IN a time when oil prices are falling, it’s surprising to see the trade deficit continue to widen. Latest figures show that the trade deficit in December grew by 31pc compared to the same month last year. Since the fiscal year began, the trade deficit has expanded by 34pc for the first six months.

By December, the impact of a falling oil price had begun to be felt in the external account, so it remains a puzzle why imports should continue to grow. Between November and December of 2014, for instance, imports grew by 6.3pc, even as exports grew by 9.7pc. The continuously widening trade deficit over the course of 2014 is a cause for concern because it is happening at a time when the country’s external debt service obligations are also about to rise. Reserves remain healthy, which is why the outflows are not leading to an adjustment in the exchange rate, but given the persistent increases in the trade deficit it is worthwhile to ask how long this can be sustained.

There are still no clear answers as to why the trade performance is going so poorly. The government needs to conduct a detailed study on where the increases in the import bill are coming from, and why export growth is unable to keep pace. Is the poor trade performance due to supply-side problems such as the power shortages or is the currency being kept at too high a level given the state of competitiveness of our exports? Whatever the problem may be, it needs to be clearly spelled out and a course of action should be adopted to arrest the slide, especially given the outflows on the external account that are about to kick in. Exporters will naturally point towards incentives they require in order to increase performance, for example on the tax side. But a clear picture of the reasons behind the widening deficit ought to be provided before any further concessions are granted.

Published in Dawn January 11th , 2014

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