PROACTIVE APPROACH NEEDED TO TACKLE TRADE DEFICIT
The country's import bill rose by 13.38% to $7.428bn during July-Sept 2006-07 as compared to $6.551bn in the same period last year owing to rising imports of petroleum products, vehicles and mobile phones.
KHALIL AHMED, Senior Correspondent
Feb 12 - 18, 2007
Undoubtedly, the surging trade deficit brings about serious implications for the economy of a country. Shortfall in exports and increasing dependence on imported items cast direct impact on the overall economy of a country for which the concerned authorities need to adopt proactive approach. Trade deficit at times can be the product of high economic growth of a country as well, however, the darker side of the phenomenon is graver and needs not to go unheeded. Recently, the surging trade deficit in many large and small economies has been attributed to the escalating oil prices across the globe. Oil prices increased from mere $20 a barrel in 2002 to $78 a barrel until recently which became the major hurdle in the progress of many economies in the world. Moreover, the international oil prices dipped to about $53 a barrel last month and have again surged to around $59 a barrel at present.
Having experienced the mammoth trade deficit due to huge fuel bill and import of vehicles, mobile phone sets, food items, etc. during the last fiscal year, half-yearly trade deficit of the current fiscal is being discussed by many these days in our country. One could recall that just a few years back during the 2001-02 fiscal year, half-yearly trade deficit stood at mere $425 million. However, half-yearly trade deficit of the current fiscal is the matter of billions of dollars. Lots of concerns were expressed last year regarding the trade deficit of Pakistan which reached around $12 billion during 2005-06 fiscal year. And the current fiscal year also seems to be ending with similar figures as according to the Federal Bureau of Statistics the July-August trade gap during the current fiscal totaled $2.132 billion. It is to be noted that Pakistan's import bill rose to $7.428 billion during the first quarter (July-Sept) of the current fiscal year. The trade deficit phenomenon has been witnessed not only in Pakistan but also in various countries.
At the end of the first half of the current fiscal year, India's trade deficit ballooned to $24.6 billion and it has been mainly attributed to the oil imports. Due to the robust economic growth in India at over 09 percent, the country's energy needs have increased which led the oil imports zooming to $28.66 billion at the end of the half year of the current fiscal. The US trade deficit in April last was $63.4 billion as oil prices surged to nearly $71 per barrel. Last October's deficit of the US was $58.9 billion, the steepest fall since December 2001. Large trade deficit is not a new thing in the USA. Even it went up in December 1998 by nearly 11 billion dollars which was a record in nine years. The UK's trade deficit remained unchanged at £4.4 billion each in July and August last. According to a report, during August last, the goods trade deficit in the UK was £6.7bn, including a £2.5bn deficit with EU countries. Overall, the value of goods exported from the UK rose to £19.3bn in August while imports totaled £26.1bn.
For trade in goods alone, last September's deficit of the UK was £6.6 billion. According to a report last year Japan posted its first monthly trade deficit in five years, and its biggest in 23 years. The trade balance fell to a 348.9 billion yen ($2.95bn; £1.7bn) deficit in January 2006. A report quotes that during 2003 Australia's worst drought in a century pushed its trade deficit to its highest level in more than two years in November 2002, as agricultural exports faltered. The deficit had increased for 12 successive months and was over A$1 billion for the first time since August 2000.
Rising oil price during first half of the current fiscal was a major contributor to our trade deficit. Pakistan imports around 80% of the total oil consumed in the country.
According to a report, Pakistan imported over 350,000 barrels a day in 2006 and domestic oil production stands at 50,000 barrels a day. Pakistan's oil consumption is increasing with every passing year, which fuels the trade deficit. It is being said that the total oil import bill during the current fiscal will be over $7 billion. Oil import bill has seen a big increase every year for the last three to four years. The import bill of petroleum products rose to $5.957 billion during the fiscal year 2005-06 as against $3.626 billion in 2004-05. The rising demand of oil is due to more demand of energy and increase in the number of vehicles, particularly during the last few years.
It is essential to see how we can be less dependent on the imported oil and what measures should be taken in the short and long terms. Growing demand of electricity in our country is one of the reasons for more import of oil. Though the concerned authorities have started looking for alternate options, yet the problem does not seem to be subsiding. On the one hand it is presumed that we have electricity shortfall and measures are being taken to tackle the situation but on the other hand the concerned authorities have recently declared that there is no shortfall of electricity, rather the country has 874MV electricity in excess at present. It has also been pledged that over 17,000 villages will be provided electricity in the near future. According to a report, our country is facing a shortfall of 2,000 MW at present and a 50 per cent increase in the demand is expected in the next two years. A report says: "The power shortage that has been estimated to remain in the range of 1000-2000MW during the current year is likely to cross 3,000MW next year and to increase to about 5,300MW by 2010".
Last month, an agreement was signed with an Iranian company for the purchase of 100mw of electricity for Gwadar. The demand is on the rise which will compel us to import electricity in the days to come, leaving us with perhaps further increase in the trade deficit. The question is how will we meet the rising demand in the days to come? A report says: "Pakistan's gas reserves are 32.8 TCF at present with reserve-production ratio in the order of 27 years - domestic production is not expected to grow substantially. The power sector demand represents 41 per cent of total gas consumption".
BALANCE OF TRADE
BALANCE OF TRADE
Balance of Trade = Exports + Re-exports - Imports - Re-imports Source : Federal Bureau of Statistics
It is widely accepted that thermal and hydro-electric plants leave us with dependence on import option and at the same time this option is an expensive proposition due to rising oil and gas prices across the world. The government has announced a comprehensive alternate energy development policy and it is hoped that it would work efficiently. In the meantime, one of the options for electricity generation is to exploit wind energy. It is said that wind energy's global-installed capacity is around 70,000MW at present and many countries including USA, China, India, Germany, Spain, Denmark, Argentina, etc. are investing in this type of energy in order to reduce reliance on imported gas and oil. Pakistan has got potential for the generation of wind power for which the coastal areas of Sindh can be of great help in achieving self sufficiency in electricity production to some extent.
Apart from importing petroleum products, import of cell phone sets and vehicles and food items are also the major reasons for the increasing trade deficit.
According to the Federal Bureau of Statistics, the second biggest component of the import bill was of machinery group, which stood at $7.026 billion during the July-May 2005-06. Over one billion dollars were spent on the import of vehicles during last fiscal year. A local newspaper reported: 'The country's import bill rose by 13.38 per cent to $7.428 billion during the first quarter (July-Sept) of 2006-07 as compared to $6.551 billion the same period last year owing to rising imports of petroleum products, automobile and mobile phones. In the telecom sector, the import of mobile phones increased by 57.3 per cent to $198.956 million during July-Sept as against $126.466 million the same quarter last year. The second biggest component of the import bill in value was machinery group. However, it declined 4.31 per cent during July-Sept 2006 over last year mainly due to a 30.78 per cent negative growth in import of textile machinery followed by 31.36pc fall in agriculture machinery and implements and 21.58pc in other machinery."
More and more dependence on import and decrease in export of our goods and services is a matter of grave concern, which should be addressed immediately for the sustainable growth. At present, our foreign exchange reserves are over $13 billion, which is a healthy sign. With this the expectation of healthy figures of remittances, reaching around $5 billion during the current fiscal, will further bring good news. However, the liberalized imports of food and other essential items for the reason of combating inflation is a matter of concern and it needs to be addressed promptly.