FOCUS ON EXPORTS TO CONTROL TRADE DEFICIT

SHAMIM AHMAR RIZVI
Jan 26 - Feb 01, 2009

There seems to be no end to negative developments on the external trade sector of the country. This is happening despite the sizeable cut in the oil import bill during the last 2 months of the outgoing year. According to the latest data released by the Federal Bureau of Statistics (FBS), Pakistan's trade deficit hit dollars 9.55 billion during the first half of the current financial year (Jury-Dec, 2008) compared with dollars 8.29 billion in the corresponding period of last year, showing an increase of 16 percent. The import bill reached dollars 19.13 billion as against dollars 16.95 billion last year while exports rose to dollars 9.51 billion as against dollars 8.65 billion during the first half of 2007-08. Obviously, the reason for widening of trade deficit was a lower growth in exports than imports. While imports increased by 12.87 percent, exports went up only by 10.57 percent during July-Dec, 2008.

However, trade deficit during the latest month i.e. December, 2008 at dollars 816 million was lower by 20.67 percent over the same month last year. Imports during the past three months, particularly in December, appear to have slowed down due to a substantial decline in international prices of edible oil, crude oil, steel products and some food items while exports declined because the textile and clothing sector, the largest contributor to the country's foreign exchange earnings, showed a negative growth.

In the trade policy announced in the beginning of the year, exports during 2008-09 were targeted at dollars 22.1 billion. Though the level of imports was not specified, these were expected at over dollars 36 billion and the trade gap was estimated to be around dollars 14 billion. Extrapolation of the trend witnessed so far would suggest a lower level of exports and higher trade deficit during 2008-09 which is a cause of concern due to the likelihood of its negative impact on the current account, foreign exchange reserves of the country etc. However, the latest developments indicate that the trend witnessed so far cannot be relied upon to make a fairly accurate estimate for the whole year. Continued tight monetary polio, depreciation of the exchange rate of the rupee and a sluggish business activity have tended to reduce import demand in the country while a sharp decline in international prices of several commodities like oil and food seem to have reinforced the downward trend in imports.

While this is a welcome trend, the recent slower growth in exports is, nonetheless, worrisome and cannot be easily dismissed as a byproduct of global recession because most of our exportable commodities are relatively cheaper and, as such, their demand is largely inelastic in the world market. Apparently, Pakistan could have earned more from its exports if the authorities had succeeded in removing some of the major bottlenecks like energy shortages and poor law and order situation which is affecting the overall economic activity very adversely in the country. Also, it would have been much more preferable if the recent reduction in trade deficit could have resulted primarily from higher growth in exports rather than the decline in imports.

Stagnation in exports and shrinkage in imports are a dear reflection of reduced business activity and increasing unemployment which could have disastrous consequences for political and social stability in the country. Highly chaotic situation in Faisalabad and unrest in some other urban areas due to energy shortages witnessed in the recent past are early indications of the things which could follow with greater intensity if the level of frustration in the society continues to simmer.

Analysts believe that, under the circumstances, the only option for the government is to bring drastic reduction in luxury imports as no prospect in increase of exports is in sight due to high cost of doing business and frequent power disruptions. Independent economists, including those included in the panel appointed by the Planning Commission have warned the Government that it should immediately take strict prohibitive measures to curb all unnecessary imports.

Curbing imports drastically is the only option as a short terms measure. As long term measures, they suggest an all out well coordinated plan to improve our exports for which they are convinced, there is vast potential.

In order to restrict the level of imports the Government has taken some measures. It has recently imposed additional duties on more than 370 items and State Bank has enhanced LC margin to 100% on import of Luxury items. These measures are not enough in view of the seriousness of the problem; they maintained and suggested a total ban on import of all non-essential items at least for a period of one year. They are of the view that through prudent exploitation of national resources and planning we can boost our exports to cut our trade deficit drastically. There is a vast potential and exports surplus available in textiles, carpet, leather and sports goods provided necessary incentives to these industries.

Agriculture is another sector with huge unexploited potential. A country that is currently footing $5 billion bill on food imports could in fact reduce it to $1.5 billion, plus export agricultural products of around $5 billion in one year if the government pays proper attention to this sector. The legal system relating to agricultural marketing is in favor of trade ad industry that marginalizes the farmers. This is the reason that high commodity rates have not benefited farmers much. Productivity of most of the major crops of Pakistan farmers is much below the global standard.

Another neglected sector from export point of view is the services sector which has big potential. Export of services accounts for about 30% of exports worldwide. But unfortunately in our country neither the Ministry of Commerce nor the TDAP have much expertise in this area. In the trade policy for 2005-06, the then commerce minister, Humayun Akhtar Khan, identified export of services as one of the corner stones for rapid export growth. Presently, the efforts related to export of services remain unfocused and fragmented. With the possible exception of the software export board (SEB), the agencies entrusted with the task have neither the required resources nor the expertise. Unfortunately no body exists to determine the national comparative advantages and select priority areas and target export markets.

Exports of engineering and construction services from Pakistan have significant potential. If properly facilitated, its exports can reach $2billion per year by 2010. The expertise and resources created by exports will enable Pakistani contractors to undertake projects at home that are currently being executed by foreign contractors. This will bring total balance of payments support to about $2-4 billion per year. There are a number of Pakistani contractors already working abroad. In the past, these contractors could not gain strength because of weakness of the construction industry at home. All we need is the kind of facilitation provided to Chinese, South Korean and Turkish contractors by their respective governments. With out harnessing our export potential in different sectors we cannot balance our external trade.