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While the role of stellar remittance inflows has been roundly acknowledged in providing stability to the external account in a challenging time, what has largely gone unnoticed is the small-but-significant contribution from Pakistan’s services trade. This piece attempts to highlight that aspect and hopefully give some food for policymaker’s thought when it comes to making Pakistan trade-resilient in the future.

In the twelve months of the pandemic so far (March 2020 to February 2021), calculations based on central bank data show that Pakistan’s services deficit (services exports less services imports) stood at $1.9 billion, compared to $4.1 billion of deficit in the prior period (March 2019 to February 2020). This lower deficit resulted in a gain of about $2.2 billion for the current account.

Not bad to have a windfall of over two billion dollars on this count, especially given the context that incremental remittances in the same period were $4.2 billion. The services trade also compared favorably with the merchandise trade. In the same analysis period when services deficit significantly narrowed, the goods trade deficit had swelled by an additional $1.2 billion to clock nearly $23 billion.

What stands out is the services exports being more resilient than services imports during the crisis. Exports of services in the March 2020 to February 2021 period stood at $5.4 billion, lower by 6 percent year-on-year. Historically, annual services exports have been rather sticky, hovering in the $5 billion to $6 billion range. So it begs question as to why this level was nearly maintained during an active pandemic.

The star services exports segment was the ICT sector, whose proceeds increased by 35 percent year-on-year to reach $1.5 billion in the 12-month period ended February 2021. The incremental exports of roughly half a billion dollar under these digital exports (classified by SBP as “Telecommunications, Computer, and Information Services”) is partly explained by the fact that Pakistan’s software houses were able to get more foreign business despite pandemic.

Consequently, ICT’s share in services exports jumped to 33 percent, from 20 percent in earlier periods. However, other segments had a visible decline during the period under review, as international travel restrictions on physical movement of personnel, and economic slump abroad reduced business. These segments include business services, transport services, construction services and government services.

Meanwhile, imports of services declined by 26 percent year-on-year (a drop of about $2.5 bn), to reach $7.3 billion in the analysis period. Historically, imports of services in the same analysis period had averaged about $11 billion. As foreign travel restrictions came online in March 2020 and intensified afterwards, these imports were bound to go down. This resulted in some noticeable savings for forex and Pak Rupee appreciation as people couldn’t travel for business, tourism, education or religious pilgrimage.

The leading service import category is ‘transportation’, accounting for a third of Pakistan’s services imports. Reflecting marked reduction in passenger air travel abroad, this segment declined by 26 percent year-on-year to come down to $2.6 billion in the period ended February 2021. Spending on foreign travel was down by 59 percent year-on-year to $707 million in the same period, as spending on business and personal travel-related expenses went down sharply due to travel restrictions.

Together, these two segments – transport and travel – provided nearly $2 billion in import savings in the analysis period. A drastic fall in imports of construction services and financial services rounded out the service import slump. On the flip side, expect most of these imports to recover faster when the global economy gets going again sometime later this year.

While the ICT sector helped provide some fillip to service exports, those earnings need to be enhanced many times over to cover for import deficit and provide another vital financing source of current account. It won’t happen overnight, but recent government measures, including amending foreign exchange rules and setting up special technology zones authority, are encouraging. Similarly, measures to open up Pakistan for foreign tourism for leisure and purposes may start paying off after the pandemic eases.

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