IS THE REDUCTION IN TRADE DEFICIT SUSTAINABLE
By Syed M. Aslam
Sep 22 - 28, 1997
The external trade deficit has been a chronic problem besetting Pakistan's economy all through its history, except for three years: 1947-48, 1950-51 and 1972-73.
For the first time after many years the trade deficit showed signs of a declining trend when it registered a decrease of 29 per cent during the first two months, July-August, of the current fiscal compared to corresponding period last year.
During this period the trade deficit declined by $140 million to $350 million as exports increased by nine per cent while imports decreased by 1.7 per cent.
The Trade Policy announced by the government on July 16 aims at reducing the trade deficit by $1.04 billion to a target of $2.33 billion and increasing exports by15 per cent to $9.575 billion during 1997-98. This translates into monthly averages of $792 million for exports and $194 million for trade deficit.
In spite of the reduction in trade deficit during the first two months, both the export and trade deficits remained below the targeted monthly average: exports, $689 and $662 in July and August, respectively; and trade deficit $350 million cumulatively for July and August.
It was alarming that the exports of the cotton group, the single biggest foreign exchange earner, registered a sharp decline as export of cotton yarn, fabrics, knitwear and towels decreased.
While it is too early to make a prediction whether the export and trade deficit target would be met during 1997-98, an informed guess could be made.
Talking to PAGE, Sameer Kakakhel of Carr Mashriq said that while it was a bit early to predict whether the export and trade deficit targets would be met during the current fiscal, there has been no significant shift in the export pattern as the thrust remained on regular exports like rice and raw cotton. The measures announced by the government to make export-led growth a cornerstone of its economic strategy would time to take effect, he added.
While the scenario would begin to become clearer with the second quarter (October-December) the heavy reliance on traditional exports proves that the value-added exports have yet to play a more significant role to narrow the trade deficit, he added.
Reliance on regular exports, he said, highlights the importance of the value-added sector to perform in the coming months, as, during the first two months, there has been a sharp decline in the exports of the cotton group while for the last 8-10 months Pakistan is losing the cotton market in Japan. During the last few months, there has been a major downward adjustment in European currencies making Pakistan's textile products dearer in these countries, he said. As Europe is one of the major markets for Pakistani fabrics and textile made-ups, adjustment of Pak rupee against such major Eurpean currencies as Deutsche mark, French franc and Dutch guilder has become imperative, he added.
While Pakistan has, so far, resisted to devalue its currency, Sameer predicted a a two to five per cent devalution of the rupee during the next six to eight weeks.
Though non-traditional exports depict an overall increase, the export of such non-traditional items as chemicals and pharmaceutical products declined by a huge 31.36 per cent during the first two months to $6.4 million, 20 per cent in pharmaceuticals and drugs alone which decreased to Rs 130.48 million (about $3.2 million) in July '97 compared to the same month month last year.
Exports of other non-textile items, surgical and medical instruments declined by 10.4 per cent to $14.5 million.
Talking to PAGE, the General Secretary of Surgical Instruments Manufacturers Association of Pakistan, Sheikh Abdul Majeed, said that though the surgical instrument industry has a tremendous export potential to capture one per cent (about one billion dollars worth) share of the world market.
The surgical industry, he claimed, can acheive the one-billion-dollars-a-year export target within three years, provided the government allows duty-free import of proper grades of stainless steel; establishes a laboratory for testing of stainless steel, and a government-sponsored quality assurance training institute for CGMP (current good manufacturing practice), a US standard which is equivalent of ISO 9000 of the European market; provides soft loans, etc.
He said that while the incentive package for the surgical industry had a provision for a stainless steel testing laboratory, the industry still awaits its implementation.
Export of fresh fruit contributed $65 million registering an increase of 96 per cent including Kino export which almost tripled from $5.5 million to $13 million and mango export which doubled from $1.65 million to $3.215 million a growth rate surpassing all other exports in 1996-97 over the previous year.
It was, perhaps, this strong export performance which made the government announce a three-year tax-holiday for fruit processing and preservation industry in Budget 1997-98. But the decision remains unimplemented at present, President of Fresh Fruit and Vegetables Group (Sindh), Mateen Siddiqui, told PAGE.
He said that except for the 25 per cent freight subsidy on the national air carrier, PIA, the fruit exporters are not enjoying any other incentive. There is a 50 per cent duty on the import of wax used in fruit shining and while duty-free import of fruit processing machinery is allowed it was primarily due to the initiative taken by the exporters themselves to organise themselves on professional lines and to explore of new markets which has turned fruit into the top export performer.
While statistics show that there was a 14.56 per cent decline in the value-wise export of fruit during July-August, he said that most of the fruit export are credit based, 60 per cent of the payments for the export during the two months are yet to be received by the exporters. There has been an increase in the export of fruits and we are sure that the export will register a 50 per cent increase during 1997-98, he added.
He said that fruit exporters choose to pass on 25 per cent freight subsidy to their foreign buyers to give the exports a competitive edge in the international markets, he added.
Value addition in fruit processing and preserving industry, he said, will take between 8-10 months if and when the government issues a directive for the implementation of tax-holiday.
Accroding to figures collected by PAGE, apart from fruit export of Rs 175 million and vegetable export of Rs 16 million in July, which depict an increase of 15 per cent and a decrease of 5 per cent respectively over July 96, the export of fruit and vegetable juices declined by 20 per cent.
As is, the export of fruit and vegetable juices has constantly going down---from $11 millionin 1990-91, $8 million in 1991-92 and a mere $3 million in 1992-93. If export performance of Rs 13.5 million in July is any indication the country would not exporting more than $4 million worth of fruit and vegetable juices during the current fiscal.
An overall decline in export except for huge increase in raw cotton and sythetic textile fabrics aided by smaller increase in seafood, sports goods, etc show that in fact it was the fractional increase in imports that helped reduce the trade deficit. However, it hints at the importance of bettering the performance of other exports, particularly the non-traditional who also depicted a mixed performance.
So what really contributed to help reduce the trade deficit? Sameer said that it was made possible due to a significant reduction of 19.7 per cent in the import of machinery to $400.6 million which sources attributed to reduced plant and machinery imports for power plants and also due to lower international petroleum prices. Since petroleum imports make up over 15 per cent of imports even a small price reduction translates into big savings for the country and though the average oil prices have fallen by 17 per cent over last year the impact of reduced oil import bill played a significant part to keep the imports in check but would the export target of $9.5 billion would be achieved?
Restricting the trade deficit to $2.33 billion would indeed be a hard, if not an impossible task as Pakistani exports are threatened by such issues as child labour, ISO 9000 standardisation and anti-dumping duty on one hand and heavy reliance on food stuff and oil, the prices of which traditional increases during the winter months which are fast approaching.
As is, food imports during July-August increased by 81.17 per cent to $321.7 million, $145.6 million for wheat alone, compared to same period last year. Similarly, import of petroleum products and crude petroleum registered an increase of 12.08 per cent to $333 million.
While exports normally pick up at the end of calender year observers say that the problem of regional currencies will be an obstacle which unless tackled would curtail the export growth below the 15 per cent targeted increase.
As mentioned earlier, the export of non-traditional items depicted a substantial increase during the first two months of the current fiscal. However, an analysis of the export performace highlights the need not only to improve the quality to fetch the premium price and but also to address the child labour and standardisation issues to have a hold of the traditional markets.
For instance, child labour related issues resulted in the decline of carpet exports by 20 per cent and though the export of sports goods increased by 37.36 per cent, exporters say that there has been a decline of exports to European countries due to appreciation of Pakistani Rupee with respect to European currencies.
Similarly, there has been a sharp decline in the export of chemicals and pharmaceuticals products from $9.3 million to $6.4 million, export of pharmaceutical and drugs alone decreased to Rs 130 million in July 1997 from Rs 163 million during the same period last year.
Furthermore, analysis also show that increase in quantity of a number of exports failed to translate into an even, or a close, increase in terms of value. For instance, a 48.45 per cent increase in the quantity of seafood depicted only 6.5 per cent increase in value while a 53 per cent increase in the quantity of onyx manufacture translated into 37.33 per cent value-wise increase.
There were exports which depicted a quantity wise increase and yet earned less: Despite a 6.94 per cent increase in the quantity of raw wool the value wise export registered a 6.69 per cent decline and 7.47 increase in export of oil seeds, nuts and kernels translated into a 23.15 per cent decrease in value term.
The trend hints at the failure of the Pakistani exporters to improve the quality of their products to meet the demand of the consumers in the international market to fetch a better price.
Furthermore, imposition of ISO 9000 quality certification by the European Union (EU) on a number of exports from Pakistan such as seafood (implementation extended till June next year), fresh fruits and vegetables, pharmaceuticals, calls for the need of the export related industries to acquire the certification.
In addition, the annoyance of the developed countries, many of which are major importers of hand-knotted carpets and sports goods, over child labour issues is other major impediment to exports of the related goods. Concerted efforts should be made by the government to satisfy the developed countries about the issue and policies should be formulated to solve it within the country.
Trade Policy 1997-98 announced to establish Export Development Fund to share the cost of ISO 9000 certification for manufacturers/exporters upto Rs 150,000 per certification is a step in the right direction. The facility will be available upto June 30, 2000, the year ISO 9000 certification would be a mandatory export requirement.
In addition, measures announce by the government to boost the traditional as well as non-traditional exports would be implemented in letter and spirit to clear any ambiguity detrimental to bring in investment.
As is the the over exposure of exports in the traditional markets calls for exploration of not only new markets but also diversification of export base, particularly value addition.
For instance, during the first six months of this year exports to one of the major market, Japan declined by 21.3 per cent to $257 million.
Although exports usually picks up at the end of calender year, the export performance during the first two months shows that much is required to be achieve the export and trade deficit target, which analysts feel though ambitious is not impossible to achieve.