EDITORIAL: Pakistan Bureau of Statistics (PBS) data for January 2021 indicates a 9.89 percent fall in exports compared to December 2020 – from 2.366 billion dollars to 2.13 billion dollars – with the trade deficit narrowing by 1.44 percent to 2.6 billion dollars in January against 2.639 billion dollars in December 2020. Total exports July-January 2020-21 were 14.2 billion dollars while the comparable figures for the year before were 13.49 billion dollars with the deficit of 14.96 billion dollars in 2020-21 against 13.820 billion dollars in 2019-20.
Exports have risen as per government sources due to: (i) a rupee-dollar parity that made import of raw materials financially viable again; however this raised imports – from 27.3 billion dollars July-January 2019 to 29.2 billion dollars in the comparable period of 2020. In other words, while exports rose by 8.1 percent during this period imports rose by 14.85 percent – a trend that is projected to rise unless policies are revised; and (ii) the diversion of many orders from India reeling under the onslaught of Covid-19 to Pakistan – a situation that Pakistani exporters have taken advantage of but, at the same time, it is relevant to highlight the fact that several textile exporters have complained recently that the gas load management plan would seriously impact on their ability to meet orders.
This data indicates two rather disturbing elements. First and foremost, the upfront severe contractionary policies implemented in compliance with terms of the International Monetary Fund (IMF) programme in 2019-20 (pre-Covid) - including a discount rate of 13.25 percent and a tax target of 5.5 trillion rupees - reduced the current account deficit with its impact on imports including raw material imports much greater than on fueling exports the rupee depreciation notwithstanding at a great cost to the productive sectors. This resulted in a massive reduction in demand for credit (the GDP was downgraded to 1.5 percent last year), a very high inflation rate impacting negatively on the general public’s pocketbook (projected at 13 percent in the budget) and last but not least a rise in the budget deficit with implications on the government borrowing from the domestic market (domestic debt rose from 16.5 trillion rupees to 23 trillion rupees in two years), internationally (total debt envisaged by the economic team pre-Covid-19 was 38.5 billion dollars in 39 months alone – a historic high). Business Recorder had repeatedly argued that reforms agreed with the International Monetary Fund should be more phased out to minimize their significant negative fallout but to no avail.
Post-Covid-19 while governments around the world supported expansionary policies Pakistan’s economic team leaders have managed a relaxation in their pre-Covid contractionary policies. The prevalent 7 percent discount rate is about half the earlier 13.5 percent yet it is well above the consumer price index of 5.7 percent and core inflation of 5.4 percent in January 2021 as per the PBS (though the State Bank of Pakistan, to its credit, has announced low borrowing costs for some productive sectors, particularly major exporters). Tax target at 4.9 trillion rupees presupposes a rise of GDP well above the rate of 1 percent projected by the multilaterals and even the 2 percent optimistic rate projected by the government.
Secondly, the current account deficit continues to register a positive trend this year and this is attributed to a massive rise in remittances. Again research carried out by multilaterals as well as the State Bank of Pakistan indicates that remittances are likely to decline in months and years to come mainly due to global factors and therefore reliance on this item may decline.
Apart from the contractionary policies exports remain hostage to access to utilities and their frequent rate rises that make our exports uncompetitive internationally. Foreign policy also plays a role in exports and in this context it is relevant to note that our rice exports, previously the bulk of basmati rice was exported to the Middle East, have declined by 38 percent in the current fiscal year though the Chairman of Rice Exporters Association of Pakistan noted that “Chinese buying of Pakistan’s non-basmati rice kept our exporters busy in September and December 2020.”
As the current account deficit has been contained the focus of the government must shift towards growth in the economy for which it shall have to engage with the IMF for appropriate waivers as well as a gas load management plan that does not seek to penalize the country’s productive sectors. It is critical to remember that the trade deficit is not only a function of Covid-19 but of monetary and fiscal policies as well as those being implemented in the power sector.
Copyright Business Recorder, 2021