EXTERNAL TRADE

FOZIA AROOJ
(feedback@pgeconomist.com)

June 4 - 10, 20
12

Pakistan's trade deficit - the gap between exports and imports - widened by 45 per cent this fiscal year compared with a year earlier. This dismal situation of the trade deficit, which is ballooning relentlessly, exhibits the deteriorating current account position of the country. It is exerting further pressure on the government as it seeks to pay back loans to the International Monetary Fund (IMF) secured during its earlier 2008 debt crisis.

The growth rate has dipped to 3.7 per cent during FY 2011-12 as compared to the target of a little above four per cent. Exports fell short of target causing a higher than expected trade deficit of $18 billion. The cumulative trade figure shows that exports during July-April 2011-12 were $20.5 billion, while in the corresponding period of the last fiscal year, exports were $20.46 billion. Consequently, the export target of $25 billion projected for the current fiscal year has not been achieved.

According to the Economic Survey of Pakistan 2011-12, the current account balance has deteriorated mainly due to sharp increase in oil prices and import of 1.2 million metric tons of fertilizer this year. Imports grew by 14.5 per cent and stood at $33.1 billion during first ten months of the year. The current account deficit stood at $3.4 billion, which was largely because of high oil prices and import of fertilizers. Imports' bill saw substantial increase after petroleum products continued to increase in the international market with the result of US-Iran tension. The petroleum products expense continued to swell on its increasing domestic consumption in the absence of compressed natural gas.

There has been immense pressure on rupee exchange rate causing serious balance of payment situation and also fearing that pressure on Pak Rupee might take it to Rs100 a US dollar in the months to come. This situation is further aggravated by the tension between Pakistan and US relations given the fact that Washington remains the biggest donor to Pakistan. Furthermore, changing economic scene of the world economy has not been conducive to Pakistan economy. The rupee's sharp slide, coupled with continued double-digit inflation, has hit hard the country and its economy, including both the formal and informal sector. The declining value of the rupee means government debt owed to overseas lenders in US dollars has automatically increased.

Textiles account for most of Pakistan's export earnings. However, the continuing global recession is leading to a cut in demand from key markets like Europe and the United States. But, failure to expand a viable export base for other manufactures has left the country vulnerable to shifts in world demand also. The value of raw cotton has also declined to reach almost half in the international market. Besides cotton, the volume of textile made-ups also recorded decline on account of lower production. Export of textile and clothing sector remained below $12 billion by the end of this year.

The central bank reported the current account deficit in July-Feb 2011-12 stood at $2.952 billion compared with a deficit of $194 million in the same period last year. Even the rising flow of remittances, which recorded over 28 per cent increase, had failed to contain the ballooning current account deficit because of decline in export proceeds during the period under review. Alarmingly, the exports also witnessed a decline in terms of rupee reflecting that export proceeds did not get advantage of depreciation of the rupee in the past few months.

Another underlying reason of worsening trade deficit is the ever-increasing burden of debt servicing. Debt servicing payment increased steeply by 72 per cent in the third quarter of the financial year 2012 on the scheduled repayment of International Monetary Fund loans and huge amount on account of external debt liabilities. According to the State Bank of Pakistan (SBP), debt servicing principal payment to international lenders and multiple exchange expenses surged to $912 million in January to March 2012 as compared with the previous quarter's amount of $530 million, showing an increase of $382 million on quarterly basis. The rupee will remain under pressure if the foreign exchange will continue to decline on the repayment of debt servicing and foreign exchange liabilities.

Furthermore, domestic political instability also affects trade deficit. Failure to explore and exploit its own oil and gas resources to its full capacity has led to relying on imports to meet the growing energy demands in the country.

Pakistan is a member of several international organizations such as ECO (Economic Cooperation Organization), SAFTA (South Asian Free Trade Area), WIPO (World Intellectual Property Organization) and WTO (World Trade Organization). We need to explore new horizons and capitalize on existing opportunities to reduce trade deficit.

Tragically, there are little hopes that the government can control the macroeconomic situation if it is successful to meet its set target to increase foreign exchange through stuck coalition support fund and auction of 3G.

On the other hand, the widening deficit of current account and trade may fail to stabilize the situation until the government moves to take the structural policy measures to increase its earning resource at domestic and international level through taxes, exports, and foreign investment.

Alone strategic planning and the determination of the government and the nation are required for gaining a competitive edge in the global markets in order to achieve a trade surplus.

Government needs to increase revenues by widening of tax base, applying minimum tax regime, reducing corporate tax rate, taxation remittances, targeted subsidies, ensuring energy sustainability, macroeconomic reforms, reducing circular debt, and ensuring budgetary safeguards for industry after opening up of trade with India.