Trade deficit is feared to escalate to $6 billion by the end of June 2005

Apr 25 - May 08, 2005

The Economic Coordination Committee (ECC) of the Cabinet has reviewed the current economic situation leading to an all-time high trade deficit of US$4.3 billion despite having a 14 percent increase in the exports during the first 9 months of the current (2004-05) financial year.

There were apprehensions that the trade regime might be facing a whopping trade deficit to the tune of $6 billion at the end of the current financial year.

The first nine months of the current financial year i.e. July 2004 to March 2005 witnessed that exports from Pakistan rose to $10.2 billion, showing 14.6 percent growth over $8.9 billion of the same period last year.

However, the bulging imports on account of higher imports of petroleum products, food items and machinery resulted in a massive 37.8 percent increase to $14.47 billion, from $ 10.5 billion during the corresponding period of last year.

A sense of consolation, however, remains that exports from Pakistan maintained a robust growth since January 1, 2005, especially when the textile quota was over in the wake of WTO rules which opened new opportunities for especially for the textile exports.

In terms of value, exports during the month of March 2005 registered a 32.5 percent increase to $1.4 billion, as against $1 billion exports during the same month of last year. Imports during the month increased from $1.4 billion to $2.1 billion, showing 52.2 percent increase.

The record trade deficit during this period makes it certain that Pakistan will end the year with a whopping trade deficit somewhere in the vicinity of $6 billion, as imports look certain to touch $20 billion mark.

Given the current trends, it is expected that export would also be higher than the target to total in the range of $14-14.5 billion in the end. This would put enormous pressures on the balance of payments position of the country, which had not been threatened since the 9/11 events that opened the doors for massive inflow of dollars. However, the authorities appear to be cool so far.

Officials in the Ministry of Finance are not worried about this unprecedented trade imbalance. According to them the current account position is okay, and there is no reason to worry. The import bill has increased demand for capital goods, like machinery and equipment, besides rising cost of fuel.

Officials, however, said they maintained the most pronounced ailments of the economy during the 90s due to large fiscal and trade deficits, which forced all the governments in power between 1992 to 1998 to finance such large gaps between exports and imports through the privately-held Foreign Current Accounts (FCAs).

After the nuclear tests in May 1998, when international sanctions exposed the foreign exchange vulnerabilities of the country, authorities ended up freezing these FCAs worth $11 billion, which were all eaten up by the then governments, leaving merely a billion dollars in the balance. Although, the official foreign exchange reserves position is pretty stable and sound at the moment, authorities need to really propel exports to overcome such unsustainably high trade gaps.

Pressures on reserves, coupled with soaring inflation, leaves little options for the policy makers. With the rate of inflation already in the double-digit at 10.25 percent for the month of March, courtesy some poor handling of the foodstuff and fallout of the petroleum prices, poor segments of the society are already feeling the crunch.

The central bank has also aggressively moved in to tighten monetary expansion, which helped the industrial sector register 16 percent growth rate during first half of the year by injecting Rs347 billion to the private sector. Now, the pressure of prices would tend to rein in monetary expansion by raising the interest rates.

Surprisingly Cabinet Committee was not concerned about the skyrocketing prices. "The ECC just reviewed the prices, sources said. Sources, however, explained that the current food inflation kicked off last year when the government had increased the support price of wheat to Rs400 per 40 kg, which failed to overcome supply shortages in the country and flour prices vaulted up.

The ECC expects around 22 million tonnes of wheat harvest this year which would be enough to meet the domestic requirements," said the sources.

The total wheat procurement target has been set at 4.73MT for the next crop by the government. In a related move, the ECC has also asked all the provincial governments to provide wheat to the flour mills to their capacity at the rate of Rs400 per 40 kg. This, he said, would check the price spiral of wheat flour.

The ECC also approved provision of 2500 metric tonnes of sugar to the military at the rate equivalent to the Utility Stores Corporation (USC). The Cabinet Committee also extended the coverage of 50 percent import duty slab on 1300cc cars to cover the cars up to the capacity of 1350cc.

Sources said this decision has been taken to facilitate new assemblers in the country with hope that this measure would help bridge the supply-demand gap in the auto industry, which has tripled its sales during the last three-years.