TRADE DEFICIT PROSPECTS

SAAD ANWAR HASHMI
(feedback@pgeconomist.com)

June 25 - July 1, 20
12

Throughout financial year 2011/12, Pakistan's economy faced various challenges in the monetary, external, and real sectors. It has not been viewed a supportive year for business growth. With Pakistan being a net importer, constant devaluation in exchange rate against the dollar now trading around Rs95 per US dollar has increased the cost of importing raw materials which in turn has increased the retail price of products offered in the market. It is inevitable that the rupee-dollar parity is expected to cross 100 per dollar through FY13 with constant pressures on the reserves through import and debt payment.

The GDP is expected to grow and remain around three to 3.2 per cent through FY13. As per the latest report released by the Pakistan Bureau of Statistics (PBS), trade deficit increased to $19.43 billion up to May 2012 and is expected to remain close to $21 billion in FY12. Based on cumulative figures, exports were valued at $21.5 billion and imports $40.93 billion.

Pakistan is a net importer with imports averaging double that of exports which continues to put pressure on reserves. The economy has suffered due to political uncertainty, law and order issues, rise in costs of inputs including cost of electricity, and fuel squeezing margins of exports.

Since the government is financing budgetary deficit through borrowings from the banking system, the crowding out has resulted in high interest rate on advances. Banks are reluctant to lend and primarily practicing "hold and maintain" policy keeping with the macro issues faced in the economy. To avoid such risks, banks are not hesitant towards investment in government securities since the return is guaranteed and considered risk free. There is no possibility for the government defaulting since currency notes may be printed to retire such debt leading to inflation. One such medium for Pakistan to build reserves is through worker remittances averaging one billion dollar a month. However, such remittances cannot be over-relied since the future pattern of inflows is unpredictable. The term resolution for an increase in reserves is through building an export base supplementing imports from those produced locally.

Pakistan's exports are primarily directed towards the western markets. Since the recession due to the Subprime crisis and now the uncertainty associated with the European financial crisis, Pakistan has been competing with regional players including India and Bangladesh for exports, primarily textiles on the basis of both quality and costs.

Textiles constitute a total of 60 per cent of Pakistan's major exports and employs 42 per cent of the workforce, considered a back bone of the economy if exploited to the maximum. Even through, the sector faces cost control issues with respect to input prices and shortage of electricity and gas, apparels along with home textiles remain in high demand on a global scale.

The value added sector decreased by 20 per cent during the given year as Pakistan was not able to compete with regional players through volumetric orders. Based on the latest figures, the textile exports overall has decreased by 9.6 per cent up to May 2012 with textile exports recorded at $11.273 billion. The exports primarily depict more of a price and the devaluation impact along with price corrections by the textile exports based on rise in manufacturing costs. Decrease has been witnessed in yarn, knitwear, bed wear, and readymade garments whereas silk and synthetic textiles have reduced by more than 50 per cent by May 2012 as compared to the same period last year.

Due to reduced demand for textiles and cost pressures, textile imports including raw cotton, synthetic and artificial fiber, and yarn reduced from $2.184 billion up to May 2012 against $2.684 billion in the corresponding period last year.

Import of textile machinery has primarily taken place for replacement of old machinery rather than expansion or enhanced production.

Import of food groups including milk, wheat, dry fruits, tea, spices, soya beans, palm oil, sugar, and pulses, have shown a similar trend as compared to previous year with imports reaching $4.639 billion by May 2012.

Export of food groups including staple foods and vegetables decreased by 3.34 per cent. Chemicals and pharmaceuticals exports have been encouraging with healthy exports of pharmaceutical products and plastic materials. Cement exports increased 7.73 per cent with high domestic demand for construction and demand driven from Afghanistan.

With respect to imports, a critical factor for Pakistan import bill is the international oil prices, which determine the quantum of the oil payments to be made each year. The country imported petroleum products amounting to $13.93 billion up to May 2012 as against $10.46 billion recorded up to May 2011.

With the weakening of the rupee against Yen, the import bill for motor vehicles including completely knocked down (CKD) increased from $1.255 billion to $1.451 billion. The rise in the import bill shows the currency devaluation impact and increased demand for reconditioned vehicles, which are priced lower than new vehicles sold domestically.

The challenge faced by Pakistan is heavy reliance on imports for raw materials to assist production. With respect to food groups, many items are imported which can easily be manufactured locally. Significant efforts need to be in place to provide incentives to industries, which are capable of producing import substitutes to assist in lowering the import bill.

Textile is the strategic sector of the economy. However, it is hampered due to increased finance cost, shortage of electricity and gas, increase in price of raw materials, reduced demand from international markets, and competition from regional players.

Worker remittances are viewed as a positive sign for the economy. However, any adverse impact with law and order issues or political uncertainty may reduce these inflows going forward. Pakistan is likely to remain a net importer in the next fiscal year. However, the trade deficit can be reduced through increase in the export base and reduction in import of commodities and products, which are produced locally.