THE TRADE DEFICIT:
The country is faced with mounting worries as the trade deficit races along to the $ 3 billion mark.
May 04 - 10, 1996The year 1996 seemed to bring with it a barrage of warnings about the consequences of a ballooning trade deficit. Headlines through the year have echoed the slower than sluggish growth in exports and the continually surging import bill. The latest figures released at the end of last month showed that the trade gap had touched $ 2.69 billion or Rs 88.663 billion as against $ 1634 million in the corresponding period last year; this translates to a 64% increase. And now it seems, despite sporadic reassurances from the government and its representatives, that we are undoubtedly heading for a massive $ 3 billion trade deficit by the end of the current fiscal year.
The Federal Minister for Commerce, Chaudhry Ahmed Mukhtar, while expressing hope that exports would reach their target of $9.2 billion in the current year, recently admitted that export growth had so far been "not very satisfactory."
Figures from July 1995 up until March 1996 show a total export figure of $ 5.9 billion, a growth of only 4.7% over last year as against the projected growth rate of over 13 %. And with only a couple of months left in fiscal 96, the chances of sudden and rapid growth in exports are abysmally low.
If we analyse monthly figures, exports were at $5902 million till end March up 4.7% from $5628 million last year. Exports in March were up 17.6% from February to $ 844 million from $ 718 million and up 23.8% from the March figure last year of $682 million.
Major exports July 1995 to March 1996 $ millions Cotton Yarn 1032.392 Cotton fabrics 784.778 Raw cotton 444.291 Rice 329.985 Leather 178.491 Carpets 128.106 Fish and Fish preparations 106.498 Raw wool 8.323 Towels
Leather manufactures 229.023 Fruits 25.556 Vegetables 7.255 Knitwear 493.385 Surgical instruments 94.758 Others 589.080 Bedwear 277.815 Sports goods 155.635 Guar 28.469 Petroleum and petroleum products 39.948 Ready made garments 407.787 Tarpulin and canvas 27.968 Other textile made-ups 112.013 Synthetics fabrics 283.543
Exports up to end February were $ 5055 million while they were $ 4946 million in the corresponding period the year before, increasing by just 2.2%. In the period from July to December exports were $ 3515 m while in the same period last year they were $ 3713 million.
Exported goods in the month of February totalled $547 million down from the January high of $ 654.965 million. In the first seven months of the fiscal year exports fell by 3.9% over the corresponding period last year. Exports in December totalled $ 717 million up 14.2% from November but down from the December 1994 figure of $746 million.
Till end February most major exports showed a decline although surgical instruments rose just over 37%, carpets rose 10.5%,Guar and guar products rose 27.63% to almost $ 21 million,and bedwear rose 8.69%, towels rose 4% to $ 90.5 million; ready made garment exports fell 15.88%, synthetic textile fabrics fell just over 27% and leather fell almost 13%. Major losers in the last eight or so months have been the synthetic textile sector which is down 33% from $ 575 million last year to $209.4 million this year and the ready made garments sector which was down 17.5% in the first half of the year.
Yet the government continued to issue reassuring statements; "the exports to the Central Asian Republics have increased by 19.4% at the beginning of the fiscal year and the trade gap with ECO countries has also minimised with exports multiplying 448%." All this while the indicators pointed to a worsening export front.
Fruit exports, for example, were targeted at $ 40 million for 1995-6, which translates to a monthly target of $ 3.5 million, and while exports in February were $ 5.722 million, they fell by 69% to a level of $ 1.7995 million in March. The problem in this sector as expressed by a fruit exporter was that in anticipation of a shortage, exporters bought and stored fruit but since demand in the international market was low, they had to sell off their stocks at very low prices. Furthermore air and sea freight charges also rose by 12.5% in the last quarter and heavy rains and floods destroyed a lot of crops, and the traditional problems of inadequate packaging and under-invoicing as well as inadequate market information also hampered exports. An estimated $24 million loss is also coming from the US ban on imports of shrimp from Pakistan due to the fishing method.
For Pakistan's major export, cotton and related products which constitute 60% of total exports, the year 1995-96 was an excellent year, since the cotton crop was far better than expected after three years of failed crops due to widespread pest attacks. Inspite of this though, the amount of cotton which has already been exported in the year 1995-96 has so far been 1.6 million bales. Cotton yarn, cotton fabrics,and raw cotton remain the largest exports with export values of $ 1032 million, $785 million and $444 million respectively in the curent year. Attributing low exports to the textile sector and the high prices of cotton (even though they are at par with the prices in the international market) Mr Mukhtar suggested that the industry would require more incentives in order to generate surpluses for export; or else the trade gap would continue to widen.
Exporters themselves have directed the blame towards the Finance Ministry and the CBR for their inability to meet export targets since measures approved by the Federal Export Promotion Board have not been implemented. Their argument is that it was decided in October last year to introduce an export rebate voucher system which has still not been put in place.
Secondly, regulation was supposed to be developed so that exporters could get a refund of sales tax paid on local purchases of machinery and other export items. This was not done and it caused their production chain to slow down which resulted in non-compliance of foreign orders which they had previously booked. This refund of sales tax along with payments of duty drawback claims amounts to some Rs 15 million.
The traditional problems with export industries have, ofcourse, also slowed down export growth; inadequate packaging, non-adherence to time schedules for export orders, poor marketing as well as non-compliance with specifications. A pertinent example came from a leading exporter of ready -made garments who described the use of chemicals and dyes which are used in textiles and leather in Pakistan and are banned in Europe; resulting in the cancellation of consignments. These are issues that also need to be addressed at the upcoming meeting of the Federal Export Promotion Board which is to be chaired by the Prime Minister in the middle of this month.
Although the World Bank sponsored Aid Pakistan Consortium (who recently decided to extend a $2.4 billion package of assistance) in a recent meeting held in Paris commented on Pakistan as having a narrow export base and chronic fiscal problems, an Economist at the AERC, Zareen Naqvi was optimistic of growth in exports over the next few years: " With the new efforts by the government to market and promote exports goods, exports are likely to hit the $ 10 billion mark in the next few years."
Imports for 1995-96 were projected at $10.92 billion, up 9.2% from last year. The total import bill from July last year to end March 1996, is 18.3% up from last year's level of $7262 million to $8592 million .This figure is likely to exceed $12 billion by the end of fiscal 96. Imports for the month of March were $ 1174 million up 19.6% from the February figure of $ 982 million and 22.5% up from last year's March figure of $ 959 million.
Major Imports July 1995-February 1996
$ millions Machinery 1839.976 Petroleum Crude 363.971 Petroleum Products 1010.778 Chemicals 1611..830 Edible Oil 657.861 Road Motor Vehicles 301.210 Wheat unmilled 335.696 Iron And Steel 349.466 Tea 124.185 Paper and Paperboard manufactures 116.385 Synthetic and artificial silk yarn 42.559 Synthetic fibre 88.897 Milk and Cream 40.643 Rubber crude 48.346 Sugar 1.091 Pulses 92.492 Others 1566.803
In the period from July 1995 to February 1996, imports increased by 17.8% over the corresponding period last year. In the last year, the import of the major items, i.e. POL, wheat, fertilisers, and edible oil totalled $3214 million while the same bill for the current year has reached the $ 9434 million mark. The milk powder import bill in the first 9 months of the fiscal year, for example, was $ 140.643 million depicting a rise of 122% over the year.
Total imports averaged $ 916.27 million per month in July 95 to January 96 as compared to $776.38 million per month in the corresponding period last year. In July to December imports totalled $ 5507 million as opposed to $ 4469 million last year. Imports in December 1995 were $ 959 million as compared to $ 885 million last year; a rise of 6.4% year-on-year.
The import of machinery, too, is usually a significant portion of total imports. Machinery imports in December were $142.5 million. In the period July to Jan machinery import was $ 1441.59 million up 22% from the year before. Up to end March 1996 the import bill for machinery was $ 1839.976 million, an increase of 14.3% over the last year. Mr Mukhtar has called the import of machinery "a silver lining to our economy", since it is expected to generate industrial growth; a contention that is being questioned since many believe that it is really only replacing obsolete machinery and not adding to the capital. Makhdoom Shahabuddin, the Federal Minister for Finance and Economic Affairs attributed the rise in imports mainly to machinery imports which increased by 23% "reflecting a higher investment tempo."
The fuel bill
Growth of the energy sector has been estimated at a rate of 13%. The total POL bill in the current year so far has been $ 1908 million up from $ 1732 last year. In December Petroleum was one of the main imports with petroleum crude $ 52 million and petroleum products $ 146 million. From July 1995 to January 1996, petroleum imports rose 25% to $ 718.919 million. The government earlier this week announced the duty-free import of petroleum as well as a granting of duty concessions on the import of some equipment and materials by petroleum sector companies. This would, ofcourse be subject to certification by the Directorate General Petroleum Concessions that the items are not locally manufactured or competitive in terms of prices, quality, delivery schedules and so on. The question that needs to be addressed here is that the import bill will inevitably rise because the demand for petroleum products is projected to increase at significantly higher rates than the current levels of around 7-8% per year. This will mainly be due to additional demand of furnace oil in the power sector with the private power units that are expected to be set up. According to a paper prepared by the Ministry of Petroleum, twelve units are expected to be generated by 1997-98 with a total generating capacity of 4400 MW. Total furnace oil requirements for private sector power projects are projected to be 6 metric tons a year. The peak demand schedule for furnace oil in 000 MT is given in the table.
Furnace oil POL Crude Oil
1993-94 8320 7218 4100
1994-95 8320 7867 4100
1995-96 8653 8607 4100
1996-97 11154 11551 4100
1997-98 15346 16224 4100
1998-99 15960 17360 4100
1999-2000 16598 18556 4100
According to Anwar Saifullah Khan, the Minister of Petroleum and Natural Resources, in a speech delivered to the Economist Roundtable Conference in Islamabad last year, Pakistan's indigineous supply of oil satisfies only 20% of the current oil requirement. The oil import bill is therefore expected to grow from the current level of around $1.5 billion to around $ 4 billion by the year 2000.
The point here is that though this import of fuel will have its benefits in the long-term with the establishment of lucrative private power projects, the import bill for fuel in the meantime is going to be astronomical-- where is this money going to come from? This is one of the most central issues with regard to the trade deficit and one that is gong to be of increasing importance in the years to come; it is towards this area that policy should be directed.
The numbers seem to show that despite the 11% loss in the value of the rupee year-on-year, exports have averaged $598.87 million per month as against $622.98 million per month a year ago. Figures have shown that value-added export items did not show any appreciation in terms of quantity shipped even though the unit value in dollar terms was favourable compared with last year. The 7% devaluation of last October did not generate a higher exportable surplus and nor did it reduce the volume of imports.
According to economic theory and the Marshall- Lerner condition, (Marshall and Lerner were the pioneers of the elasticity approach to the balance of payments), devaluation may be a cure for some countries balance of payments deficits but not for all. The condition itself states that a devaluation will improve the current account only if the sum of foreign elasticity of demand for exports and the home country elasticity of demand for imports is greater then unity. If the sum is less than one, the devaluation is likely to lead to a deterioration of the current acount.
It has been argued that a devaluation may work better for industrialised rather than developing countries, since many such countries like Pakistan are heavily dependent on their imports so their price elasticity of demand is likely to be very low. The difficulty here is that these elasticities relate to long run responses; they describe the effects of an exchange rate change after enough time has passed for consumers and producers to find new suppliers and customers. The short-run elasticities are shorter and do not always satisfy the Marshall-Lerner condition. Therefore even if the elasticities are high enough for a devaluation to work for a developing country like Pakistan, the current account balance may trace a J-shaped curve through time, getting worse before it improves in response to a devaluation. So even though figures show that the devaluation has not helped our exports, and Mr Mukhtar announced earlier this week that there would be no more devaluations before the budget, it is possible that we may see some growth after a time lag.
The elasticity and absorption approaches to the balance of payments have remained influential because they contain useful messages for policy makers; a devaluation is more likely to be successful when elasticities of demand for imports and exports are high and when they are accompanied by fiscal and non-fiscal restraint that boost income relative to domestic absorption.
Major trading partners
It was recently announced that Pakistani exports to the US, its largest trading partner were to the tune of $ 1.2 billion in 1995 up 18.3% from last year and Pakistani imports were $934 million up 30%; once again depicting a worrying trend. The deficit therefore stands at $263 million. According to the 1996 National Trade Estimate Report on Foreign Trade Barriers, in 1993-94 Pakistan initiated a 3-year programme to reduce maximum tariffs from 90% to 35%. Because of government dependence on customs duties for revenue it has been unable to meet its tariff reduction schedule and at the same time achieve a goal of a reduced overall fiscal deficit.
Although figures for the current fiscal year were not yet available, last year's figures show that Pakistan's top ten buyers took up more than 60% of Pakistan's total exports.The US was the largest buyer in 1994-95 absorbing over 16% of the share, and the main items of export were hoseiry, readymade garments, towels, cotton fabrics, leather garments, synthetic textiles, surgical instruments, carpets and rugs, sports goods, and fish and fish preparations. The total value of the exports was $ 1315 million, slightly above the figure for the current year.
The second largest buyer was the UK with $574 million with 7.1% of the total share. The composition of the exports was mainly in textiles, leather, fish, carpets and sports goods.
The third largest buyer was Germany with a share of 7% and a total of $ 571 million. The composition of goods was more or less the same as the UK. Other main partners were Japan, Hong Kong, Dubai, South Korea, France, Holland, and Italy.
On the import front, Pakistan's largest partners are the US and Japan with about 10-12% each. Other major partners are Italy, UK, Germany, Malaysia, China, Kuwait, Singapore, South Korea and Saudi Arabia.
In 1995-96 the maximum tariff was set at 65% compared with the target level of 15%. After the first quarter, the government imposed a temporary duty of 5-10% on most imports, and the average tariff rate exclusive of temporary duty is 45%; under IMF standby arrangement approved in December 1995 temporary duty is to be removed and maximum tariff is to be set at 55% by July 1996. Therefore in order to in order to reduce tariffs other sources of revenue need to be explored. One problem here is that administrative decisions frequently grant exemptions and concessions from general rules under Special Regulatory Orders. This results in different rates being applied to the same product and average rates applied are often lower than statutory duties. The flip-side argument, ofcourse, is that this lowering of tariffs as per IMF requirements will actually lead to an increase in imports, and most likely to an infiltration of consumer goods produced in the developed world. Mr Mukhtar recently announced that 10% regulatory duty on imports would also be withdrawn..
A major concern now has been the IMF pressure to cancel all fiscal incentives for industries; the argument is that industries should be made more competitive but this will result in an increase in the cost of production and although it will help in reducing the budget deficit it will have an adverse effect on the balance-of-payments position and export growth.
Trade Deficit Rupees in billions
1995-96 (July - March) -88.63
The BOP was expected to rise to 4.1% of GDP from 3.5% last year, but it looks now that the deficit will touch 6.4% of GDP fueled by low remittances and low levels of portfolio investment. Imports ofcourrse will continue to rise especially in fuel because of reasons already discussed and in wheat and fertilser a well.
Some experts now believe that the deficit will hit $3.5 billion with some estimates as high as $5 billion. The Commerce Ministry announced just last week that it would invite trade bodies to suggest methods to frame a new 10-year trade policy. The policy is to be related to exchange rate, tariff structure, collection of customs duty the duty drawback system and so on. The balance of payments, being a statistical record of all economic transactions between residents of the reporting country and residents of the rest of the world during a given time period, is obviously always in balance. So a deficit or a surplus in the balance of payments refers to a deficit or a surplus in the current (records all income flows from goods and services) or the capital account (records changes in assets and liabilities). Pakistan's large trade deficit obviously implies that the country has paid far more for its imports than it has earned from its exports; but what really makes a deficit important is that the country as a whole is reducing its claims on the rest of the world. The trade deficit is one component of the current account which is like;ly to pick up changes in other economic variables such as the real exchange rate, domestic and foreign economic growth and relative price inflation.
The trade deficit also has an obvious impact on the basic balance (the current account balance plus the net balance on long term capital flows); In 1994-95 the current account deficit was $ 1847 million and the long term capital flow figure was $ 2713 million so the basic balance is in a surplus. What is important to realise here however, is that this is not necessarily a good thing; a current account deficit which is more than covered by a net capital inflow so the basic balance is in a s urplus could mean either of two things: one that because the country is able to borrow in the long run, there is nothing really to worry about since the country is regarded as viable by foreigners or that the long term borrowing will actually lead to future interest profit and dividend payments which will worsen the current account deficit. Conversely if the trade deficit expected this year is large enough to cause the basic balance to be in deficit as well, that may not be a bad thing completely but it is likely to be if the capital is flowing outwards.
Conclusions and future prospects
An important point here is the time dimension when looking at the balance of payments; a deficit is not necessarily a bad thing if it is likely to be followed by future surpluses. Of course a deficit coupled with high inflation (as in the Pakistan case) and low economic growth causes the balance of payments problems to be more serious.
If imported goods, for example are predominantly consumer items, the deficit is more worrying than if they are, for example machinery or fuel that could be important in generating future exports.
As to the direction of the trade deficit for the next year the outlook does not seem too hopeful with some estimates touching the $5 billion mark; as we have already pointed out, Pakistan is going to have quite an import bill to contend with. Fuel imports will continue to rise, as will machinery imports, and the way things stand now, wheat, fertiliser and edible oil do not seem to be coming down either.
As a solution then, the trade gap can only be narrowed if exports are increased; both in terms of a wider base and a larger volume, both of which will hopefully be taken up by the government and the newly established Pakistan Trade Fair Corporation. There is a case for optimism in this regard especially if consistent efforts are made at marketing and promoting Pakistan's major export goods.