Circular debt show on the trade deficit

Based on the provisional figures for imports and exports, released by the Federal Bureau of Statistics, the cumulative balance of trade from July-August, 2011 showed a deficit of $3,328 million. This deficit is largely attributable to the accelerated growth of imports compared to that of the exports. Pakistans imports have continued to increase since the start of FY12. Imports during July -August, 2011 totalled $7,495 million (provisional) as against $6,249 million during the corresponding period of last year, showing an increase of 19.94 percent. The main contributors towards this increase include the food and petroleum groups, which increased by 28 and 40 percent, respectively; in value terms in July-August 2011 compared with the same period last year. In the food group, although palm oil increased in quantity and value terms, the latter was more dominant with an increase of 59 percent in the first two months of FY12, compared with the same period, in the last fiscal. A decline of 16 percent in the value of imported machinery was experienced at the start of the current fiscal year, compared with the same period last year. The dominant factor behind this result was the decline of 51 percent in the value of power generating machinery imports in August, compared to the same period last year. This comes as no surprise given the current economic slowdown and the barriers to investment in Pakistan including the political instability and a dismal law and order situation. Added to these issues is the problem of circular debt that is a strong deterrent against new investments in the power sector. Petroleum group, another major contributor to the import bill, has increased in value terms at the start of FY12. This owes to high international oil prices and inelastic local demand that added to the already inflated import bill. In this group, petroleum products increased in value terms by 91 percent in the two months of FY12, compared with the same period last year. While there has been an increase in the quantity of petroleum products over these two months compared with the two-month values of last year; an equal decline in quantity terms is seen in the petroleum crude for the period of July-August 2011 compared with the same period last year. This highlights the problem of circular debt and the sub-optimal utilization of the countrys refineries. On the export front, results show an improvement of 20.3 percent, increasing from $3,465 million in July -August 2010 to $4,167 million (provisional), during the same period this year. In the textile group, there is overall growth but a closer look at the data from July and August suggests a decline in textile exports, month-on-month. This is due to the decline in cotton prices that have affected the value of exports in Pakistan. Exports of value added textiles have however increased in the two months of FY12 compared with the same period last year. These include readymade garments (increased by 21 percent in quantity and value terms) and knitwear (increased by 10 percent in quantity terms and 13 percent in value terms). Last years floods in China and Pakistan affected the world cotton supply and led to increases in the cotton prices. With no floods in China this year, the global crop output will likely be higher. According to analysts, cotton prices are expected to decline on the back of growth in global cotton output this year, which will lead to a 10 percent fall in textile prices and impact the optimistic export target set by the Pakistan government for FY12. Rice exports have fallen by 32 percent in quantity terms and by 14 percent in dollar terms in the first two months of FY12 compared with the same period last year. Going forward, rice prices are expected to rise in the future, having a favourable impact on the export bill, next year. With expectations of an inflated import bill due to food and petrol imports, along with a lukewarm future on the export front; the balance of trade deficit seems set to shoot up.