The exceptional increase in trade deficit estimated
at $4.3 billion during first nine months (July-March) is likely to
reach $6 billion at the end of the current financial year 2004-05.
Stemmed from persisting imports of machinery and
equipment and the costly oil were the major contributors to the
largest trade deficit ever reached in the history of Pakistan
offsetting otherwise an impressive growth of 14.6 percent in export
earnings during current financial year.
Pakistan's trade deficit rose by 141.52 percent in
ten months of the current financial year as compared to the
corresponding period of the last financial year.
Other sources revealed that trade deficit stood at
$4.842 billion during the first ten months from July to April 2004-05
which is more than double of $2.005 billion during the same period
The trade policy announced for 2004-05 soon after
the last budget had projected a trade deficit of $3 billion for the
whole year. The quantum leap in the imports bill which is said to be
unavoidable in view of growing economic activity both in the private
and public sectors is expected to stretch the trade deficit to $6
billion by the end of June this year.
A break down of import figures indicates that the
deficit increased by 45.71 percent to $601.548 million in April 2005
as against $412.834 million during the same period last year. The
deficit was lower by 23.49 percent in April when compared with the
figures of March 2005.
The increase in imports of machinery, and petroleum
products appeared to be the real factors featuring prominently in
widening of the gap between imports and the exports of the country.
Though the high international oil prices played a
major role to increase the trade deficit as the oil imports are likely
to cost over $5 billion this year, yet the textile machinery remained
on top of the list with an unusual figure of over $7 billion for the
outgoing year. However, the increase in import of machinery is
substantiated by valid reasons in the face of development activities
at port in Gwadar port in Balochistan, expansion in existing projects
in textile and cement sectors and permission to import vehicles to
bridge the gap between demand and supply in the automobile sector.
AUTO IMPORTS, GROWTH
Actually, it was the reduction in import duty which
led to unusual growth in imports of cars by almost 70,000 units in the
financial year 2004-05.
The incentive of reduced duty was announced with a
view to ease the situation stemmed from demand growth for automobiles
in the country. Low duty incentive has attracted the auto
manufacturers who started importing new models of cars to avail the
opportunity of windfall profits.
If the government allows the import of
reconditioned cars, it could hurt the domestic industry though it is
not expected to happen in the upcoming budget.
The import duty reduction has, however, steered
huge growth in the import of cars as local assemblers, besides
expanding their capacities, are importing significant units from
abroad. According to available figures, almost 70,000 units of new and
used cars are estimated to be imported during the FY05, which will
abate the existing domestic demand-supply gap. It seems that local
assemblers would continue to import new cars to keep their profit
margins intact. Premiums in the auto market would come down only when
the demand and supply gap is reduced. If the government allows the
import of reconditioned cars in the upcoming budget, it could create a
serious threat to the domestic industry hence it is not in the
interest of the growing auto sector that any such plan is materialize.
According to reports from auto sector, Dewan Motors
have emerged as the biggest importer of new cars in the sector. They
have re-launched the Mitsubishi brand cars in Pakistan. Earlier Dewan
had launched the BMW series for the first time in Pakistan. Nexus
Automobiles have also launched Chevrolet Optra (1600 cc) in addition
to Chevrolet Classic (1000 cc) already being imported. The Indus Motor
Company (IMC) has recently launched the Toyota Camry, the best selling
car in the US market while it further plans to launch more vehicles in
the SUV segment.
The Pak Suzuki Motor Company did not lag behind and
has announced plans to launch imported models of Liana and Grand
Vitara by the end of December 2005. The latest entrant to the imported
car market is Nissan, who have also reentered the market with two
models of passenger cars, Nissan Sunny and Nissan Cefiro and two
models of SUV's (Sports Utility Vehicles), Nissan Petrol and Nissan
XTrail. Manufacturers selling fully imported cars with no local value
addition or local assembly indicating that CKD manufacturers were also
shifting interest on CBU business over domestic manufacturing.
"Our economy has not yet reached a point to
afford such luxurious imports of cars. The imports of cars helped
increasing the trade deficit at one end while the trend could damage
the growth in auto sector which is stated to be the mother industry in
the engineering sector," said leading economist and an
industrialist, Kaiser Bengali.
He was of the view that the foreign investment
received in the country so far was related to domestic consumer market
while the flow of foreign investment through strategic sale of
state-owned entities by and large confined to the domestic market and
in no way lending a helping hand for our exports. Contrary to the
privatization scenario in Pakistan, it is altogether different
elsewhere in the regional countries like China and India where the
foreign investors contributing significantly to their exports.
"Obviously, the trade deficit should be a
matter of concern of the people at the helm of affairs who according
to him borrowing from the international market to mitigate the effects
of the yawning trade deficit. According to Kaiser, the government has
so far borrowed $1.3 billion in a panic like fashion which might
provide a temporary relief but add burden to our foreign debt on the
other hand. It is not the trade deficit alone, the services sector was
also eroding our resources. Citing the example of the shipping sector
where foreign flag vessels taking away millions of dollar every year
in the absence of national shipping services, he observed instead of
spending our hard earned foreign exchange earnings on imports of cars,
it is much needed shipping area which calls for immediate attention of
Wajid Jawad, former Chairman Export Promotion
Bureau, an industrialist and a leading textile exporter, however,
looks at things with a different angle. It's a sign of a vibrant
economy, only the idle economies remain dormant. There is no
panic-like situation if the trade deficit has gone up especially on
account on import of machinery. Its one time expenditure and not going
to haunt as a financial burden persist, rather the investment on
import of machinery will pay back in the times to come, he remarked.
As far as increase in oil imports was concerned, it
was an external factor and beyond anybody's control. It is not the
question of Pakistan it is equally affecting the regional economies.
In spite of efforts being made by the oil producing countries to
increase their production capacity, they were unable to match the
growing demand due to worldwide increase in oil consumption. However,
the major player in the oil game is the United States which holds the
lever. The oil prices can come down provided it is desired by the US,
however, it seems that low oil prices were not in the interest of the
US as it was using it as a tool for financing its war expenses, Wajid
Meanwhile, the exports from Pakistan though
registered a growth of 15.28 percent in the first ten months of the
financial year and stood at $11.529 billion this year as against
$10.001 billion during the corresponding period of the last year and
hopefully the exports will hit the target of $14 billion set for the
current fiscal year.
Monthly exports registered an increase of 18.79
percent as it stood at $1.301 billion in April 2005 as against $1.095
billion during same period of the previous year.
On the other hand, imports also took a quantum leap
indicating an increase of 36.36 percent during first ten months of the
financial year. In terms of value, the imports stood at $16.372 as
against $12.006 billion during the same period last year.
The import target of $16.7 billion had been met
during the ten months while there are strong indications that the
total imports may cost over $20 billion at the end of the year in June
According to assessment made by SBP, the
exceptional increase in trade deficit stemmed primarily from
persistent strong growth in imports and more than offset the increase
The overall trade deficit continued to surge
steadily, reaching $4.3 billion during first nine months of the
current financial (July 2004 to March 2005).
Specifically, during the first three quarters of
the current financial, overall imports grew by 37.8 percent, compared
to 14.6 percent rise in exports during the same period last year.
On the positive side, monthly exports, which had
been witnessing during most of the first half of the financial year
have finally bounced back in February and March 2005. More notable is
the sign of recovery in the textile sector as all major categories
including cotton fabrics, bed-wear, readymade garments, towels,
synthetic textiles showed increase both in terms of value and volume
despite significant fall in exports of unit price of some of
The export performance was impressive given the
loss of duty-free access to EU market from January 2005 onward. The
increase in bed wear exports during Feb-March indicates that the
exporters in this category have been able to overcome the impact of
the anti-dumping duty imposed by the EU on bed-linen exports probably
by reducing their margins.
It is also evident that besides bed wear, unit
values of readymade garments and towels have also fallen during
Feb-March period. This suggests that exporters, in their bid to
preserve export markets under post quota regime, are passing on
savings to their buyers. In view of rising competitive pressures, it
is clear that only those exporters who have efficient production
process would be able to uphold their markets. It is, however, evident
that other competing countries are also going through the recovery
phase in their export of apparel products to the USA. As a point of
concern, upturn in Pakistan's exports of apparel products to the US
was too late and little when compared with other countries.
Pakistan's exports reached $10.2 billion during
July-March 2005, depicting a growth of 14.6 percent over the
corresponding period last year and 5.2 percent higher than the period
target of $9.7 billion. What is more heartening is the fact that
exports have finally started recovering from the considerable slowdown
witnessed in September-November 2004. The recovery is reflected in
remarkable export growth of more than 32 percent witnessed in two
successive months of Feb and March 2005 over the corresponding months
A further analysis of export data for the third
quarter of the financial reveals that the recovery in the major
categories of textile export along with strong growth in exports of
primary commodities and other manufacturers have been the key factors
that led to this uptrend.
The upturn in exports is also visible in the
primary commodity group that posted a massive growth of 23.2 percent
during the year so far.
Major contribution in export of primary commodities
comes from rice and raw cotton both registering significant increases
in terms volume. Yet another aspect of the export performance is the
persistent rising trend in miscellaneous exports over several years
that continued during the current financial year as well. This,
together with declining share of the textile sector in total exports
provides some tentative evidence of diversification in the export
basket of the country.
In fact, the import of machinery in 2004-05 is set
to exceed $6 billion for the first time in the history of Pakistan. In
July to March this fiscal, the country had already imported $3.9
billion worth machinery of various kinds while more than $1.60 billion
machinery is expected to be imported in remaining three months of this
The country had spent $1.39 billion more on the
import of machinery in July to March period of this fiscal when
compared to $2.51 billion import bill of machinery in the
corresponding period of last fiscal. In percentage, the overall
machinery import had depicted 55 percent robust increase in nine
months of this fiscal year over the last financial year. In rupees,
the private sector had spent Rs230.92 billion on the import of
machinery in nine months of this fiscal, showing a bumper growth of
Rs86.38 billion over the last fiscal during the same period.
Officials in the Ministries of Finance and Commerce
told PAGE that the average monthly import of machinery in
remaining three months of 2004-05 is expected to add yet another $600
million to the total export of machinery at the end of the year. In
the month of March 2005, the private sector had imported machinery
costing $590 million, said the officials, adding the monthly import of
machinery during April to June is expected to remain above $600
They said that power machinery import had depicted
32.74 percent increase, office machinery 17 percent, textile 53.62
percent, construction/mining 27 percent, road motor vehicle 46.6
percent, agricultural machinery, imports 105 percent, while machinery
falling in others category marked 78 percent growth in nine months of
this financial year.
According to break up, the import of power
generating machinery had consumed $272.46 million, office machinery
$182.87 million, textile $697.43 million, construction/mining $112.11
million, electrical machinery $228.44 million, road motor vehicles
$706.32 million, agricultural machinery/implements $48.70 million
while machinery, falling in the category of others, cost $1.51 billion
in this financial year.
Officials said that the tax incentives announced in
the current financial year have given an unprecedented boost to the
import of various types of machinery in 2004-05 that was an indicator
of industrialization, expansion and modernization of the existing
industry in the country.
They further said that the textile sector was
continuing the much needed modernization and expansion plans to meet
the challenges, arising from the quota-free world trade of textiles
under the WTO charter from January 2005.
According to estimates, the oil imports will rise
to $5.5 billion next year owing to another 15 percent increase in the
international oil prices despite constant consumption.
According to informed sources, next year's crude
oil import bill would amount to $2.9 billion followed by $2.08 billion
for diesel and furnace oil.
The rocketing oil prices have forced the government
to calculate foreign exchange estimates keeping in view the oil import
costs. The petroleum sector would be the single largest segment after
import of machinery which is eating up major part of foreign exchange
reserves during this and next year. For the current year, the
government had estimated around $3.5 billion oil imports in the budget
2004-05, which has now been revised upward to $4.66 billion because of
higher international oil prices.
These estimates were part of the next year's budget
under which the balance of payment position would continue to
deteriorate for the second consecutive year and increase trade
deficit. The increase in petroleum imports will be on two fronts —
an increase in the consumption of high-speed diesel and furnace oil
and a rise in the international oil prices.
The prices of diesel and fuel oil for the remaining
period of the current year are based on actual average prices of July
2004 to April 2005. The prices diesel of and furnace oil for the next
year budget are estimated at $375 per tonne and $200 per tonne,
The crude prices for April-June 2005 are taken as
actual average for July 2004 to March 2005 i.e. $39 per barrel.
However, the crude prices for 2005-06 have been estimated at $45 per
barrel on the basis of actual average of the last 10 months ($39 per
barrel) plus a forward provision of $6 per barrel in view of the
instability and current trend.
Consumption of furnace oil was on the rise for the
last two years because of low water availability for power production
and this trend would continue next year as well. The fuel oil import,
which amounted to 665,600 tonnes in 2003-04, was estimated to increase
to 1.2m tonnes in the budget projections but has now been revised to
1.67 million tonnes. The furnace oil in use is expected to go up to
1.8 million tonnes next year.
On the contrary, the use of high speed diesel is on
the decline as compared to the past. In 2003-04, the HSD consumption
stood at 4.5 million tonnes but reduced to 4.2 million tonnes in
2004-05. It is expected to go up again to 4.6 million tonnes.
Similarly, the import of crude oil continues declining in terms of
quantity but rising in value terms. In 2003-04, the crude consumption
stood at 57.7 million tonnes at a cost of $1.747 billion. It was
estimated in the budget that the consumption would increase to 68.8
million tonnes in 2004-05 at a cost of $2.06 billion. The consumption
is expected to be much lower at 62.4 million tonnes but its cost will
increase to $2.4 billion by the end of the year.
According to a report, the total petroleum
consumption, which stood at 16.8 million tonnes in 2002-03, reduced to
13.8 million tonnes in 2003-04. Total consumption was estimated at
15.4 million tonnes in the last year budget, but actual consumption
target has been revised to 15.55 million tonnes. The next year's
consumption would be slightly higher at 16 million tonnes.
The first nine months of the year posted a sharp
increase of 37.8 percent, reaching $14.4 billion during the period
under review. Interestingly, the growth is exceptionally high at 57.2
and 52.2 percent in the months of February and March 2005.
The total import bill for the current financial
year would be much higher than the target of $16.7 billion if the
prevailing trend in imports continues to follow similar trends during
the last quarter of the current financial year.
The surge in imports during first three quarters of
the financial years is mainly due to a steep rise in domestic demand
for machinery, petroleum crude, agriculture and other chemical group
and base metal imports which are essential for sustaining the
long-term economic growth.
Import of machinery has the largest share of 26.9
percent in total imports. It witnessed 55.0 percent rise during first
nine months of the financial year. Within machinery, the textile
machinery and road motor vehicles are in significant higher demand and
in turn responsible for the quantum leap in overall machinery imports.
The increase in textile machinery imports is in response to
Balancing-Modernization and Rehabilitation (BMR) drive launched by the
textile sector under Textile Vision 2005. On the other hand, the rise
in road motor vehicle is probably a function of increase in the
automobile production and higher spending for the improvement of
infrastructure under public sector development program.
So far, the import of petroleum products having a
share of over 19 percent in the total imports shows a growth of 31
percent during the said period. This mainly reflects more reliance on
thermal sources for power generation owing to water shortages during
first half of the financial year under review.
Higher fuel consumption following a recent increase
in automobile sale in the country and significant rise in
international oil prices.
Import data for February 2005 shows an increase of
$89.4 million under aircraft, ships and boats. This includes import of
equipment for the development of Gwadar port, a part of these imports
is supposed to be exported later.
During the second half of the financial, the import
volume of petroleum products reduced substantially attributed to
increase in hydro electricity generation due to improved water
availability. Over 19 percent YoY increase in July-March 2005 in
import quantum of crude petroleum reflects the impact of the Bosicar
refinery that started its commercial operations in July 2004.
Agriculture which has emerged as a major
contributor to the economic growth has over 18 percent share in the
total imports due to significant increase in the import of
fertilizers, insecticides and plastic materials. Higher import of
fertilizer and pesticide is associated with the improved farm income
and availability of agriculture credit. Import of fertilizer, in
particular remained exceptionally strong due to lower domestic
production following the recent disruption in gas supplies from
Balochistan. Since the domestic production of fertilizer is also
facing capacity constraints, import of this product is likely to
remain strong in the remaining period of the financial year.
The economy as a whole was no doubt marching
towards the goal; it is heartening to note that Pakistan will soon be
joining the club of five regional countries with higher growth rate.
Prime Minister Shaukat Aziz has projected 8 percent GDP growth which
portrays a rosy picture of the economy. However, this growth should
also reflect in the life of the people. Unless the benefits of
economic growth reach to the grass root level, people will continue to
look at these statements of economic growth with a doubt in their
(In Million US $)