THE Federal Budget 2005 – 06 initiated measures to contain the trade deficit and can be deemed as a major step in this direction. For any developing economy foreign exchange inflow is vital for sustainable development because it acts as a cushion against unanticipated and sudden shocks and defence against unforeseen emergencies.
Pakistan has experienced the adverse impact of heavy borrowing when our external debts and foreign exchange liabilities jumped from $10 billion in 1980 to $20 billion in 1990 and just before the freezing of foreign exchange, the liabilities touched $42 billion in May 1998.
During this period, Pakistan’s debts reached to an unmanageable level due to large deficits and an imprudent use of borrowed resources.
During the financial year 2004 – 05 the trade deficit continued to surge steadily, reaching $5.51 billion during July – May 2005. Dr Ishrat Hussain, governor of the State Bank of Pakistan, does not rule out the total deficit touching US$ 6.5 billion for the financial year-2005.
Now, the situation seems to be fairly under control but the government needs to keep an eye on its trade deficit. It has to take into consideration the foreign trade statistics for the last 11 years. (table)
In 2000 – 2001 the level of SBP reserves were inadequate, which were barely $1 billion and only adequate for three weeks imports when reforms introduced by the present government brought a positive change. On September 10, 2001, the foreign exchange reserves touched $3.2 billion and by June 23, 2005 they reached U$12.406 billion.
In any developing economy, imports are always on the higher side than exports, creating a trade deficit. In order to meet that deficit, the developing economies use their Current Account Surplus or alternatively borrow from various international agencies like the IMF, World Bank and other countries with trade surplus.
In the past, Pakistan experienced disaster by excessive dollar borrowing, which to a large extent has been taken care of now.
Borrowed dollars come with conditionalities and impinge on indepedent decision making. Imprudent borrowing also has a deleterious effect on economic growth which keeps foreign investors away.
On the other hand, foreign exchange generated by exports has manifold benefits like it provides employment, accelerates economic growth, strengthens local currency, improves the standard of living, attracts foreign investment and brings economic stability.
The budget is no doubt export friendly as it aims to bring changes by reducing duties on inputs of various industries like leather, textile, surgical goods, and carpets. The government may further exempt all machinery, spares, and other inputs of said industries from all duties and taxes in order to make our exports competitive in a global market. There is a dire need to close foreign trade gap.
For this, we have to identify bottlenecks and hindrances in exports and introduce export culture. Exporters must be given facilities to remain competitive in an international market which is only possible through the availability of export refinance at low rates, waiver of all taxes on imports, and availability of utilities at cheaper rates. The government needs to remove tariffs on imports for the export industry.
Another area where the government needs to pay attention is the re-structuring of the Export Promotion Bureau (EPB). It needs to identify problems faced by the export industry and suggest remedies to remove such problems in consultation with the exporters.
The “export cities” for various items should be introduced as is the case in countries like China and India. We should develop cities like Sialkot for sports and surgical goods and leather garments, Gujrat for cutlery and furniture and Faisalabad for textiles.
This concept may be expanded to other parts of the country keeping in view the potential of the area. Borrowing should be confined to development projects like construction of dams, ports, infrastructure, electricity generation and human resource development. The concept of borrowing needs to be restricted to projects which are feasible and have the ability to pay back loans.
The country needs to attract foreign investment for such projects. And it cannot be done simply by requesting foreigners to invest. For this, feasibility studies of various potential projects should be prepared. These reports should be distributed gratis to relevant investors during the foreign visits of the president and the prime minister. Pre-feasibility studies should be conducted to facilitate foreign investors for mega projects like construction of dams, exploration of oil, gas, minerals and other vital infrastructure projects.
The other major source of foreign exchange is the remittances by our expatriates. We must encourage these expatriates to transfer their all savings home. Currently, most of the remittances were made through proper banking channel rather than the system of hundi.
Privatization of our major units is, no doubt, the right step to meet our foreign exchange requirements. But the country can only benefit if priority is given to export sector, which to some extent has been addressed in the 2005-6 federal budget, and export refinance is made available at a cheaper rate.
