EDITORIAL: The trade deficit has widened by a whopping 30.56 percent to 27.488 billion dollars July-May 2021 compared to 21.054 billion dollars in the comparable period of the year before - 27 percent lower than the 37.6 billion dollars in 2017-18 and only 13.5 percent lower than the 31.8 billion dollars in 2018-19.
Critics of the severely harsh upfront monetary and fiscal policies agreed with the International Monetary Fund on 12 May 2019 argue that the containment of the historically high current account deficit of 20 billion dollars inherited by the Khan administration to a trade deficit of 27.488 billion dollars today reflects a need to revisit some of the earlier claims.
First, the record high discount rate (13.25 percent) and massive rupee depreciation in 2019-20 led to an undervalued rupee and stifled domestic output while raising the budget deficit to an unsustainably high 8 percent of GDP. Sadly, the usual linkage between an undervalued currency and exports is not apparent in Pakistan as our major export items are heavily reliant on imported raw materials and semi-finished products that were rendered too expensive due to the rupee depreciation and the high borrowing cost made most productive activities economically unviable. True that the high discount rate attracted “hot” money to the tune of a little over 3 billion dollars but this source of inflows is extremely fickle at best and most of these inflows left the country with the onset of the pandemic. Unfortunately, however, these inflows were not sufficient to strengthen the rupee.
Secondly, there is a need today to focus on the trade deficit instead of the current account deficit mainly because raising exports, particularly value-added exports, remains one of the most desired forms of earning foreign exchange. In this context, it needs to be acknowledged that orders were diverted to Pakistan from the much more severely pandemic-hit competing countries like India and Bangladesh: consequently our exports rose from 19.795 billion dollars in July-May 2019-20 to 22.560 billion dollars or 2.78 billion dollars. It is, however, unclear whether this rise will continue once competing countries come out of the pandemic mayhem.
In the ongoing year, Pakistan’s remittances have risen dramatically yet in spite of the executive and the central bank claiming success for these inflows it is unclear whether this trend will continue after the pandemic has been dealt with globally and hence greater attention is required on raising exports on a sustainable basis through some ‘creative’ policy revisions or interventions.
Finally, economists acknowledge that post-pandemic easing of monetary and fiscal policies fuelled growth (projected at 3.94 percent in the current fiscal year) that accounts for a trend evident in Pakistan for decades; notably, growth is accompanied by a rise in imported raw material and semi-finished products. It is, therefore, no surprise that imports rose from 40.849 billion dollars in 2019-20 to 50 billion dollars in the current year or a rise of a little under 10 billion dollars with the largest increase in food and live animals (including a rise in wheat imports to meet domestic shortages and sugar imports to bring the domestic prices of sugar down) - from 282.4 billion rupees in 2017-18 to 371.5 billion rupees in 2019-20. This is attributed partly to policy and administrative failures as well as a dramatic increase in animal/vegetable fats/oils imports which touched the 307 billion rupee mark in 2019-20 – elements of our imports that should compel the government to focus on import substitution policies.
It is, therefore, evident that the benefit of contractionary policies to contain the current account deficit, albeit at great cost to the general public, are now frittering away and therefore there is an urgent need for implementation of major trade policy reforms/revisions.
Copyright Business Recorder, 2021