The factors responsible for this huge deficit were higher outflows on account of transportation, travels, insurance, construction services, royalties and licence fees.

SHAMIM AHMED RIZVI, Bureau Chief, Islamabad
Aug 14 - 20, 2006

The State Bank of Pakistan, in its latest report released last week, has shown concern over the ballooning trade deficit, which has fuelled the current account deficit reaching a "worrisome level of 4.7 percent ($ 5.683 billion) of the gross domestic product (GDP), posing a threat to the economy simultaneously on both internal and external fronts".

According to the latest figures released by the Federal Bureau of Statistics, the country's trade deficit during July 2005 to June 2006 has surged to $ 12.112 billion - highest ever in the history of Pakistan. Experts during this period figured out $ 16.469 billion, showing a shortfall of $ 441 million while imports surged to $ 28.581 as against $ 20.598 billion during the corresponding period of last year, showing an increase of 38.76 percent and thereby bringing the trade deficit during the financial year 2005-06 to the alarming figure of $ 12.112 billion or Rs. 725.285 billion.

It is worth mentioning that owing to higher than expected trade deficit, the Finance Ministry revised the target for current account deficit and set it at $ 5.137 billion (4.2 percent of GDP) against the budgeted target of $ 2.7 billion (2.19 percent of GDP) for FY 06. But, at the end of the year, it breached the ministry's target by a sizeable margin.

According to independent economic experts, this external disequilibrium in the shape of current account deficit may have a significant impact on the value of the rupee - a matter attracting keen attention around the country. Besides, it would translate into a large increase in Pakistan's net foreign debt position. A large and growing public debt could also eventually put pressure on interest rates and crowd out private investment.

The government's economic managers, on the other hand, are of the view that Pakistan is enjoying an economic boom, and the current account deficit was manageable by borrowing from abroad, receiving remittances, drawing down from reserves and inflow of investment.

The country has witnessed this current account imbalance as trade deficit (in goods and services) jumped to $ 12.84 billion during FY 06 from just $ 7.81 billion in FY 05. The trade deficit figures are arrived at using free on broad value of imports and exports.

The central bank's data shows that goods' imports stood at $ 24.984 billion, whereas exports totaled $ 16.50 billion, thus leaving a trade imbalance of $ 8.44 billion. The services account also witnessed a large imbalance of $ 4.40 billion during FY 06 as inflows under this account stood at $ 3.748 billion and outflows totaled $ 8.15 billion. The factors responsible for this huge deficit were higher outflows on account of transportation, travels, insurance, construction services, royalties and license fees. Pakistan had to spend $ 2.856 billion on transportation account, whereas its earning under this head was only $ 1.06 billion. Thus the net deficit in the services account due to chartering of vessels for importers, exports shipment was $ 1.79 billion.

Another factor responsible for big services' account deficit was a net outflow of $ 1.185 billion on account of overseas traveling. Pakistan had to spend $ 1.40 billion to finance personal and business-related traveling abroad of individuals and groups, whereas it earned only $ 216 million under this account. The same applies to spending on insurance and royalties and license fees paid to international organizations and their employees operating in Pakistan. The imbalances in trade and services were so large in FY 06 that the current account turned negative despite a strong buildup in current transfers. Net current transfers rose to $10.62 billion during the period, from $ 8.768 billion in FY 05. Current transfers went up as Pakistan received $ 4.60 billion in workers' remittances or foreign exchange sent home by overseas Pakistanis, up from $ 4.17 billion in previous year. A big increase in foreign currency deposits, held by resident deposit holders also boosted current transfers. However, it declined to $ 312 million against $ 521 million primarily because of the stable rupee.

Independent economists have also questioned time and again that how long the trade deficit would continue on that trajectory without disrupting the economy? And, how much longer can Pakistan continue to spend more than it earns, and support the growth? And, are the inflows sustainable in the long run.

At a seminar recently held under the auspices of Social Policy Development Center, speakers warned the economic managers of the country that the current role of trade deficit was "enormously high" and posing a serious threat to the economy of the country". They were of the opinion that the ballooning trade deficit during the last two years is not the liberalization of trade but a much higher level of domestic demand beyond the productive capacity. This imbalance needs to be corrected to bring the trade deficit under control. As one of the speakers remarked: "It is beyond doubt that open market mechanism is always good for an economy but for a country like Pakistan there should be targeted intervention".

The other remedy is to achieve a quantum jump in the experts through diversification and funding new market. Despite all rhetoric of the government functionaries nothing tangible has been done in this regard so far. Despite the claims by different Musharraf-led regime functionaries over the past seven years that they were pursuing a proactive policy to diversify the country's exports, it is only now that the Ministry of Commerce has started preparing a strategy to capture the markets of the African continent that has 59 countries. Pakistan's Roving Ambassador to Sub-Saharan was quoted in Press Report as exhorting FPCCI members at a meeting to capture the African markets that have so far remained outside Pakistan's export loop. Kidwai has asked the Pakistani business community to establish their offices in African countries so that they are able to tap the huge marketing potential of the continent. Incidentally, there are only nine Pakistan embassies and two trade offices covering 41 African countries, and only one branch of a Pakistani bank in Nairobi.

Africa, though largely poor, remains a market of immense potential for Pakistani exports. There are some problems relating to delayed payments etc. but this does not mean that an entire continent should be allowed to stay off Pakistan's export map. A positive thing about Africa is that profits are simply fantastic there, and exporters with expertise in forex handling can achieve great success. As Kidwai pointed out in his briefing that South Africa, Sudan, Angola, Sierra Leone and Ethiopia are endowed with vast marketing potential for Pakistani exports. He has rightly urged Pakistani businessmen to establish branch offices in African countries because their on-the-spot presence will help smoothen many snags that can otherwise crop up in the delivery and receipt of consignments and payments. Secondly, our exports can gain a competitive edge in the international market only when the government enforces strict quality control over the production process. It should show no laxity or leniency whatsoever in this regard. Thirdly, it should go in for large-scale value addition to impart to the country's exports a competitive edge in the world market. Any investment made in this direction will further strengthen the country's manufacturing base, and will pay rich, long term dividends.

The suggestions made are important and useful which should be taken up at a high policy-making level. There is clearly a need to rethink our export strategy to broaden our export outreach. Instead of keeping the focus mainly on Western markets equal stress should be laid on Africa and Latin America, etc. Let the loss suffered so far be made up through redoubled efforts.