PAKISTAN'S CHRONIC TRADE DEFICIT

SYED FAZL-E-HAIDER
July 28 - Aug 03, 2008

Pakistan's trade gap during 2007-08 showed a leap of 52.95 per cent or $7.18 billion from $11.14 billion recorded in the fiscal year 2006-07, according to the Federal Bureau of Statistics (FBS).The economy pulled in imports worth $39.96 billion, which was more than double of exports of $19.22 billion. During the fiscal year 2006-07, imports stood at $30.54 billion and exports at $16.98 billion. This depicts a 30.87 per cent growth in imports, while only a 13.23 per cent in exports.

Last month, the country's trade gap widened to $1.97 billion, up by 1.76 per cent from a trade shortfall of $1.94 billion recorded in May 2008. During the last month, imports went up by 3.64 per cent to $4.02 billion, while exports increased by 5.51 per cent to $2.05 billion over the previous month. Likewise, imports during June 2008 went up by 43.94 per cent and exports by 33 per cent over June 2007.

Former government of Prime Minister Shaukat Aziz had been relying on financing trade deficit instead of making strategy to bridge the gap. Local experts believe that financing trade deficit is not sustainable, as the resources of the country are going to be exhaust in the next two years. Trade deficit will force the country to borrow from donors or the market. If the rising gap is not arrested, the country is threatened to again fall in debt trap and the debt servicing would hit development expenditure. It seems extremely difficult for new economic managers to cover the chronic trade deficit, as the inflow of investment from abroad, which helped the former government meet the country's foreign exchange demand in the recent years, is now on a declining course.

The capital market witnessed huge capital flight during the financial year 2007-08 and the portfolio investment turned negative during July-June period of last financial year. Last month of the outgoing year witnessed a net cumulative outflow of $146.6 million as the total inflows remained at $255 million while the outflows were at $402 million.

Owing to the political uncertainty and law and order problem, the negative situation prevailed throughout the last fiscal year, which was contrary to the fiscal year 2006-07 when the portfolio investment added about $1.9 billion to the total foreign private investment in the country. According to the State Bank, during the last fiscal year the total inflow reached $4.449 billion but the outflow exceeded it at $4.682 billion, thus the cumulative outflow was $233 million.

Present coalition government has sought help from multi-lateral lenders and friendly governments to stave off the economic threats as the country tries to cope with soaring import costs. An Asian Development Bank credit of $810m is reportedly expected to be approved in August and disbursed in September. Foreign currency reserves have dwindled to levels equivalent to less than three months worth of imports as the central bank sold dollars to help oil importers make payments

Pakistan is heavily dependent on the oil imports and its fuel imports represent more than 30 percent of merchandise imports. Rising oil price has ever remained a risk for its economy. The country's widening trade gap is attributed to the recent record rise in oil prices and no substantial increase in major exportable items like textile products during last fiscal year. Pakistan's central bank has already warned that the decrease in export growth and the rise in cost of financing for funding external deficit are the potential risks to Pakistan economy.

The widening trade gap has created increased pressure for the rupee to drop even further.

The central bank is currently engaged in a battle to hold the rupee from free fall against the dollar, as the increased demand for US dollars from oil importers and dealers has put the Pakistani rupee under pressure. The rupee has dipped to record low of Rs70 to a dollar in open market. While the local dealers believe that the rupee will remain under pressure in coming days, the state bank is pursuing an aggressively tightened monetary policy to curb the import demand.

The central Bank is continuing to support the rupee to ensure exchange rate stability, according to the Governor State Bank Shamshad Akhtar. The main measure was a temporary suspension of forward booking of foreign currency for all imports, removing the simplest way for importers to hedge against a weakening rupee. The State Bank has made sweeping changes in foreign exchange regulations to protect the rupee against US dollar by suspending forward cover facility against imports and reducing advance payment against imports to 25 per cent from 50 per cent.

In its trade policy for the fiscal 2007-08, the former government had targeted imports at $29.6 billion and exports at $19 billion with a trade deficit of $10.6 billion. The country achieved its exports target, while surpassing imports target by 35 per cent or $10.73 billion. In the trade policy for the current fiscal, present government has decided not only to increase the country's exports, but also to bring negative growth in imports as to bridge the trade gap. The country's huge trade deficit has contributed over 90 per cent of the current account deficit. The inflows, which are lower than the current account deficit, have made it difficult for the country to arrange more dollars for external payment.

The country has been unable to sustain the modest improvement in the current account deficit witnessed during the first quarter of fiscal year 2008, and it widened sharply in succeeding months.

The decline in the country's foreign exchange reserves also reflects the sharp increase in the current account deficit. Pakistan's foreign currency reserves are depleting rapidly and have dropped by over $6 billion in the last eight months. The foreign currency reserves stood at $14.08 billion on February 15, 2008. According to the central bank, the foreign reserves fell below $11 billion mark on July 12 and reached $10.83 billion compared to $11.12 billion the previous week. The rapid depletion of reserves is quite disturbing for the economic managers as it increased the external debt to $46 billion. The country's foreign debt was also swelled by $10.5 billion in the last six years and currently stands at $45.9 billion.

At the end of last fiscal year, the country's current account deficit reached $14.4 billion, mainly because of very high trade imbalance, according to the State Bank of Pakistan. The trade and services imbalances collectively stood at $21.588 billion, of which trade imbalance was of $15.286 billion. According to the central bank, the oil payments alone put a heavy burden on the country's balance sheet since the oil payments remained around $11.38 billion in the last fiscal. Pakistan paid $7.345 billion for oil import in the fiscal year 2006-07, which means the country paid additional $4 billion against oil payments last year.

The trade imbalance created difficulty for the country to remain in the market with cash for its imports. The new trade policy sets higher export target, but it does not specifically mention the import target. The government should work out a comprehensive plan to curtail huge import.