ALARMING TRADE DEFICIT
A fresh look at the budgetary allocation might be held in January 2005
From SHAMIM AHMED RIAVI,
Nov 15 - 28, 2004
The widening trade deficit, declining budget surplus and rising inflation during the first four months of the current financial year are the worrying factors for the government as they have disturbed almost all the projections made in the budget 2004-05. The bleak situation with no sign of immediate relief from any sector in sight has forced the economic managers of the country to have a fresh look at their budget projections.
The government Advisor on Finance, Dr. Salman Shah, hinted at a seminar in Lahore last week that a fresh look at the budgetary allocation might be held in January 2005 in view of the performance of the first six months of current financial year. This vindicates the general perception that the recent oil surge coupled with weakening rupee and burgeoning trade deficit have put unforeseen pressures on the economy, which need to be taken into account at the earliest. Hitherto, the government has been found hesistant to share with general public the likely impact of these events, which seem to be creating troubles for the government. How long the government can conceal the real impact of such wide-ranging pressures is anybody's guess. However, it appears more prudent that policies be fine tuned immediately to cope with the present challenges.
This appears to be the first experience of its kind after the 9/11 incident as the economic situation since then has largely been improving, which has been endorsed even by the most independent economists. There has been a systematic retrieval of economy, which though criticized at the popular level, has helped the country to infuse confidence in local and foreign investors. Foreign exchange reserves and remittances surged while the fiscal and trade deficits largely brought under the control due to healthy exchange rate and better revenue collection. Thus economy presented a healthy picture, which helped Pakistan market in the most competitive international environment. While the government claimed that its policies resulted in economic turnaround, the critics termed the international environment in favour of windfall returns for the economy. Now, suddenly the international oil prices, the impact of which has been more severe on the developing countries due to absence of any depth in their economies. If the oil prices in the international market maintain the present trend, the government may loose by January 2005 about half of its 65/70 billion rupees revenues estimated to be earned through petroleum development surcharge during the current financial year.
In normal circumstances, the government would not have hesistated to cover this loss by passing on the addition of oil price hike by increasing the sale prices of petrol and petroleum products and raising the power tariff. The government does not feel it expedient and rightly so, to resort to this normal practice of meeting revenue shortfall because of the overcharged political atmosphere in the country. In view of the deteriorating environment in the two houses and threatened agitation by the opposition after Eid, the government is abstaining from providing another cause, most appealing to the general public, to the opposition. But how long it can afford to avoid it, is yet to be seen.
According to the State Bank report for the first quarter, Pakistan's economy has shown a somewhat mixed performance in the first quarter of the current financial year. Foreign investment and home remittances are reported to have shown improvement as compared to July-September period last year. Large-scale manufacturing has kept growing its growth momentum as imports of machinery and raw materials have increased during this period. Revenue collection has also shown good performance and this expected to be maintained in subsequent quarters. The government is trying to ensure that wheat is sown on the maximum possible area so that its production targets could be fully achieved in the next season.
On the other hand, trade in balance has widened and it will need to be contained through export acceleration. The rupee/dollar parity has been low as the rupee has been showing a sliding trend against the dollar. Inflation in the first quarter of this year is also said to be on the higher side and it is required to be firmly controlled. In order to provide relief to the people, the government has frozen the domestic oil prices since the beginning of May though world oil prices are said to have posted an increase over this period. In view of high world oil prices, the pressure on trade balance has been in escapable. As for their impact on the domestic prices of POL products, the government absorbed the effect of this increase. This is proposed to be offset through higher revenue collection.
According to a press release, the Central Board of Revenue has collected Rs 162.9 billion during July-October period indicating a healthy growth of 23.8 percent over the corresponding period of the last fiscal. It said according to provisional figures upto October 29, the board collected 91.3 percent of overall tax targeted for the month of October. The total tax collection for October was Rs. 4.7 billion while the CBR collected Rs.37.1 billion collected in October 2003. The statement said the CBR expect that collection will increase further when the revenue figures for October are finalized in the next few days. It said direct tax revenue has increased by 35.4 percent during July-October period as overall tax collection during the period under review has reached Rs. 48.4 billion against Rs. 35.7 billion in the same period last year.
The trade deficit increased to an alarming level of over $1.4 billion during the first four months against the target of about $ 500 million. The country's export have increased by 12.3 percent to $ 4.462 billion during the first four months (July-October) of the current fiscal, as compared to $ 3.974 billion in the same period of last year.
Provincial foreign trade statistics released by the government on Friday indicated that imports during the first four months of current fiscal showed 37.4 percent increase, to $ 5.894 billion, against $ 4.289 billion in the corresponding period of last year.
The figures show that trade deficit has increased by about 35 percent as the gap between exports and imports during this period was $ 1.432 billion while trade gap in the same period of last year was $ 314 million.
The trend shown by the country's economy in the period under review indicate that the government should focus greater attention where it is required and the areas have already been identified in this regard. As the government is trying to accelerate economic growth, combat poverty, create jobs, stabilize prices and reduce its dependence on high cost foreign debts, it is all the more necessary that the grey areas in the economy are removed as early as possible. The growth momentum of the economy needs to be sustained.