Trade: Where do we go now?

The trade deficit has widened by 36 percent in FY17 as exports remained stagnant and imports for oil and machinery b
Updated 25 Jul, 2017

The trade deficit has widened by 36 percent in FY17 as exports remained stagnant and imports for oil and machinery ballooned. Neither the 100% cash margin restriction imposed by the Central Bank on non-essential products, nor the exports package that was launched earlier this year have afforded any reprieve from exports that have remained stuck throughout the fiscal year. Where do we go from here?

Capital goods imports mainly power generation and construction machinery constituted 23 percent of all imports taking the top spot from oil imports which historically take up the bulk of the imports share. Together petroleum products and machinery imports constitute nearly half of the total imports and have grown by 30 percent and 37 percent respectively in FY17.

Most of the machinery imports are for the power plants that are being set up as part of the CPEC projects but once these machineries are up and running, the petroleum and gas group will take most of the import burden and will grow substantially owing to the rising consumption based economy that demands oil—for be it greater use of transport, as well as running of the power plants. The country is also seeing RLNG imports go up as new RNLG based power plants are coming on line.

The pressure from imports will be felt in the coming years; and imposing import restricting measures (like the cash margin measure) is hardly the way about to curtail the rising trade deficit. At most, such barriers to imports are very short term measures; but they have done no good so far to hedge against the increase in capital import goods. All other imports minus machinery and oil grew by 9 percent with food imports rising by 14 percent in FY17.

The government also imposed regulatory duties on over 500 items of goods (Read our story: “More protection”, published on July 7, 2017) to shore up revenues and curb imports and perhaps, it is too soon to see the effect of that but once again, imposing indirect tariff and non-tariff measures is neither the right policy step to reduce trade deficit nor incentive enough for local industries to start producing those imports at home.

The real issue is crumbling exports—whereas the government promised the refunds will be made to exporters in time; and load shedding was over—most exporters still complain about lack of liquidity, and high costs of energy. Textile exports remained unchanged in the face of reduced cotton exports balanced off with value added textile which find a market in the EU because of the GSP plus.

However, the export package has yielded no outstanding outcomes—exports from Jan to June for textiles actually fell by 6 percent in FY17 year-on-year which shows how much of a failure the export package has been. Even if that package worked, it is only a small proportion of the work that actually needs to go into bringing up exports—from exploring new avenues of exports in terms of diversified products to introducing technology and value addition in existing exports where Pakistan has a competitive advantage, or create a competitive edge.

Do we think that Pakistan—with the current lack of policy direction—can achieve exports to the tune of Rs35 billion, even by the next five years? No. All else remaining equal, with the currency remaining unchanged, exports going forward will further squeeze even as we enter into more trade deals with different countries. Don’t bank on the trade deficit improving anytime soon.

Copyright Business Recorder, 2017

Read Comments