Widening trade gap alarmingly high

July 12, 2012

RECORDER REPORT

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Recent data released by the Pakistan Bureau of Statistics (PBS) indicates that the trade deficit has widened to 21.2 billion dollars with exports declining by 4.7 percent to 23.6 billion dollars against the previous year's total of 24.8 billion dollars while imports increased from 40.4 billion dollars in 2010-11 to 44.9 billion dollars last year, a rise of 11.1 percent.

Although, recent data released by the PBS is considered rather suspect not only by independent analysts but also reportedly by cabinet members, trade statistics are not easy to manipulate and their veracity can be taken as given.

To ameliorate the negative consequence of the rise in trade deficit, it is critical to understand the factors responsible for a rise in the trade deficit. The major share of Pakistan's exports as per the Economic Survey 2011-12 is due to the fact that exports are still concentrated in a few items with only three items (cotton manufacturers, leather and rice) making up 61 percent of total exports; while imports, the Survey notes, rose for two reasons namely the price effect (the dramatic rise in the price of oil and products as well as the price of fertilizers internationally are well documented) accounting for 70 percent of the increase in imports for the two successive years under consideration with only 20 percent rise in imports attributable to an increase in the quantity imported.

Pakistani exports have been on the decline for mainly two reasons, one domestic and the other external to our economy. The domestic reasons for a decline in exports are also fairly well documented and include the continuing massive energy shortfall, a major input for most manufacturing units, that accounts for a major decline in large-scale manufacturing output over the last four-year period as well as high government borrowing that is crowding out private sector borrowing with implications for national output. Additionally law and order problems that have spread to settled areas including Karachi, the financial hub of this country, and major cities in Punjab namely Lahore, Faisalabad, and the south of Punjab have exacerbated the problem of industrialists leading to a steady exodus of our manufacturing units to other countries, particularly Bangladesh.

Pakistan's major export items are consumer goods mainly textiles, carpets, leather goods which during a recession are the first casualties in terms of deferring consumption and hence given the ongoing global recession it is little wonder that demand for our exports has declined. Pakistan continues to wait for the implementation of the European Union's two-year trade incentive package that was promised in aid of 2010 flood victims with debt-ridden European countries now arguing that the package, if extended, would compromise their own textile sales.

Raw materials including cotton and cotton yarn as well as food exports including rice and fish and preparations are also major sources of export revenue for this country and they too witnessed a decline.

In contrast, imports rose not only due to the steady rise in the international price of our major imports but also because of the steady erosion of the rupee value vis-a-vis the dollar. Or, in other words, each dollar paid out for imports contributed more to the trade deficit in rupee terms than before.

What is unfortunate is that neither of these negative trends that are responsible for the decline in exports and rise in imports seem to have been reversed or likely to be reversed if the budget document, the economic treatise of the government for the ongoing fiscal year, and predictions made by the International Monetary Fund with respect to the global economy including that of our major trading partners in recent weeks are anything to go by. In short, this disturbing trend is likely to continue until and unless some measures are taken to either promote exports or decrease imports. There is an urgent need to take action to promote exports, through increasing energy supply to export-oriented industry and reducing government borrowing to allow the private sector to borrow, and launch a strategy that is designed to reduce long-term dependence on expensive fuel like furnace oil in favour of exploiting domestic sources of fuel including coal.