EDITORIAL: A worsening balance of trade, a perennial problem for the country that accounts for Pakistan being on the twenty-third International Monetary Fund (IMF) programme in its history, has been arrested and reversed with the trade deficit for the first four months of the current fiscal year declining to 11.469 billion dollars against 15.624 billion dollars in the comparable period of 2021.
This is in spite of the fact that imports of petroleum and products, by far the largest import item, including LNG, rose from 3,973 million dollars July-September 2021 to 6,078 million dollars in the comparable period of this year.
And, given the OPEC + decision to curtail output by 2 million barrels a day effective November, the projection is that the prices of petroleum and products would rise internationally, thereby our import bill will also rise.
In addition, food imports rose by 300 million dollars with wheat and palm oil mainly accounting for this rise.
There was a marked reduction in imports of all other items July-September 2021 compared to the comparable period of this year as per the State Bank of Pakistan website, including machinery group (particularly power sector and textile) by 762.9 million dollars, transport group by 533.6 million dollars (including cars, buses, completely knock down kits) and textile groups (raw cotton, synthetic fibre,) by 386.5 million dollars.
This was possible not only because of a massive slowdown in economic activity due to the severely contractionary policies agreed with the International Monetary Fund (IMF) in the seventh/eighth review, the floods and as noted by the Fund in the last review the “exchange restriction resulting from the limitation on advance payments for imports against letters of credit and advance payments up to the certain amount per invoice (without L/Cs) for the import of eligible items.”
However, the IMF also emphasized that “more prominence should be given to exchange rate flexibility as a means to address the Balance of Payment (BoP) pressures rather than administrative and exchange measures.” While finance minister Ishaq Dar did recently pledge to clear all L/Cs of upto 100,000 dollars yet time will tell if this will be implemented or deferred till the foreign exchange reserves strengthen.
The SBP website indicates a steady decline in reserves since 30 September with no major inflows in spite of reports that multilaterals and bilaterals have pledged considerable support: on 30 September reserves were 7878.5 million dollars, on 14 October they declined to 7597.2 million dollars and by the last update on 21 October reserves had further fallen to 7439.9 million dollars.
While actual international prices will determine how much of our critical imports can be met by our current reserves; however, independent analysts maintain that the amount is possibly not enough to meet a month’s imports – a far cry from reserves meeting a minimum three months of imports supported as an international best practice.
Exports, however, have yet to show a meaningful rise. July-October 2021 exports were an estimated 9.460 billion dollars while in the comparable period of this year they rose to 9.549 billion dollars – a rise of 89 million dollars. This is in spite of considerable subsidies to the export-oriented sectors.
There is, therefore, an urgent need to undertake studies linking the cost of the incentives - monetary and fiscal – with exports. If the linkage is tenuous at best and only increases the profits of exporters’ then there is a need to discontinue this practice as it is at the taxpayers’ expense.
To cite Jihad Azour, the IMF head of department dealing with Pakistan, subsidies are regressive, a point that is well made though not appreciated by our economic team leaders.
To conclude, while one can appreciate the decline in the trade deficit yet the underlying factors remain a source of serious concern as they are not sustainable even in the very short term as defined by a month.
It is time to slash government expenditure drastically especially the subsidies extended to the elite sector, particularly the 19.99 rupee per unit of electricity all-inclusive to exporters, at a time when the general public is paying 24 rupees per unit excluding taxes.
Copyright Business Recorder, 2022