THE year 2014-15 depicts an uneven picture of the external sector, where positive effects like lower international oil prices and higher remittances have been offset by some negative developments, like supply-side constraints on the domestic front.

Overall, the growth in the trade deficit was restricted to 0.7pc to $13.9bn during July 2014 and April 2015; exports on free-on-board price basis (fob) stood at $20.2bn and imports (fob.) at $34.1bn.

Meanwhile, the services deficit declined 30pc to $1.6bn during July-April 2014-15 (10MFY15) from $2.4bn in the same period a year ago. This was a result of an inflow of $1.5bn under the Coalition Support Fund (CSF) during the period.

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This improvement, however, is not sustainable. Excluding this amount, the services deficit would have been over $3bn (nearly 1.5pc of GDP).

The decline in exports is largely due to the quantity effect and reflects the supply-side constraints that the export sector faces owing to a host of domestic factors like the energy crisis, slowdown in investment inflows and the law and order condition

The deficit in the income account has worsened by 12pc primarily because of higher interest payments and the increase in income payable abroad. On the other hand, net current transfers rose by 8pc, of which workers’ remittances (which went up over 16pc over the previous year) constituted a major part (84pc).

All these factors contributed in reducing the current account deficit to $1.4bn in the first 10 months of FY15 compared to $2.9bn in the corresponding period of FY14 (a decline of 54pc).

But these positive developments were neutralised by almost across the board decline in exports. Total exports stood at $20bn during 10MFY15, down 5pc from 10MFY14. Foreign sales of a wide range of commodities dropped, including those of major products.

Textile exports, which constitute more than 57pc of total exports, showed a depressed performance with an overall decline of 1.2pc. Within textiles, exports of cotton yarn and cotton cloth dipped 7.5pc and 11pc respectively. Exports of another major product, rice, also slipped 5.4pc.

Meanwhile, the exports of non-traditional goods like carpets and rugs, sports goods, leather tanned and manufactures, surgical goods and instruments, chemicals and pharmaceuticals, engineering goods, gems and jewellery, and cement also cumulatively dropped 18pc.

The finance minister has attributed the fall in exports on the decline in international prices. But that appears to not be the case. Given that different export items have different shares in total exports, these items thus command different weights. It is important to look at the weighted growth rate of some selected items, which constitute 80pc of total exports, by weighing the growth rate of each item with its respective share in exports.

For instance, this shows that rice exports dipped by a weighted rate of 0.47pc. The crop’s foreign sales went down as a result of a 0.66pc decline in prices, even though its quantity rose 0.18pc; with the net effect being a negative 0.47pc.

Analysing other items in the same way shows that many items witnessed overall declines because the drop in their quantities outweighed the increase in their respective prices.

For example, the highest decline in terms of the weighted rate was seen in cotton cloth (-1.2pc) — constituting 10.5pc of total exports. This was a result of a decline in quantity, not prices. Knitwear exports, with a 10pc share in total exports, rose at a weighted rate of 0.78pc, with the price effect overpowering the quantity effect.

In case of all other non-traditional manufacturing items, the price effect is positive while the quantity effect is negative. Overall, these 80pc exports dropped by 6pc due to lower quantity and rose 3.3pc due to the increase in prices, causing a net decline of 2.8pc.

This indicates that the decline in foreign sales is largely due to the quantity effect and reflects the supply-side constraints that the export sector faces owing to a host of domestic factors like the energy crisis, slowdown in investment inflows and the law and order condition.

Imports amounting to $37.7bn during July-April 2014-15 were up 1.8pc over 10MFY14 ($37.1bn). Imports of items in the food, machinery and metal categories recorded big increases of over 22pc, while the chemical group went up 11pc.

But these increases were neutralised by the sharp decline in international oil prices, which reduced the oil import bill by about $2.3bn.

Therefore, the external sector appeared to have benefitted from exogenous factors rather than any meaningful improvements in the strength of the economy. The sharp drop in international oil prices helped reduce the growth in the trade deficit. And this, combined with $15bn in remittances and CSF payments, have contributed in a lowering of the current account deficit by a big margin.

The writer works at the Social Policy and Development Centre, Karachi

Published in Dawn, Economic & Business, July 6th, 2015

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