TRADE DEFICIT LIKELY TO REACH $12 BN AGAINST THE $9.4 BN TARGET

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.

SHAMIM AHMED RIZVI, Bureau Chief, Islamabad
Feb 12 - 18, 2007

It is unfortunate that the external sector's account of the country, which sharply declined during the last financial year (2005-06), continues to be worrisome with no sign of improvement in the near future. The merchandise trade recorded a highest-ever deficit of $ 12.11 billion during 2005-06 against $ 4.5 billion estimated in the budget. From the performance of the first six months (July-December 2006) of the current financial year (2006-07), it appears that we may end up with an equivalent if not higher trade gap.

During July-December 2006 the trade imbalance has sharply gone up to about $ 6 billion during the first half (July-December) of the current fiscal which is about 15 percent higher than the corresponding period of last fiscal ($5.604 billion). During this period, Pakistan's exports totaled $ 8.836 billion and imports $ 14.896 billion against $ 8.047 billion and $ 13.65 billion, respectively, recorded during the same 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 much lower than the expectations of the government during the first six months of the current fiscal 2006-07 against the corresponding period of the previous year. However, Commerce Minister Humayun Akhtar Khan insists that the exports were not falling, but the rate of growth in exports had declined contrary to their expectations. In other words, he is hopeful that situation would improve. 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.

Pakistan racked up a 3.16 billion dollar 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 has been recently announced.

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 trend 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 have 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 12 billion dollars as against the target of 9.4 billion dollars fixed for 2006-07. So far as the 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 trends 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.

The rising trade deficit of the country is undoubtedly going to have serious implications for the balance of payments, particularly on current account and also on the health of the rupee. The trade policy of the country had targeted a deficit of $ 9.4 billion for 2006-07 but if the present trend continues, the gap in merchandise exports and imports could be much more. Since home remittances, privatization proceeds and official transfers, put together, will not be able to fill this gap, the deficit would, in all likelihood, be met by a draw from foreign exchange reserves. The Pak rupee which has already been facing downward pressure against the greenback during the last few months would have to shed more value. Inflationary pressures in the economy would be exacerbated with the falling value of the rupee. Such a vicious circle could lead to a drastic reduction in foreign exchange reserves, sharp contraction in imports, slowdown in industrial activity and growth rate and increase in poverty and unemployment levels. The irony is that economic managers of the country do not seem to be very much worried about the risks inherent in deteriorating trends in trade statistics, probably in the hope that some divine intervention in the form of a sharp decline in international oil prices (much larger than the present reduction) or large capital inflows from unexpected sources would save the situation going from bad to worse. To entertain these kinds of illusions would be of no use and the country has to come to terms with the new reality and find a way to narrow the widening gap between imports and exports on its own.

EXPORTS AND IMPORTS BY COMMODITY GROUPS/ PRINCIPAL COMMODITY
(Million US Dollar)

COMMODITY GROUPS/COMMODITY

EXPORTS

IMPORTS

 

FY 04

FY 05

FY 06

FY 04

FY 05

FY 06

Grand Total

12,313.3

14,391.1

16,451.2

15,591.8

20,598.1

28,580.9

Live animals, animal products

189.4

163.7

245.0

15.8

26.9

58.0

Vegetable products

912.7

1,244.0

1,566.1

692.2

1,091.6

1,127.1

Animal or vegetable fats and oil products

66.4

59.0

106.1

768.3

835.0

819.0

Prepared foodstuffs, beverages, spirits and vinegar and tobacco products

186.7

259.6

254.9

101.9

263.4

944.5

Mineral products

350.6

583.3

971.1

3,426.8

4,437.2

7,053.7

Products of the chemical or allied industries

139.8

258.3

242.4

2,300.9

2,880.8

3,216.1

Plastics, rubber and articles thereof

157.3

286.3

286.0

767.6

1,085.6

1,394.3

Raw hide and skins, leather and Fur skins, Travel goods

732.3

880.1

1,045.4

46.4

73.2

87.2

Wood, corks and articles thereof

12.4

12.6

14.5

42.9

56.9

73.6

Pulp of wood, paper, paper board and articles thereof

21.1

17.4

27.4

286.7

341.9

433.7

Textiles and textile articles

8,643.2

9,378.2

10,468.3

1,010.5

1,053.2

1,295.1

Cotton

2,919.4

3,067.2

3,598.9

576.5

559.6

404.4

Man-made filaments

454.8

273.6

182.1

150.3

40.9

334.4

Man-made staple fibers

98.5

106.2

72.9

118.9

161.5

280.5

Wadding, felt and non woven special yarns ,ropes ,cables and articles thereof

55.3

37.9

43.5

13.2

158.4

22.3

Carpets and other textile floor coverings

231.4

277.8

257.3

10.1

16.0

16.7

Special woven fabrics , tufted textile fabrics and embroidery etc.

20.1

85.4

32.1

16.6

10.2

23.2

Impregnated, coated and laminated textile fabrics etc.

2.0

10.9

4.1

28.4

9.8

44.5

Knitted or crocheted fabrics

54.9

187.2

51.4

11.6

36.3

11.1

Articles of apparel and clothing accessories, knitted or crocheted etc.

1,461.6

1,640.1

1,754.3

6.2

3.9

12.1

Articles of apparel and clothing accessories, not knitted or crocheted etc.

990.4

1,082.9

1,307.2

4.6

5.0

8.9

Other made up textile articles and rags etc.

2,351.5

2,598.4

3,156.5

41.6

5.4

92.8

Others

3.4

10.6

8.0

32.5

46.2

44.2

Footwear, headgear, umbrellas, walking sticks and articles thereof

91.1

142.0

147.8

17.7

25.2

24.4

Articles of stone, cement, ceramic, glass , asbestos and products thereof

43.1

44.5

52.7

109.7

154.7

183.3

Natural or cultured pearls, precious metals, stones and articles thereof

28.2

23.8

21.5

473.3

353.9

572.9

Base metals and articles thereof

115.8

164.8

183.8

945.9

1,591.2

2,409.1

Machinery and mechanical appliances electrical equipments and parts thereof

81.0

144.1

186.3

2,674.8

4,593.1

6,009.1

Nuclear reactors, boilers, machinery and mechanical appliances

47.3

61.1

76.6

1,814.8

2,804.3

3,271.7

Electrical machinery and parts thereof

33.8

83.0

109.8

860.0

1,788.7

2,737.3

Vehicles, aircrafts, vessels and associated transport equipments

33.8

41.5

43.8

1,538.2

1,333.8

2,319.2

Vehicles other than railway or tramway rolling stock etc.

29.6

29.2

38.1

675.9

1,122.9

1,777.4

Others

4.3

12.3

5.6

862.3

210.8

541.8

Optical, photographic medical or surgical instruments, clock , watches musical instruments etc.

138.7

190.9

173.1

211.6

265.2

353.9

Arms, ammunition; parts and accessories thereof

14.5

2.3

0.8

1.2

2.8

5.8

Miscellaneous manufactured articles thereof

350.3

488.4

406.8

114.0

102.0

144.6

Works of art, collectors pieces and antiques

4.8

6.4

7.3

45.4

30.7

56.2

Source : Federal Bureau of Statistics
FBS has switched over to Harmonised Coding System (HS-02) since July 2002, therefore external Trade data is being compiled accordingly

Diversification of exports and production of required volume of value-added goods of international quality are often recommended as measures to boost export levels of the country and narrowing the trade deficit without realizing that this is a long term process. Moreover, exporting units, like other business houses, are profit-maximizing enterprises and are not likely to move in a certain direction indicated by the policy makers in response to mere solicitation. In our context, a better alternative at the policy level would be to allow the rupee to find its own level combined with reasonable containment in domestic demand predicated on tightening of fiscal and monetary policy of the country. Such a policy, besides curtailing domestic demand, would release higher percentage of GDP for the export market. Of course, domestic consumption level would decrease but that is the price the country must be prepared to pay for the viability of the foreign sector.