. Under the IMF programme the government will be forced to focus again on stabilization. “The growth thrust is not compromised and Pakistan is all set to post over 6 percent GDP growth in fiscal year 2019”, Dr Nadeem said.

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