FOREIGN TRADE: CONSUMPTION-LED GROWTH TILTS IN FAVOUR OF IMPORTS

The trade deficit target was revised upward by $ 2.8 billion to $ 12.2 billion about a month ago but it seems that even the revised target would not be achieved.

SYED M. ASLAM
Feb 12 - 18, 2007

In the last four fiscal years ended June 30, 2006, Pakistan's foreign trade has registered a phenomenal increase and it is expected to continue its upward thrust during the current fiscal if its performance during the first half of the current fiscal ended December 31, 2006, is any indication. It increased from $ 19.475 billion in 2001-02 to $ 23.380 billion in 2002-03 to $ 27.905 billion in 2003-04 to $ 35.989 billion in 2004-05 and to 45.049 billion in 2005-06, depicting a healthy increase of 20 per cent, over 19 per cent, over 25 per cent and over 29 per cent, respectively.

In the first half of the current fiscal ended December 31, 2006 the country's foreign trade stood at $ 23.331 billion indicating that though it would still manage to outperform last year's performance it would grow much less briskly compared to last four years. Phenomenal as it is the growth has come at the cost of bludgeoning trade deficit because imports have increased at a much bigger pace than exports. Pakistan's trade deficit has swelled almost twelve-fold from fiscal 2002-03 to 2005-06- from $ 1.060 billion in 2002-03 to $ 3.279 billion in 2003-04 to $ 6.207 billion in 2004-05 and to $ 12.113 in 2005-06. This depicts a year-to-year increase of 209 per cent in 2003-04, 89 per cent in 2004-05, and almost 95 per cent in 2005-06 when imports overran the target of $ 22.5 billion by $ 6 billion while exports failed to achieve the target of $ 17 billion touching only $ 16.468 billion figure.

And during the first half of the current fiscal (July-December 2006) the trade deficit swelled to record 6.459 billion depicting an increase of 15.28 per cent over $ 5.603 billion in the corresponding period of previous year. This means that if exports fail to pick up during the second half, of which a month has already passed, the trade deficit would touch another record high of $ 13 billion this fiscal. If that happens, and chances are that it will, it would render the official exercise of target-fixing obsolete: In the trade policy 2006-07 announced on July 16 last year the government projected a trade deficit of $ 9.4 billion- exports at $ 18.6 billion and imports at $ 28 billion- for the current fiscal. The trade deficit target was revised upward by $ 2.8 billion to $ 12.2 billion about a month ago but it seems that even the revised target would not be achieved.

During the first half of the current fiscal import bill touched $ 14.895 billion over $13.650 billion same period the previous year while exports managed to record a marginal growth of 4.83 per cent to $ 8.436 billion over 8.047 billion in the comparative period last year. If international prices of oil, the top import expense, has not fell substantially in the first half of the current fiscal compared to $ 78 per barrel in the July-December 2005, a period which also witnessed large imports of edibles such as sugar, wheat, pulses etc., the situation during the first half of this year would have been much worse in the context of trade deficit.

The major cause of the swelling trade deficit is that imports have increase much more rapidly than exports. On year-to-year basis exports depicted a highly erratic performance - an increase of 22 per cent, 10.33 per cent, 16.88 per cent and about 14 per cent in fiscal 2003, 2004, 2005 and 2006, respectively. On the other hand, imports registered much higher and consistent growth of 18.18 per cent, 27.59 per cent, 32.11 per cent and over 38 per cent during the same period. During the first half of this year exports remained depressed across all sectors despite given huge subsidies by the government and have thus far failed to depict any signs of gaining momentum despite commerce ministry's signing a number of preferential trade agreements with a number of countries, including China.

The immense increase in Pakistan's foreign trade in so short a time could be explained in many ways depending on one's frame of reference and line of reasoning. There are many, and they seem to be in majority, who see the incessantly increasing trade deficit as a matter of grave concern. There are others, particularly the top decision makers of the country, who say that the increasing foreign trade in spite of rising deficit is an indicator of economic growth and the affluence that it has brought.

That brings us to an extremely vital question: Is trade deficit really a menacing thing? The simplest answer to this question could be: it depends on a number of factors the most prominent of which are: (a) Is a particular national economy strong to absorb imports that surpass exports without being a threat to its industrial, agricultural base as the case may be? And (b) the classification of imports itself. In the developed countries economists can afford to argue about the implications of trade deficit, both positive and negative. Critics in the United States have been asking the people to stop seeing trade deficit as something bad. They say that public understanding and media reporting about trade matters are flawed because it focuses on the producer who considers exports as good because it represent sales while imports are bad because it represent competition. And these critics say that it is an altogether a different matter from the prospective of consumers for whom imports mean greater choice and lower prices, a competition to force local producers to keep the prices down and access to products not produced domestically. These critics also say that when foreign companies, importing products to the United States, get dollars they buy increased American goods and services or even invest there thereby bringing back the dollars back to the United States.

It is clear that the pro-import doctrine advocated by critics in the United States has no significance to Pakistan simply because trade deficit means different things to different economies depending on their strength, or for that matter weakness; industrial, agricultural, trade or any other edge that they may have, the per capita income, etc. Trade deficit, thus, should be a matter of utmost importance for a developing economy like Pakistan that has to work hard to earn every paisa that it could and save every paisa it may. All of us are familiar with the consequences when one spends more than one earns i.e. living beyond one's means. This is a rule that applies not only to individuals but also nations.

Trade deficits are known to put immense pressure on current account deficits and this is also true for Pakistan. As is, the government issued the Global Depository Receipts (GDRs) of Muslim Commercial Bank and Oil and Gas Development Corporation and plans to sell its stake in the Pakistan State Oil, the largest oil marketing company in the country, to a strategic buyer by March this year and has also announced to issue GDRs of United Bank, National Bank, Muslim Commercial Bank (additional GDR) and Kot Addu Power company this year. Many say that all these activities are aimed at financing the current account deficit, which touched an uncomfortable level of $ 5.2 billion last year, through privatization, foreign direct investments and remittances from overseas Pakistanis.

And the last has been great help. Overseas Pakistanis sent $ 2.568 billion in the first half of current fiscal (July-December 2006) that depicted an increase of almost 25 per cent over $ 2.055 billion same period the previous year.

It is easy to see that if the government had not issued the GDRs and had the overseas Pakistanis not sent such substantial volume of remittances the current account deficit would have been far larger and much more critical.

One major concern is that while Pakistan's foreign trade has increased phenomenally its ratio as percentage of Gross Domestic Product has increased only marginally and that too erratically. According to official figures trade as percentage of GDP was 25.8 per cent in 1999-2000, 28 per cent in 2000-01, 27.2 per cent in 2001-02, 28.4 in 2002-03, 29 in 2003-04, 31.6 in 2004-05 and an estimated 34 per cent in 2005-06.

LOW EXPORT BASE

Pakistan's exports are highly concentrated in few items, namely: cotton, leather, rice, synthetic textiles and sports goods. These five categories of exports account for almost three-quarter of total exports and include cotton manufacturers followed by leather, rice and synthetic textiles and sports.

Just as the exports are concentrated to few items the direction of Pakistan's exports are also concentrated to a few countries- namely USA, Germany, Japan, UK, Hong Kong, Dubai and Saudi Arabia that account for 50 percent of the country's overall exports. The United States is the single largest export market for Pakistan, accounting for 27 percent of its exports followed by the United Kingdom, Dubai, Germany and Hong Kong. Japan as Pakistan's export destination is fast vanishing as less than one percent of its exports entering Japan. Pakistan needs to diversify its exports not only in terms of commodities but also in terms of markets. Heavy concentration of exports in few commodities and few markets could cause serious export instability.

Pakistan is one of the top cotton growing countries of the world but it enjoys a tiny share in the global textile market. Though cotton and cotton-textile exports still make the bulk of exports, Pakistani textile industry is struggling to maintain whatever share it enjoys in the post-WTO era. In the first half of the current fiscal textile exports registered a marginal increase of $ 220.493 million or just 4.3 per cent to $ 5.318 billion against $ 5.097 billion during the comparative period of previous year. Exports of cotton yarn, knitwear, readymade garments, tents, art silk and others grew by 9.66 per cent, 13.29 per cent, 2.49 per cent, 206.13 per cent, 127.87 per cent and 2.97 per cent, respectively. However, exports of raw cotton, cotton cloth, bed wear and made-up articles decreased by 23.53 per cent, 10.5 per cent, 6.41 per cent and 6.87 per cent, respectively.

And a recent development may pull the rug out of sports goods imports as world renowned sports accessories maker Nike has reportedly decided to pull out of Pakistan. Nike served a notice to Sialkot-based Saga Sports to cancel all its contracts of making footballs after March this year due to child labour related issues. Sialkot produces around 40 million soccer balls a year and has about 3,000 soccer ball stitching units. Around 80 per cent of all the hand-stitched footballs produced in the world are made in Sialkot. Sports good exports from Silakot earn the country around Rs 19 billion a year the bulk of which comes from football exports. The termination of contract by Nike would thus have an extremely destabilizing impact on Sialkot's sports goods industry in particular and the country's economy in general.

REGIONAL COUNTRY VARIATION ANALYSIS
VALUE IN 000 $

S. NO.

COUNTRIES

JULY-AUG. 2006-07

JULY-AUG.
2005-06

CHANGE

. .

EXPORT

% SHARE

EXPORT

% SHARE

VALUE

%

1

U.S.A.

812,567

28.61

733,945

27.49

78,622

10.71

2

CHINA

81,701

2.88

65,664

2.46

16,037

24.42

3

INDIA

40,372

1.42

65,132

2.44

(24,760)

(38.02)

4

BANGLADESH

37,789

1.33

33,567

1.26

4,222

12.58

5

SRI LANKA

27,286

0.96

23,289

0.87

3,997

17.16

SOURCES: EXPORT PROMOTION OF PAKISTAN

KCCI PRESIDENT'S COMMENTS

Talking to PAGE President of Karachi Chamber of Commerce and Industry Majyd Aziz expressed concerns at growing trade deficit, saying that while China and India have managed to enhance their exports "we have made a record in trade deficit and will also not achieve the export target of US$ 18 billion-plus. "Where do we stand? What is the effect of this trade deficit? Would we be able to bear this negative pressure?"

He answered the self-posed questions by attributing the main reason of our trade deficit to oil bill that he said "puts a big dent in Pakistan's treasury. "We are very casual in our policy to import this and that. We are so enamored with foreign stuff that we dish out over a billion dollars in importing luxury items and goods of conspicuous consumption. Do we need foreign bottled water, cereals, honey, juices, and other such stuff? Why do we import junk cars? Why do we have to import third-rate cloth from China, India and Indonesia? Why do we need lots of shoes and sneakers from China? Some may argue that all this is essential as there is demand but there is not enough production here. Poppycock, I say. These are cop-out expressions we like to make in our drawing rooms. Our domestic industry is going to the dogs and we, like Nero, are fiddling away."

He also attributed the share of imported components in our exports as another major reason putting it at over 37 per cent. He also called lack of initiative on the part of exporters as a major detriment to increased exports. "We are not excited enough. We do not have that intense fire in our bellies to go and put the 'Made in Pakistan' stamp on the global market. We are followers and not trendsetters. We wait for the tide to flow instead of navigating the uncharted waters. Our exporters are solo pilots and not willing to join up and make institutionalized efforts. Thus we are vulnerable in markets where our presence is not worth writing home about.

"We do face formidable competition from the regional exporters who have many advantages over us. Their governments are two steps ahead in providing all kinds of incentives. Wal-Mart has sales exceeding US$ 300 billion and our share of this is peanuts because we are not on the same wavelength with this juggernaut. India and Bangladesh will soon encroach upon our niche export product, the home textiles. Our home textile sector would be tottering in a couple of years under severe pressure because we will not have too many big buyers clamoring for our goods.

"The country is primarily dependent on imported oil to keep its wheels moving. We are vulnerable and we have to pay the piper. We do not have new dams to generate hydel power so we import furnace oil and diesel for our power companies and captive plants. We have limited gas reserves so we are looking towards brothers Iran and Turkmenistan. We are still unsure whether we would get gas from them at the right price.

"The burgeoning trade deficit should be a matter of concern. We cannot just depend on capital inflows such as privatization proceeds, foreign direct investment, overseas Pakistanis' remittances, foreign grants or aid, and of course loans from multilateral agencies. We may have to depend on investment bonds issued to foreign entities to sustain the trade deficit pressure. We are aiming for over US$ five billion FDI this year. But, then with our cost of production going higher and higher, we still would be up the creek without a paddle. We should also start taking out our worry beads because we are still not in the high-value export stage. We are still in the lower tier of value addition with our focus on the lower end of the market.

"We are also susceptible to economies of scale. So we cannot depend on the present export scenario to tackle the trade deficit. Let me give you one recent example. As one of the founders and as Vice President of Pakistan Japan Business Forum, I am proud to state that we recently had a meaningful joint dialogue in Karachi and Islamabad with our Japanese counterparts. Japanese Parliamentary Secretary for Economy, Trade and Industry, Ms. Michiyo Takagi, who had especially come for this dialogue, said that it would prove very successful and yield positive results on the economic cooperation between the two countries. "There is a new thinking in Japan regarding Pakistan and it is hoped that more effective measures would be introduced to increase investments and trade between the two countries." She said there is dire need to promote diversifications in the export products to improve the quality of products, to strengthen marketing strategies and above all to enhance human resources. My point is that if we get our act together we may be able to harness the billions in FDI that is available around the world. We have to be very sensitive to what others want and desire. FDI will not wait for us. Other countries have already padded up and are in the field. We are still deciding who will be in the 11-man squad for the match.

EXPORT FROM PAKISTAN
VALUE IN MILLION $s

MONTH

03-04

04-05

05-06

06-07

CHANGE OVER TARGET

CHANGE OVER EXPORT

.

.

.

.

TARGET

EXPORT

VALUE

% ACHIEVED

VALUE

%

JULY

890

1,184

1,269

1,440

1,342

(98)

93.2

73

5.7

AUGUST

1,039

1,188

1,401

1,563

1,499

(64)

95.9

98

7.0

SEPTEMBER

1,039

1,113

1,483

1,566

1,416

(150)

90.4

(67)

(4.5)

OCTOBER

1,007

998

1,325

1,434

1,282

(152)

89.4

(43)

(3.2)

NOVEMBER

862

909

1,113

1,243

1,380

137

111.0

267

23.9

DECEMBER

1,045

1,130

1,455

1,564

1,517

(47)

97.0

62

4.3

JULY-
DECEMBER

5,881

6,522

8,047

8,810

8,436

(374)

95.8

389

4.8

JANUARY

1,094

1,148

1,225

1,494

 

 

FEBRUARY

906

1,166

1,229

1,422

MARCH

1,024

1,347

1,513

1,673

APRIL

1,096

1,298

1,443

1,656

MAY

1,064

1,378

1,484

1,694

JUNE

1,249

1,532

1,510

1,851

JULY- JUNE

12,313

14,391

16,451

18,600

SOURCE: EXPORT PROMOTION OF PAKISTAN

"I would conclude by saying that the government should not wait for loans and privatization proceeds to offset the trade deficit. The industrial sector needs support, the non-development expenses of the government need pruning, the superfluous and frivolous imports need to be discouraged, and more importantly, fast-track initiatives by the government would mean the difference between a manageable trade deficit and an alarming situation. The only privilege we don't have is time. We cannot wait. We must act now. The writing is on the wall."

Is there anything left unsaid to highlight the importance of controlling the rising trade deficit that is expected to touch the $ 13 billion mark this fiscal which would be $ 800 million more than the imports of $ 12.22 billion during the whole of 2002-03.

The swelling trade deficit also poses another important question about what kind of economy we intend to be - industrial, agrarian or just trading. With the imports growing at much faster pace to overrun exports at such a huge margin trading seems to be the intended destination. In a consumption-driven economy there are signs that trade is the intended target indeed.