Where are capital goods imports?

With global commodity prices going through the roof, keeping the trade balance within manageable limits might be a sound development for the countrys financial managers.

Driven by the jump in commodity prices and quantity demanded, the import bill for essential food items, such as milk products, tea, sugar and edible oils, increased in FY11. At the same time, on account of an 18 percent growth in petroleum crude imports to 7.5 million tons, along with higher prices for petroleum products, the total fuel bill surged by 20 percent to $12 billion in FY11.

However, it is disappointing to note that it was the decline in demand for capital goods - such as heavy machinery and steel for industrial use - that provided a breathing space (though small) in the total import bill. It is a known fact that power shortages, poor law and order situation, and weak demand have been responsible for the anemic performance of the manufacturing sector.

The industrial sector is also losing touch because of the slowdown in capital formation. This can be determined from the fact that industrial investment in the manufacturing sector slipped by 11 percent to Rs316 billion in FY11, according to the Economic Survey of Pakistan.

Import data indicates that expenditures on imported power generation, construction and mining machineries reduced by one-third in FY11, whereas the import of steel, iron, and scrap plunged by 19 percent to 3.15 million tons.

The lackluster performance of the local manufacturing sector can be gauged from large scale manufacturing data. FBS data shows that the LSM index managed to increase just marginally to around 208 points in the first eleven months of FY11 from an average of 205 points, over the same period a year earlier.

Similarly, improvement in local mining and construction activities was also next to nothing, barely inching up by 0.4 percent and 0.8 percent year-on-year, respectively, in FY11.

The textile segment was the only major exception where demand for both textile machinery and inputs registered a reasonable growth. Growth in textile exports has kept the sector two jumps ahead of other industries. In the meanwhile, reduction in demand for DAP and increase in local urea production resulted in a massive drop in the fertilizer import bill.

For the countrys fiscal mangers and policymakers, this is a time to wake up and smell the coffee. The decline in demand for capital goods will have an adverse bearing on the country's current and future production and in turn will increase the pressure on the import bill in the future.

It's a chicken and egg situation - the weak economy will continue to discourage investment but to help the economy pick up steam, the country badly needs more gritty attempts to resolve its structural flaws compared to anything else that has been tried so far.