Merits and demerits

From Shamim Ahmed Rizvi, Islamabad
Jan 31 - Feb 06, 2005

The International Monetary Fund (IMF) has cautioned the economic managers of Pakistan over what it called the mounting trade deficit during the current financial year.

While expressing its concern, the Fund feels that the growing deficit may create problems by disturbing the economic estimates and projections for the year if immediate corrective steps are not taken. The IMF has, however, appreciated the macroeconomic fundamentals which it says are the positive signals regarding overall economic growth in Pakistan.

These observations regarding the state of the economy were made by IMF's advisory team, headed by its Deputy Managing Director, in its recent visit to Pakistan.

Pakistan is likely to face the highest ever trade deficit to the tune of $5 billion at the end of current fiscal year because of an unprecedented growth in imports. It is worth mentioning that apart from IMF's apprehensions, there are some positive aspects as well of the growing deficit because the exceeding imports on account of imports of textile machinery and other trade related accessories would ultimately payback to the economy in the years to come. Hence the situation was not all that bleak was being painted by the Fund officials. The current trend of robust growth in imports was set to widen the trade imbalance of the country much beyond the annual projection of $3 billion in 2004-05.

In the first six months of this fiscal, trade deficit has already reached $2.41 billion and it would increase further during the second quarter (January-June). In 2003-04 fiscal year, the overall trade deficit stood at $3.25 billion. The trade imbalance had shown a rapid deterioration in the second quarter of this fiscal. In the first quarter of this fiscal (July to September), the country sustained a $825.8 million trade deficit, $274 million in July, $287.5 million in August and $264.3 million in September. However, in the second quarter of this fiscal (October-December), the deficit increased by $1.583 billion, $450.7 million in October, $586 million in November and $546.7 million in December.

An official source said that it was a common trend that imports picked up during the second half of every fiscal year and this factor could widen the trade deficit much beyond the official projection in this fiscal.

In the period from July to December, imports have depicted a 26 percent growth, at $8.9 billion, showing an impressive increase of 2.3 billion over imports during the same period last fiscal. He also said that total imports in this fiscal were expected to exceed $17.50 billion, against the annual target of $16.7 billion. In 2003-04, imports settled at $15.45 billion and exports at $12.20 billion, he added.

While briefing the IMF team on foreign trade of the country, the Commerce Minister said that Pakistan's trade and tariff policy regimes had been simplified, streamlined and rationalized over the year in tandem with the government's macroeconomic reform agenda in order to provide a conducive environment for development of the production and manufacturing base of the country. As a result, the country's foreign trade, which used to be around $19.5 billion annually before 2002, was now set to be around $31 billion in 2005, showing a growth of over 57 percent during a short span of three years. More importantly, Pakistan's imports had started showing a breakaway phenomenal growth with a composition of 56 percent industrial raw materials, 35 percent capital goods and machinery and 9 percent consumer goods.

Our government seems to be very proud of the fact and almost never fails to mention that foreign trade as a percentage of GDP and in absolute terms has recently depicted tremendous growth, without clearly stating that most of this growth was attributable to an abnormal rise in imports. It is true that rising imports of machinery and industrial raw materials is a healthy trend but the fact that these imports are leading to a widening trade deficit (about $5.0 billion as against $3 billion projected for 2004-05) should also be a cause of great concern to the authorities. It is clear that items like home remittances and official transfers would not be able to offset the gap of this magnitudes in trade transactions, and according to most of the estimates including those of the State Bank of Pakistan, the country would experience a sizable current account deficit this year.

The continuation of this trend, which is very much on the horizon, has the risk of taking the country back to the old days of depletion of reserves, external borrowings, increased foreign indebtedness and depreciation of exchange rate. The position could become really ugly if home remittances and official transfers reverted to their old levels. Therefore, while concurring with the government that increased imports of capital goods is a positive indicator, there is a dire need to find ways to finance such imports on a sustainable basis like a major jump in export so that the country can spared the adverse consequences that are not envisioned now or are simply ignored.

Actually, the widening trade deficit can be attributed to the increasing oil prices which have gone to the record high. Consequently, the oil imports alone may cost over $4 billion this financial year. Hence there is a need to gear up efforts for reinforcement of the oil substitute within the country. As far as other imports are concerned, that is the sign of growing economic activity which are bound to produce positive results at the end of the day.