AID FOR TRADE
TARIQ AHMED SAEEDI (firstname.lastname@example.org)
May 11 - 17, 2009
Aid for trade will help developing countries prepare for post-crisis scenario, World bank Director General Pascal Lamy said in a press release on Friday. Trade finance will help them grasp trade opportunities that in turn make up economic growth. World over, trade has surfaced as vulnerable victim of global economic slowdown. The World Bank forecasts 9 percent contraction in the global economy in 2009. Foreign direct investment, revenue from tourism, and remittances are falling like prices of commodities and are of serious concern, said Lamy referring to Latin America and Caribbean states. "The current economic crisis is, of course, of major concern to us all."
During three quarters of this financial year, average Pakistan's economic growth rate stayed at 2.5 to 3 percent, which was unprecedentedly low when compared to historical trends. Acute energy crisis, precarious law and order situation, lower export demands, and most importantly contraction in private credits resulted in negative growth in large-scale manufacturing. That what growth in real GDP was registered was attributed to resilience of agriculture sector, according to the review of economic situation July-March FY09 by ministry of finance. The positive outlook drew strength from anticipated bumper wheat crop and above target postings of minor crops and berserk price motivated progress of livestock sector, it reported.
The World Bank recommends trade financing as shield to weather current economic crisis. For developing economies, this is relatively important as these countries are coming under serious liquidity strains and finding it difficult to keep trade and industry operational. Keeping gap of exports and import feasibly shortened, not through just decreasing imports but also increasing exports, require flows of investment in trade activities, which for country like Pakistan, are posing a challenge.
Balance of trade cushion by IMF under $7.5 standby arrangement loan facility provided the Asian nation with tranquilizer to clam down inflammation of current account deficit. Shrinkage of trade deficit compounded with robust remittances brought down current account deficit by $2 billion during July-Mar FY09. Recent G20 pledge of $250 billion over two years for trade finance through IMF and other international financial institutions is a popular step towards creating fiscal space for countries so that they could revitalize dampened demand pressure. Injecting monetary impetus in to industrial downsides can restore demand. In Lamy's words, "trade finance is the oil that keeps the wheels trade turning, so it is essential to ensure it does not dry up".
In Pakistan, large-scale manufacturing witnessed fallout of 5.73 percent during July-February 2008-09. Slowdown in exports was one of the prime reasons of this downturn. In the same period last financial year, the growth rate was positive at 5.27 percent. According to the review, barring one or two major groups all major items posted decline in production such as automobiles (-38.22%), electronics (-22.21%), petroleum products (-8.4%), food and beverages (-6.38%), rubber products (-5.35%) and iron and steel products (-4.65%). The growth in production was depicted in fertilizer (24.29%), glass sheets and plates (17.38%), cement (6.52%), chemicals (4.39%), leather products (3.83%), paper and paper board (3.80%), and engineering products (2.54%).
The prediction is that growth will remain at lower side of the graph. Although commercial banks took safe or sage position in extension of credit to private sector, they increased disbursement of credit to agriculture sector substantially by Rs13.3bn during the period under review. This also led to good production of two major crops cotton and rice, which registered growth of 7.3 percent and 13.5 percent respectively, though production of sugarcane and maize remained below target, down by 18.5 percent and 7.5 percent. While growth of major crops was production driven, it was price-driven in livestock sector as high price of livestock products closed the sector near to annual target. MoF report sees attainability of 3.3 percent growth target by overall agriculture sector of the current fiscal year.
Import contraction unchained adverse impact to industrial production by registering negative growth of 6.6 percent in July-March 2009 despite that oil and food imports were two main catalysts of import bill by 80 percent last year. Exponential fall in prices of crude oil caused decrease in import payment. However, imports of raw materials and in textile group that saw plunge in exports dropped with considerable percentage points. Textile imports fell down by 37 percent to $1.15bn in nine months of current fiscal year from $1.83bn in the comparable period last fiscal year. Negative 4.8 percent was recorded in import of raw materials. Overall, imports depicted a negative growth of 6.6 percent in the period. In July-March, there however was some economically productive uptrend in import bills. For instance, machinery group registered an upward trend in import bill by 4 percent and power generation machineries posted momentous upsurge of 63 percent. This was significantly in quantity terms instead of due to exchange rate disparity. The import coverage ratio that stood at worrisome level of 9.1 weeks on end-October 2008 improved to 19 weeks by April 27, 2009 because of loan of IMF and Bank of China's $500 million.
Perhaps, reasonable growth in agriculture and service sector like financial sector may compensate slowdown in economic growth or may prevent further fall in growth until end FY09 from expected level of 2.5 to 3 percent, but achieving real economic growth next year calls attention of the government towards importance of trade finance to help industries keep running. Improving condition of foreign exchange reserves and easing of liquidity strains give government significant fiscal space to address internal causes of slowdown in industrial production. Trade aids to mend imbalance should be channelized to real economic sector of which manufacturing is core part.