The burgeoning of trade deficit would not have been too disturbing if it was offset by receipts from other sources like home remittances and provision of services.

SHAMIM AHMED RIZVI, Bureau Chief, Islamabad
Dec 11 - 17, 2006

It is unfortunate that external sector's accounts of the country have sharply declined in the recent past with no improvement in sight in the near future. The merchandise trade recorded a highest ever deficit of $ 12.11 billion during the last year (2005-06) against 4.5 billion estimates in the budget and it is being feared that the situation may not be different during the current (2006-07) fiscal year.

As per July-October 2006 figures released by the Bureau of Statistics, imports stood at $ 9.560 billion against $ 5.551 billion exports, showing a deficit of $ 4.09 billion during the first four months of the current financial year. In view of the last four months figures it seems highly difficult to achieve the target of $ 18.8 billion as provided in the current budget.

While announcing the trade policy 2006-07, Commerce Minister had announced lot of measures to achieve the export target and reduce the import bill. However, there seems no improvement on the ground as the county's trade deficit has risen to over four billion dollars in the first four months (July-October) of fiscal year 2006-07, registering a 17.9 percent increase over the deficit of 3.4 billion dollars during the corresponding period of last year.

This is a cause of worry as imports continue to rise while exports are not catching up. The trend in export of goods remained just 1.34 percent, much lower than the expectations of the government during the first four months of the current fiscal 2006-07 against the corresponding period of the previous year. Commerce Minister Humayun Akhtar Khan, however, insists that the exports were not falling, but the rate of growth in exports had declined contrary to their expectations. In other words, he was hopeful. Earlier last week, the Trade Development Authority of Pakistan (TDAP) formally replaced the Export Promotion Bureau as the new engine driver for exports. Judging by the performance of the EPB, the TDAP has a tough task ahead of it. Already, many observers are saying that the TDAP is just old wine in a new bottle.

Pakistan racked up a 3.16 billion dollars foreign trade deficit during the first quarter of the current fiscal year (July-September, 2006) which was 31.7 percent higher than the deficit of 2.40 billion dollars registered in the same period last year. The worsening of deficit resulted from a sharp increase in imports and a sluggish growth in exports. While imports shot up by 30.3 percent to reach a staggering level of 7.43 billion dollars, exports grew only by 2.8 percent to fetch a total of 4.27 billion dollars. On the import side, Pakistan spent more on petroleum products, machinery, sugar, raw materials and services. On the other hand, there was more than eight percent decline in exports of textile products, including ready-made garments. Other traditional sectors like footwear, surgical instruments, sports and leather products also witnessed negative growth. This was despite the fact that the government had exempted all these sectors from duties and taxes besides six percent subsidy for the textile sector and a package of Rs. 25 billion announced recently.

The burgeoning of trade deficit would not have been too disturbing if it was offset by receipts from other sources like home remittances and provision of services and as a result the current account of the country would have shown satisfactory trends. Unfortunately, however, the behaviour of current account deficit is no better than the trade deficit. This swelling trade deficit is coupled with higher outflows on account of transportation, travel, construction services, royalties and licence fees. Current transfers in the form of home remittances increased but could only partly neutralize the huge negative impact of other items. Even a layman could calculate that the actual developments in the external sectors are totally out of line with the targets fixed by the government. At the present rate, the trade deficit could reach a record level of 13 billion dollars as against the target of 9.4 billion dollars fixed for 2006-07. So far as current account deficit is concerned, it had increased to 5.68 billion dollars in FY 06 from 1.78 billion dollars a year earlier. The present trend could push it to over 10 billion dollars. It may be mentioned that the Asian Development Bank in its last month's Outlook had projected Pakistan's current account deficit at 7.9 billion dollars or 5.5 percent of GDP. Some of the analysts believe that decline in the international price of oil and the likelihood of fall in the import of machinery could reduce the import bill of the country somewhat in the near future. However, it is difficult to be certain or quantify the impact of such a scenario at this juncture.

It will be of no use repeating that worsening trends in the external sector are unsustainable and a matter of great concern. Multilateral donors have also, time and again, cautioned the government about the burgeoning current account deficit as a grey area of the country's economy. It also needs to be highlighted that the options of the government to bridge the widening current account deficit are now more limited. The privatization of public sector units could hardly yield any significant amount as the bungling in Pakistan Steel's self off has put a cork on the process. The political climate in the country is also turning against privatization due to the deterioration in the performance of some of the privatized unites like KESC and PTCL. The flow of foreign direct investment is also not very encouraging for obvious reasons. The implications of worsening external sector trend, to be realistic and candid, are too serious to ignore. It would put further pressure on the rupee and exacerbate inflationary pressures in the economy. In order to bridge the widening external sector deficit, the country has either to borrow heavily and increase its foreign indebtedness or deplete its foreign exchange reserves that are presently at a comfortable level but unable to sustain the ongoing hemorrhage for a longer period.

In the event of depreciation of the rupee, domestic debt servicing would also increase in nominal terms forcing the authorities to impose more taxes and mobilize higher level of revenues. In short, policy makers of the country have no justification to ignore the lengthening dark shadows on the external sector and must remedy the situation before it is too late. It is better to cure the disease at an early stage in order to save oneself from punishing treatment, which is certain to become inevitable at a later stage.