August 21, 2006	Monday	Rajab 25, 1427

A TRADE deficit of over $12 billion recorded for 2005-06 was higher than cumulative figure of last five years. Exports target was not met while imports rose to unprecedented level

Oil imports, on account of higher prices, touched $5 billion and contributed a sizeable portion of the total import bill of some $28.5 billion. The current account deficit rose to 4.3 per cent of GDP, the highest ever since 1995-96. But a major chunk of the huge trade deficit was met by non-debt capital inflows of $8.2 billion in 2005-06, the higher ever in a single year.

Despite this massive non-debt inflows, another $ 1.6 billion was to the external debt stock. This is the highest addition to the external debt in a single year during the last five years. During the last two years, cumulative increase in external debt was just under $3 billion.

Apparently, there is no immediate relief in oil prices in sight. The vulnerability to the national economy against any upsurge in oil prices is no doubt.

The current external sector woes trace their origin into oil price upsurge. A shortfall in export target is also attributed partially to higher energy prices which eroded competitiveness of exports.

But lacklustre trade diplomacy has also to share the blame and the ministry of commerce has failed to timely diagnose the root cause of the problem properly. The trade deficit at over $12 billion is too close to its foreign exchange reserves of $13 billion.

The combination of rising inflation and flagging growth poses a dilemma for the State Bank. Since hike in interest rates take several months to work their way through the economy, its impact has to be felt as far as demand management for imports is concerned. The impact of tight monetary policy on growth and investment are adverse.

Now, there is a consensus among analysts that the economy is loosing some of the steam in its growth momentum, the dangers of rising inflation outweigh those of slowing growth. The growth has indeed slackened abruptly over a year from an unsustainable pace from 8.6 percent to 6.6 per. It was exactly what the economy needed. The pace of imports fell from over 50 per cent growth in the first half of 2005-2006 to just 38.8 per cent for the entire fiscal year.

The official liberal import policy is to blame for fueling domestic demand for imports. The imprudent import liberalisation of motor vehicles was responsible for additional burden of at least $1.5 billion. The liberal policy for other consumer durables has also contributed significantly to the import bill. They added $2.1 billion to the import bill.

Notwithstanding, the illicit imports from neighbouring Iran into Balochistan, petroleum products remained the single largest contributor with 12.9 percentage points or one-third of the increase in import bill. The second largest contributor to the imports is so-called machinery group which according to the government’s claim is a symbol of growing economic activity.

It is strange that import of aircrafts, ships and boats (defence purchases) are lumped into machinery group. The single largest contributor to the machinery group interestingly is mobile phones which account for almost one-fourth of the import bill of machinery group. But to the amazement of researchers, it is lumped into huge quantum of other machinery. One thing is eye opener that “other machinery” accounts for more than 60 per cent weight of machinery group.

The Federal Bureau of Statistics is trying to manipulate data by hiding more than half of it behind the curtain of “others”. The seriousness on the part of the government is lacking to monitor and reduce huge trade and current account deficits. For example, to lessen the burden of import of crude oil, working days could be cut to five days, instead of six. This could save a lot of oil consumed on commuting to work places.

The government’s POL expenditure could be cut by lowering petrol entitlement of its officials. One of the alternatives would be to switch over to alternative technologies, a long-term proposition, for which measures need to be taken now.

A cause of concern is also non-oil imports which grew by 32.1 per cent. Excluding machinery, imports grew by 41 per cent which means it is not machinery that is driving imports rather there are some areas where import substitution might work. The exchange rate is coming under growing pressure and external borrowing requirements are rising at tremendous pace.

The government was able to get non-debt capital inflows like remittances, foreign direct investment etc to meet trade and current account deficits but this trend was not sustainable in the medium to long-run. The sources of non-debt creating inflows are limited. Privatization and licence fee driven FDI inflows are not going to help in the long-run. It would be a better option to work on a long-term import substitution strategy.

The government has to revisit its current and capital account liberalisation strategy to mitigate some of its external sector woes.