THE good news is that the stubborn trade deficit, that widened all through last year, is showing the first signs of falling.

This means the gap between Pakistan’s exports and imports may finally be beginning to narrow after a year of worrying increases. This January the trade deficit came in at $1bn, whereas it was more than double that the previous year in January.

Also read: Tax revenue shortfall at Rs196bn, Dar warns

The bad news is that the decline is marginal, and may be difficult to sustain given the new strength of the rupee, which is getting close to Rs101 to a dollar.

A stronger currency means trouble for exports and cheaper imports, and this is the balance the PML-N government is famous for wanting every time they come into power.

Cheaper imports are a boon for retailers, a key constituency for the ruling party, and they fuel higher levels of consumption of imported durables, something that creates the illusion of prosperity. When you can’t deliver genuine prosperity, illusions will do just fine.

But not all illusions are benign. The finance minister takes pleasure in announcing that reserves have touched $16bn, and large inflows are on their way in the form of the next IMF tranche and further CSF reimbursements.

The last few months have also been good ones for the reserves, which have risen by appreciable amounts largely on the back of multilateral inflows.

As a result, the government appears less troubled by the trade deficit than it would otherwise have been, and more indulgent of a stronger rupee than perhaps fundamentals warrant. But it is worth asking whether the comfort the government is deriving from the strength of the reserves is illusory.

Most of this money is borrowed, and many of the inflows besides remittances are multilateral or bilateral disbursements.

This means the situation can reverse fairly quickly, and is certainly not a sustainable foundation upon which to build our future growth.

The world is seeing severe competitive devaluations between emerging market economies, and just this Tuesday, the US Treasury secretary had to warn the G20 countries that his country will “push back very hard” against efforts to gain trade advantage via weaker currency policy.

This shows the extent of the competitive devaluations sweeping the world as more and more countries place greater value on their external trade than their domestic consumption.

Perhaps more than the Treasury secretary’s warning, Pakistan ought to draw its lessons from those at whom his words are directed.

Published in Dawn February 14th , 2015

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