THE IMPACTS OF A GROWING TRADE DEFICIT
The problem cannot be overcome unless exports are increased
By SHABBIR H. KAZMI
May 16 - 22, 2005
Pakistan has posted a huge current account deficit during the first nine months of current financial year, which is in sharp contrast with a surplus for the corresponding period of last year. Growing trade deficit is fast turning Pakistan's current account surplus into negative. A huge trade deficit of 3.5 billion dollars during 9-month period has already turned the current account surplus into deficit. According to the details, the country has posted 1.3 billion dollar deficit as against a surplus of two billion dollars. There are apprehensions that the current account deficit may go as high as two billion dollars at the end of current fiscal year because of 5 billion dollars deficit for the full year.
A positive factor is that Pakistan's export of textiles and clothing are picking up after phasing out of textile quota. As against export of US$3.743 billion during July-December 2004, exports during first nine months of current financial year touched US$ 5.972 billion. This is very encouraging sign. However, some analysts are of the view that rising export refinance rate may impair the growth momentum. The most perturbing factor is rising energy cost and interest rates are persistently eroding the competitiveness of Pakistani exporters.
While exports are growing at the desired rate, growing oil import bill has been identified as the key reason for growing trade deficit. Consumption of POL products has been increasing persistently in the country. Furnace oil, gasoline, HSD and lubricants consumption have increased significantly during the first nine months of current financial year. According to a report from First National Equities, the consumption increased by 17.2 percent from 7.2 million tonnes to 11.4 million tonnes. While the local production of oil and gas is also increasing, higher import of POL products is ballooning oil import bill. The oil import bill is also growing due to higher prices of crude oil in the international markets.
It has become extremely difficult to forecast the future movement of crude oil prices. One group of analysts says that prices are expected to remain around US$50 per barrel. The recent behavior is also very erratic. Despite the regular assurance of OPEC to inject additional supplies, crude oil prices are hovering on the higher side. It seems that OPEC has also decided to allow the prices to remain around the same level. Other group strongly believes that even if OPEC raises the output, limited refining capacity is a major constraint. It is hard to find out a plausible reason for not expanding the refining capacity.
Besides oil, rising import of machinery is contributing towards higher trade deficit. During July-March 2005 machinery imports were to the tune of US$3.892 billion as against a sum of US$2.512 billion during the corresponding period last year. This translates into an increase of nearly 55 percent. Further analysis indicates that import of textile machinery grew by more than 66 percent. Power generation equipment import rose by nearly 33 percent. The second highest growth was witnessed in mining and construction machinery.
While the growing trade deficit is being hinted a serious concern, some analysts are not willing to accept it a major threat. They say, "The point of satisfaction is that the deficit is due to rising import of machinery and raw materials. Higher oil price is not a unique problem of Pakistan. It is a global phenomena, it may be another thing that it is affecting the developing countries, including Pakistan, more adversely. Every one must keep in mind that days of cheap oil are over. Therefore, unless Pakistan learns to use each drop of oil efficiently, its economy will continue to suffer."
Analysts also suggest that in order to bridge the gap between imports and exports, Pakistan must follow a comprehensive strategy to enhance unit price realization. Exporters have to change their mind set. Instead of trying to export larger volume they should be concentrating on higher value addition, product diversification and exploration of new markets.
Pakistan still earns bulk of foreign exchange from export of textiles and clothing. It has not been able to exploit full potential in carpets, furniture, handicrafts, fresh fruits and vegetables. Enhancing software exports remains a dream. We have not been able to market Pakistan as a preferred destination for tourists.
Lately there was a suggestion that Pakistan should allow import of certain commodities to curb rise in their prices. This may help in overcoming an immediate problem but does not offer a sustainable alternative. Most of the commodities recommended for import have always been produced in surplus quantity. However, production of these commodities often goes down soon after bumper crop is achieved during any year.