A RECORD TRADE DEFICIT

Just how dangerous is it?

By AMANULLAH BASHAR
May 30 - June 05, 2005

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 last year.

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 the government.

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 observed.

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 this year.

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 in exports.

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 value-added items.

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.

EXPORTS

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 of 2004.

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.

IMPORTS

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 fiscal.

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 million.

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.

OIL IMPORTS

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, respectively.

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 eyes.

TRADE DEFICIT

(In Million US $)

YEARS

EXPORTS

IMPORTS

1984-1985

2491

5906

1985-1986

3070

5634

1986-1987

3686

5380

1987-1988

4455

6391

1988-1989

4661

7034

1989-1990

4954

6935

1990-1991

6131

7619

1991-1992

6904

9252

1992-1993

6813

9941

1993-1994

6803

8564

1994-1995

8137

10394

1995-1996

8707

11805

1996-1997

8320

11894

1997-1998

8628

10118

1998-1999

7779

9432

1999-2000

8569

10309

2000-2001

9202

10729

2001-2002

9135

10340

2002-2003

11160

12220

2003-2004

12313

15592