Trade deficit: the cost of growth

Exports increased by 10 percent in 4MFY18, but this recovery pales in comparison to the larger picture, one of trade deficit. In 4MFY18, trade deficit stands at $12 billion against $7 billion worth of exports, according to data reported by Pakistan Bureau of Statistics (PBS). By this column’s earlier estimates, it appears trade deficit will double the exports in FY18, as imports march forward.

Imports often bring on mixed feelings: rising incomes and infrastructure activities are leading to greater demand for machinery, vehicles, construction inputs and food items. That’s growth! On the other hand, exports are unable to cover for these imports and there are few other sources of income leading to a cash strapped economy.

Combinations of policies introduced recently by this government are targeting imports, especially those they term luxurious or unessential. Regulatory duties (RDs) have been imposed for a variety of product lines including food items and vehicles while additional measures such as 100 percent cash margin and requirement of showing money trail have been imposed for the import of cars.

So far, these measures have not yielded any substantial tightening on the dollars spent in imports, though we might have to wait a while to give a judgment. However, elasticity of goods should be kept in mind here. Many food items as well as luxury vehicles—specially motorbikes and high end cars—have an inelastic demand so changes in prices may not result in a sequential decrease in demand. After all, Honda and Toyota dealers are today taking a good premium from customers on timely car delivery and car buyers are paying up!

Imports grew by 22 percent in 4MFY18 even when machinery imports dulled down after much of the CPEC related power machinery arrived during FY17. Machinery is down to 19 percent of all imports with the lion’s share back into the bag of petroleum products. Vehicle imports now constitute nearly 7 percent of all imports remaining unaffected despite the aforementioned measures to curb them.

In fact, the increase in imports of vehicles would be even higher by the time we wrap up FY18. Lucky and Nishat with Kia and Hyundai respectively have finalized their plans for their assembly plants and will soon start importing CBU vehicles into the country. They are exempted from RD. The demands for cars and parts as well as commercial vehicles are greater than ever before. Cheaper financing, higher incomes and infrastructure development are all driving this sector. Existing carmakers, authorized dealers of commercial and consumer vehicles and new players will all be importing more, not less.

It is possible that used car imports will decrease due to the measures imposed on cars coming through gift and baggage schemes but the subsequent increase in vehicles and parts by new players and existing automakers could balance out the affect.

As for food imports, palm oil once again is front and center growing by 35 percent in 4MF18 due to the rise in consumption, greater health awareness as well as a diversion of consumers who traditionally used ghee and ghee products. In fact, the Punjab Food Authority (PFA) will ban the manufacture and sale of banaspati ghee by July 2020 which would in turn further boost edible oils imports. Similarly, steel and steel products grew by 25 percent in 4MFY18, despite RDs and anti-dumping duties imposed on a variety of steel products. There is nothing stopping these imports.

Exports on the other hand are still writing a tale of woes. In SMEs; exports of carpets, gloves, leather products, sports goods and footwear have all fallen. In food; vegetables and fruits exports have come down. This is especially troubling because we are comparing these from last year which was undoubtedly one of the worse years for exports.

Meanwhile, the value added products in textile have performed reasonably well while rice exports also increased, though volumetrically, they grew only negligibly. This means rice exports snatched a higher per unit price for basmati but it is not great in the long run given competition from Indian exporters.

The government is in the process of revising the Strategic Trade Framework Policy which did precious little to boost exports in the past. Policymakers must heed advice from experts on building a framework where exports go up and consumers don’t have to compromise on imports. That’s ideal, even if implausible.