The February figures of exports, imports and balance of trade have just been released. They tell a story of extreme contraction in the volume of trade. Cumulatively, over the first eight months of 2022-23 the dollar value of exports is down by 9% and of imports by almost 24%.
Consequently, the trade deficit has been reduced by $10.5 billion, representing a very big fall of almost 33%. This is the fundamental reason for the large decline in the current account deficit of almost $8 billion.
The basic question is to what extent this is the result of falling international prices and how much is due to a decline in trading volumes? In the case of imports if the containment is more in quantities than this raises the valid issue of the impact of the use of controls and restrictions of import LCs by the SBP.
Further, if on the other hand, export prices have fallen significantly then this may be partly because of under-declaration of prices by exporters and remittance of part of the export proceeds through other channels.
We first examine the trends in imports. Cumulatively, imports have fallen substantially by over $12.3 billion from July to February, 2022-23. During the month of February, imports were only $4 billion. This is the lowest monthly import up to now in 2022-23. Is this the consequence of import controls being applied even more intensively leading to a decline of as much as 31%?
This requires examination of import volumes. Wheat import has fallen by 41% and of cotton by 25% in February. The impact of the floods on loss of the cotton crop is 35%. This will require a nearly doubling off the volume of cotton imports in 2022-23. Instead, they have increased by only 6% in the first eight months. This does not auger well for future output by the textile sector. Similarly, wheat production is also likely to be lower.
A reduction in wheat imports will lead to escalation in domestic prices. Already, the price of atta has escalated by 56% in February 23. A policy of cutting back of wheat imports will be extremely harmful.
The major contributors to the decline in the value of imports of $12.3 billion are machinery, transport equipment, agriculture and chemicals, petroleum, and metals with shares in the fall of 29%, 12%, 31%, 9% and 12%, respectively.
The decline in machinery imports is clearly the response by the private sector to the quantum jump in interest rates. Transport equipment imports have been curtailed by big increases in taxes and limitations on imports of large cars.
However, the big area of concern is the fall in the volume of imports of petroleum products of 34% and of crude oil by 14%. PSO, the major importer, has apparently a problem of huge receivables resulting in no liquidity for financing imports. Are we heading, sooner than later, to a shortage, especially of motor spirit and HSD oil? Already, OCAC has warned that this is likely to happen.
A new development has also been observed. This is the recent fall in palm oil import volume by 6%. A continuing area of concern is the 38% decline in the import of medicines. Are we heading for a domestic shortage in many items including petroleum products, wheat, medicines and other essential consumer goods and industrial inputs?
The LCs’ restriction policies have gone too far, especially during the period after September 2022 when an overvalued exchange rate actually encouraged more imports. There is no doubt that a market-determined exchange rate policy is preferable. It will exert less pressure on essential item imports which have a lower price elasticity of demand. Arbitrary cuts in imports can then be avoided.
Turning to the exports, we are seeing an acceleration in the process of decline. Exports have fallen by as much as 22% in February and 14% in January, as compared to the average drop during the eight-month period of 9%, including a 6% fall in food exports and in textile exports of 11%. The latter group of exports has fallen by as much as 29% in February.
The issue as to whether the fall is due more to lower volumes or lower prices. An extreme example is that of the exports of readymade garments.
The volume has increased by a massive 65% but the dollar value of these exports has actually fallen by 5%. In effect, this implies that the unit price has slumped by an unbelievable 70%. This is probably a clear indicator of under-reporting of the value of exports for reasons mentioned above. Here again, a market-based exchange rate policy would have greatly reduced the incentive for diverting export earnings to other channels.
Overall, the SBP Governor has indicated recently that the projected level of the current account deficit in 2022-23 is $7 billion. This will represent a decline of over $10 billion in relation to the level in 2021-22. It will require a reduction of almost 50% in the current account deficit from February to June.
The large containment in the current account deficit will certainly help in stabilizing the balance of payments position and is probably one of the targets agreed with the IMF.
However, it is essentially that this be achieved through a market-determined exchange rate policy and not through discretionary and arbitrary cuts imposed on LCs. It may also be appreciated that the big cut in the current account deficit will only be achieved by a quantum depreciation in the value of the rupee. This will put pressure on the already rate of high inflation in the country.
The relevant authorities also need to ensure that in weeks and months to come there are no shortages in essential items like petroleum products, wheat, cotton and medicines. Otherwise, the economy will also come to a grinding halt and the living conditions of the people will be badly affected.
Copyright Business Recorder, 2023