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Reduction of current account deficit (CAD) to one fourth is manifestation of stabilization. The cumulative CAD of five months this year is less than a monthly deficit of most of the last year. The import compression is doing the trick. The side effects of the policy are in terms of LSM decline of 5.6 percent in 1QFY20 on a falling base. It’s about time to slowly bring life to the economy. The problem is that overall increase in exports and remittances combined in 5MFY20 at $379 million is almost equal to reduction in imports of mere road motor vehicles at $346 million.

Within reduction of trade deficits in goods of $5,366 million, the fall in imports is $4,907 million and the surge in exports is $459 million. The gap has to be thinned or import reduction is to be substituted by domestic goods. Merely cutting down demand is suffocating for the economy.

The benefits of lower CAD can soon be eroded if the economy cuts a little lose. Some want the interest rates significantly down. Can Pakistan afford any pick in automobile sales at this time? It is a hard call. Without lifting exports substantially, the revival of economic activities could lead to another crisis. The ADB has estimated constraint balance of payment growth of the country at 3.8 percent.

The highest import reduction is in transport group (38% or $410mn) - within it the fall is steepest in completely knockdown units (CKD) (44% of $304mn). The sector demand is probably most sensitive to interest rates as consumer finance is primarily in auto and one company claims that around one fourth of its sale is on car finance. The imports of auto parts or basic raw material is reflecting in other sectors such as steel, rubber etc.

In absolute terms, the biggest contributor to lower import bill is petroleum group – down by 32 percent or $2,197 million. The fall is not only attributed to slowdown in economy but also due to falling oil prices. According to PBS data, decline in both crude and petroleum product is at 12 percent and 14 percent respectively in quantity, while in dollar terms the fall is at 28 percent and 26 percent. It is pertinent to note that some of hydrocarbon imports (coal) is not reflecting in this head. Coal has replaced some of the import of furnace oil. Thus, the fall in actual hydrocarbons is even less if coal import is brought into the equation.

In case of exports, the textile exports in value term actually declined by 2 percent or $138 million. The prices of value added products are lower and has diluted the increase in some sub sectors. The star is garment where the volumes are up by 34 percent and increase in value at 8 percent. The industry is running at full capacity and many players are in expansion phase. The country has to import cotton of around $1.5 billion due to poor cotton crop this year. This will dilute the impact of better textile exports.

The reemergence of engineering sector is heartening to see. The exports within it are up by 102 percent to $177 million in 5MFY20. Transport equipment is driving the growth. Auto parts are picking up slowly. The number is low, but potential is huge. Part manufacturers should divert the main focus from catering to domestic industry to exports.

The push has to be on promoting exports in areas other than textile. For that, competitiveness in the economy has to be revived. Amongst other factors interest rates is one. Lowering rates can stimulate industrial growth given the rest of the economic policies are aligned. But before the impact is visible in exports, surge in imports would become a pain.

It’s advisable to tread slowly, and support import substitution industries along with export promotion. SBP is creating a bias towards exports through enhancing subsidized credit to exports where the aim is to have a scorecard with higher numbers to be assigned to new exporters attaining the service, higher incentive for incremental exports, and in accessing the new markets.

At the same time as a stop-gap solution, there should be some kind of encouragement for import substitution as well. For example, the mobile phone imports increased by 57 percent in 5MFY20 to $391 million. Pakistan is importing 100 percent of its smart phones (annual estimate of 14mn units) and 60 percent of basic 2G phones (market size estimate of 20mn units).

In India, around 90 percent of its domestic cellular phones are domestically produced, and the country has export target of $110 billion by 2025. The world factory of mobile phones is moving away from China and Korea to countries like India and Vietnam. Pakistan should position itself in the league. There should not only be lower tax on phone parts (CKD) imports but interest rates should be lower for such investment.

The benefit of import substitution is similar (or perhaps higher in short term) than export promotion, but SBP subsidy is only for exporters. They should give subsidy to import substitution on condition of exporting in certain timeframe. The subsidy could be retracted in case of net meeting the targets or when the interest rates come down. The policy of pick and choose is not recommended in long term but in days of recessionary behavior in LSM and falling industrial share in GDP, it’s advisable to target low hanging fruits.