Widening of trade deficit

The latest news on the country's trade deficit is alarming. According to the latest data released by the Pakistan Bureau of Statistics, the country's trade deficit has soared to an all-time high of nearly dollar 34 billion in the first eleven months (July, 2017 to May, 2018) of the current fiscal year, indicating a rise of almost 13.3 percent. Although exports improved by almost 15 percent to dollar 21.3 billion, import bill recorded a growth of dollar 6.8 billion or 14 percent to dollar 55.3 billion from dollar 48.54 billion in the corresponding period of last year. On a monthly basis, the country's exports grew by a massive 32 percent from dollar 1.620 billion to dollar 2.144 billion while import bill recorded a growth of 15 percent to dollar 5.9 billion from dollar 5.09 billion over the preceding month. According to the Commerce Ministry, imports for the month of May, 2018 showed an increase mainly due to persistently high oil prices in the international market while rise in exports was the outcome of improvement in energy supplies, partially releasing of refunds and cash subsidies under the Prime Minister's Export Package. The government had also imposed additional regulatory duties on luxury items besides restrictions on imports of certain goods to curtail the flows of imports.
It could be easily inferred from the data that though the expansion in exports is a matter of some satisfaction, import growth has more than neutralised the impact of higher exports and resulted in much larger trade deficit. When the PML (N) government came to power in 2013, country's trade deficit was only dollar 20.44 billion; it has been rising since then. The last fiscal year had witnessed the trade deficit rise to an all-time high of dollar 32.58 billion, representing a year-on-year growth of a whopping 37 percent and the present year may set another record of trade deficit of nearly dollar 37 billion. The rising trade deficit had become one of the most serious challenge for the PML (N) government in the last year of its five-year term and would continue to bother the caretakers and the next elected government. Unfortunately, the PML (N) government continued to make tall claims about the performance of the economy, citing some achievements here and there, but did not seriously attend to this vital area of economic management. It imposed regulatory duties on certain non-essential items and did depreciate the rupee to gain competitiveness in the international market but these measures were too little and too late to make a positive impact on the trade deficit. Another unfortunate aspect was that instead of removing the structural imbalance in the trade balance, the previous government continued to prop the external sector through easy options and borrowed from almost all kinds of sources, including from some multilateral institutions, floatation of bonds and borrowings from foreign banks. Such a policy could only increase the outstanding stock of external debt and debt servicing liability of the country in the years to come. Although home remittances are also increasing but the rate of their increase is not as robust as to cover the aggregate trade deficit with the result that current account deficit would also continue to deteriorate. Obviously, if concerted efforts are not made to reverse the worsening trend, rupee could come under further pressure, foreign exchange reserves of the country would decline and inflationary pressures could re-emerge. Some of the recent developments could, in fact, make the situation even worse. For instance, FBR has expanded the list of items on which regulatory duty (RD) would not be applicable, including 10 kinds of fruits/vegetables. This will encourage imports and widen the trade deficit further. Besides, there is a difference of about Rs 3 in the inter-bank and open market rate of the rupee. This will increase the inflow of foreign exchange through hawala/hundi and may reduce the level of home remittances through official channels. The authorities need to preserve every dollar of foreign exchange and increase the flow of home remittances through various measures to bring down the external sector deficit to a sustainable level. The latest step taken by the authorities to curtail the trade deficit was further depreciation of the rupee by almost 4 percent against the US dollar on 11th June, 2018. Hopefully, this will serve to expand exports and contain imports though its impact on the trade balance cannot be quantified.