The year 2019 is proving to be a very hard for global growth which is projected to slowdown to 3.3 percent in 2019 from 3.6 in 2018. Global trade during 2018 remained slow on account of decelerated export orders and global manufacturing activity, particularly in capital goods. Leading global institutions and agencies including IMF and World Bank are continuously downgrading their global growth projections. Developed and developing economies are finding it hard to stay on the upward trajectory of growth. Recession is silently cannibalizing the growth targets. Global output and investments are likely to be suppressed in 2019 due to uncertain business environment stemming from expected disorderly Brexit and US fiscal policy. Prices of metal and agricultural commodities also weakened due to concerns about fluctuation in trade and growth. However, if these differences are resolved without any further trade barriers and softener financial situation is observed then growth could be lifted up.
Pakistan is one of the lowest regionally-integrated countries in the world as the country’s trade with its regional partners has remained paltry over the years. Pakistan’s trade deficit plummeted by nearly 38% in the first two months of current fiscal year, driven majorly by a decline in the imports of non-essential luxury items amid exorbitant import duties. The macroeconomic indicators may have been an encouraging factor for economic pundits, however, the country is missing upon major trade potential within its region.
The desired improvement in imports and exports was partly achieved after the government implemented reforms under the 39-month IMF loan program, which started in July. The loan program binds the government to undertake structural reforms. These included increase in the key interest rate which stood at an eight-year high of 13.25% in July, depreciation of the rupee, which fell 32% to Rs160 to the US dollar in FY19, upward revision in power and gas tariffs and an ambitious tax-collection target of Rs5.55 trillion for the current fiscal year among other tough conditions for steering the economy out of the crisis.
Pakistan’s exports have been conventional in nature and that most of its exports are destined to US, EU, the GCC and regional countries. Exports to China have increased over the years and as of 2018, China had overtaken UK as the second largest export destination for Pakistani export commodities.
Pakistan’s Gross Domestic Product (GDP) growth slowed as economic policies to address the twin deficits took effect. Growth slowed to 3.3 percent in FY19—a 2.2 percentage points decline compared to the previous year, due to the stabilization measures undertaken by the authorities. Over the past year, the exchange rate was allowed to depreciate, with a cumulative depreciation of 25.5 percent, the development budget was cut, energy prices were increased, and the policy rate was raised by 575 bps. As a result, private consumption growth decelerated from 6.8 percent in FY18 to 4.1 percent in FY19 while investment contracted by 8.9 percent. On the supply side, the industrial sector growth slowed to 1.4 percent in FY19 compared to 4.9 percent in FY18. The services sector grew at 4.7 percent—1.5 percent lower than in FY18. Adverse weather conditions have dampened agricultural performance and reduced growth to 0.8 percent in FY19, significantly lower than the targeted growth of 3.8 percent. Average headline inflation increased to 7.3 percent in FY19 compared with 3.9 percent in FY18, primarily because of the exchange rate pass through.
Pakistan’s trade balance with its regional partners has cumulatively been mostly negative in the last 10 years. The country recorded its highest ever deficit of $1.06 billion, up from a deficit of $0.69 billion in the previous year. Pakistan Business Council (PBC) revealed in its latest report that “As of 2018, the share of regional partners in Pakistan’s imports was 4.67 percent against a share of 7.42 percent in Pakistan’s exports.” Although Pakistan shares a border with China, Pakistan has a Free Trade Agreement with China and is also integrated under the China-Pakistan Economic Corridor (CPEC) hence the regional trade dilemma revolves around India, Afghanistan and Iran.
Pakistan’s western neighbor Afghanistan with whom the country shares the most hostile border In the world was always a significant trading partner, however since 2011 there has been a decline in the trade volumes. As of 2018 Pakistan’s untapped export potential to Afghanistan remained $354 million for top 20 potential products. The import potential from Afghanistan for the top 20 potential products was steady at $56 million as of 2018 which was marginally less in contrast to current imports from Afghanistan. As of 2018, Pakistan’s exports to Afghanistan stood at $1.35 billion while the import remained $0.51 billion, above and beyond its potential trade capacity.
Similarly, the case is not different with Iran as only as the trade volume is very limited with exports to Iran being meager $22.77 million while imports were amounted to $373.97 million in 2018. The data shows that the potential for trade between the two countries is immense which is majorly marred by hostility on the border and US sanctions on Iran. For the top 20 high potential Pakistan items for export to Iran has a potential of worth $1.91 billion, rice alone among these commodities has a potential of $1.2 billion. The import potential from Iran for top 20 items stands at $7.18 billion.
The Current Account Deficit (CAD) has declined. The CAD narrowed to US$13.5 billion (4.8 percent of GDP) in FY19 compared to US$19.9 billion (6.3 percent of GDP) in FY18. The decline was primarily driven by lower import growth (goods imports declined by 7.4 percent while services imports fell by 14.9 percent). The largest decline in imports was for transport and machineries, because of the slowdown in investment and industrial growth, followed by food items and metals. However, petroleum related imports continued to grow (5.0 percent), albeit at a lower rate than last year (25 percent). Exports, on the other hand, did not respond to the exchange rate depreciation, as regaining competitiveness after an extended period of an overvalued exchange rate will take time.
The growth in remittances by 9.7 percent year-on-year in FY19, due to higher flows from USA, Malaysia, and GCC countries, also supported the current account. The narrowing of the CAD has continued in FY20, as the CAD declined to US$1.3 billion in Jul-Aug FY20, compared to US$2.9 billion in Jul-Aug FY19. Imports declined by 23.4 percent year-on-year in Jul-Aug FY20, while exports recorded a marginal recovery of 1.4 percent year-on-year.
Pakistan has much greater potential to tap into regional markets and integrate its trading capital with its regional partners to enhance the value of its trade. Domestic policies may have shown encouraging results, however unless the trade deficit isn’t squeezed by increasing exports and generally increasing trade partners near home, the short term overhaul policies will not drive long lasting economic results. Regional trade has proven to be a key tool in economic development and competitiveness in various regions of the world, however trade amongst the countries of South Asia has traditionally remained low.
|Table: Summary Balance of Payments|
|Current Account Balance||-12621||-19897||-15864||-11,586|
|Exports of Goods FOB||22003||24768||20,489||20,099|
|Imports of Goods FOB||48,683||56592||46,302||44,033|
|Exports of Services||5,555||5288||4,379||4,453|
|Imports of Services||9894||11356||9,420||7,670|
|Income Account Balance||-5048||-5484||-4229||-4458|
|Balance on Secondary Income||23446||23479||19,219||20,023|