Dec 31, 2007 - Jan 06, 2008

Of late, Pakistan's foreign trade has assumed grave proportions as the persistent trade deficit has soared to the new highs during the current fiscal year. Imports during the first five-month period of the fiscal year 2007-08 (July-November 2007) amounted to US$ 14.584 billion against exports worth $ 7.382 billion, resulting in net trade imbalance of $ 7.202 billion--the worse ever in the history of Pakistan.

In comparison, imports during the corresponding period of the last year (July-November 2006) were of $ 12.329 billion and exports of $ 6.890 billion, resulting in trade deficit of $ 5.439 billion. Each month the import growth exceeds that of exports thus steadily widening the trade gap. As the current trend continues and imports persistently increases at the same pace in subsequent months in relation to exports, the trade deficit has to widen further. Consequently, imports for the whole year, ending 30th June 2008, are projected at $ 34 billion whereas exports target of $ 19.2 billion can be achieved at best, resulting in trade imbalance of around $ 15 billion.

Looking back, it is observed that exports during 2002-03 were to the level of US$ 11.160 billion in relation to imports that amounted to $12.220 billion, more than 18% compared to any of the past three years. Trade deficit during 2002-03 amounted to $ 1.060 billion. Imports again registered substantial increase during 2003-04 amounted to $ 15.592 billion in relation to exports of $ 12.313 billion. It is observed that trade deficit in the year 2003-04 had reached $ 3.279 billion that was three times of the figure registered during 2002-03.

Data released by the Federal Bureau of Statistics (FBS) reveals that exports during 2004-05 amounted to $ 14.391 billion in relation of imports of $ 20.598 billion causing trade deficit of $ 6.207 billion. Trade deficit at the end of year 2005-06 further swelled amounting to $ 12.130 billion as imports during the year amounted to $ 28.581 billion against exports worth $ 16.451 billion. Again, trade deficit went up sharply to $ 13.564 billion in 2006-07 when Pakistan exports were $ 16.976 billion and imports amounted to $ 30.540 billion.

During the last five years trade deficit persistently increased not mainly due to petroleum (oil and its products as a single commodity item) import bill as generally perceived, but because of continuous large-scale import of transport, engineering and capital goods. The hard fact is that major share in overall imports consistently remains that of engineering goods alone plant, machinery, equipment, components and spare parts. In fact machinery group contributed in the range of 30% to 42% towards total imports during the years 2001-02, 2002-03 and 2003-04. In comparison, minerals, fuels, lubricants and related material (as categorized by the FBS) were to the level of 28%, 26% and 21% during these years, respectively, which remained significantly less than the share of capital goods. In succeeding years however the share of machinery group reduced considerably, basically due to high oil import prices.

Out of Pakistan's total imports of $ 11.443 billion during the period July-October 2007 oil import bill stood at $ 2.859 billion. In comparison, import of transport and machinery group amounted to $ 3.163 billion. The machinery group alone has occupied share of $2.195 billion or over 19% of total import bill. Analyzing the break-up of imports during the period, the following position emerges with regard to import of machinery and equipment. Telecommunication equipment (including mobile phones) accounted for $795.443 million, power generation machinery and equipment $ 208.027 million, textile and leather machinery $ 145.057 million, office machines and computers $ 84.848 million and construction and mining machinery $ 72.819 million. Other items related to electrical machinery and apparatus---$ 257.417 million, tractors, agricultural machinery and implements---$ 48.259 million and machinery and equipment for other industrial sectors--- $ 583.271 million constitute the group imports excluding transport.

The trend of large-scale import of machinery will continue, in future too, as the government's policies related to promoting investment in the power, petroleum, cement and fertilizer sectors are being implemented successfully. The government has reserved an additional amount of $ 3 billion for the import of textile machinery for further modernization of the industry under textile policy. The oil, gas and petroleum sector has attracted foreign direct investment to the extent of $ 5 billion. Likewise, Power Policy 2002 has been successful in attracting $ 5 billion investment already while another $ 10 billion investment is in the pipeline. Cement industry has embarked on an ambitious plan with investment of billions of dollars, and a few plants still continue to expand their existing production capacity.

Sadly, the investors continue to import a large number of machinery and equipment, in spite of the fact that local capacity and capability for manufacturing exists. Most of machinery, equipment and components for power generation, petroleum, cement and fertilizer sectors are being produced locally, as announced by the Central Board of Revenue periodically, but the mechanism to support indigenous machinery is not effective. Again, capacity and capability exists with the domestic engineering industry to designing and manufacturing of additional items of machinery that are currently being imported or envisaged to be imported, such as textile machinery and power generation equipment. On the other hand, selected sectors, such as oil and gas companies and refineries, are given concessions to import all the required machinery and equipment for their projects even if produced locally and that too duty free.

This situation has resulted in worsening the trade deficit, continued reliance on foreign sources, and above all, under-utilization of existing facilities with the engineering industry. Efforts made by the local engineering industry, mainly in the public sector, to enter into the production of new machinery items for textile and energy sectors were rather discouraged in recent past. Progress of engineering industry, or capital goods industry, is the key to social and economic progress, and it needs to be given due importance. It is catalytic in achieving import substitution, export enhancement, high degree of value addition, optimal use of agriculture, mineral and other resources, large-scale employment, and forward and backward linkages with other economic sectors.

Investment in the engineering sector has been classified as one of the priority areas under the policy in vogue, but practically not much is being done in this direction rather various sectoral policies are implemented at the cost of local engineering industry. Import of plant machinery for setting up engineering units was originally allowed duty free, but later a tariff of 5% has been made applicable. This further discouraged investment in the engineering sector. Another negative factor is that of the privatization of the public sector engineering units. Most of the industrial units privatized in the past are closed down, whereas almost all units privatised were operative at the time of privatization and profitable too. The remaining units, now on privatisation list, may face the same situation and thus the technological development achieved in these units will go down the drain.

Thus, if we continue to procure plant and machinery from abroad instead of utilizing our own engineering and manufacturing facilities and capabilities, the country's balance of payment position would further worsen in future. There is a definite need that concrete efforts are made for effectively promoting use of indigenous machinery for all industrial sectors, for which the government would be well advised to consider adopting concrete measures without delay. The two commodities, that are petroleum products and edible oil, constitute one-third of the import bill, the prices of which are not manageable by the government. But import substitution of machinery group is certainly achievable.

(The writer is former Chairman of State Engineering Corporation, Ministry of Industries, Production and Special Initiatives, Government of Pakistan).