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Trading priorities

April 13, 2017


THE new secretary commerce has assumed charge at a very difficult time it seems. Only days after his appointment, data shows that Pakistan’s trade deficit widened to a record high of $23.385 billion for the first nine months of the fiscal year. Arresting this trend, and eventually reversing it, ought to fast become a crucial policy priority for the country, but the options are limited.

The figures are now rising to alarming levels. The justification offered by the government, and echoed by the State Bank, is that the trade deficit owes itself to the imports of machinery and infrastructure equipment, which will not only support future growth but will also help plug Pakistan’s energy shortages. The argument is partially valid, but it is disingenuous to rely on it beyond a certain point.

Imports of oil and associated products are the largest share of the increase in imports. Last year, oil imports declined by 35 per cent, while this year they grew by 10pc, in the first half of the fiscal year according to State Bank data. Much of this reversal owes itself to the rising price of oil in international markets, although some amount of quantitative increase is also a factor.

The second reason why the machinery argument must be received with scepticism is because we have heard it before. Once the boom years of the Musharraf regime reached their peak, around 2004-2005, the same situation materialised. Widening imports led to a growing current account deficit, and the regime took to telling us that this was due to machinery imports which would boost exports once installed. But the boost in exports could not keep pace with the import growth, leading to a blowout in the external account and the rapid depletion of reserves, ultimately forcing a return to the IMF in 2008.

The same story a second time round is necessarily going to meet with more scepticism.

Compounding the problem is a total absence of thinking (beyond CPEC) on trade matters at the top levels of government. This is not unique to this government. Pakistan has a history of treating trade casually, or treating it as a part of our overall push to constantly seek ‘assistance’ from the world for one reason or another.

What our trade policy suffers from is too much strategic input, and not enough economic thinking.

So the biggest push for trade that we have seen recently was the pursuit for inclusion in the GSP regime of the European Union, mainly as assistance to help compensate for the costs of the war on terror. The previous government tried to push through a normalisation of trade ties with India, but failed due to pressure from the military, which would prefer to keep our relationship to India wedded to territorial grievances. The present government made a second attempt to push through that initiative, but failed for the same reason.

Most trade around the world is regional first and long distance second. Neighbouring countries with long histories of animosity and outstanding border issues, whether territorial or maritime, have managed to keep their strategic and economic interests separate from each other. A prime example is China and Japan, one of the largest economic relationships in the world, yet two countries with a depth of animosity towards each other that rivals, if not surpasses, that of India and Pakistan.

But Pakistan’s economic ties with three of its four neighbours are grossly underdeveloped, despite strong affinities. Many imported products can be substituted for cheaper alternatives from India if trade can be normalised, although in the present climate this is difficult to imagine. That window was open a few years ago, but shut at the moment.

Iran has massive energy surpluses and a food shortage; we are abundantly endowed with food yet suffer from energy shortages. This natural affinity has not been tapped, partly due to the sanctions, but in equal measure, due to our place in the larger Middle Eastern rivalry between Iran and Saudi Arabia.

Likewise with Afghanistan, which provides us natural access to the markets of Central Asia. This was seen with disdain in the years before CPEC, but now suddenly with the arrival of Chinese investment in our transport and communications infrastructure, access to the Central Asian markets is being presented as some sort of ‘game changer’ for the country.

What our trade policy suffers from is too much strategic input, and not enough economic thinking. Rivalry rather than cooperation with our neighbours is the primary lens through we view all regional relationships. Where the rivalry is our own, such as with India, we are quick to subordinate economic issues to it. Where we have no rivalry, such as with Iran, we easily import it from the Middle East, whose disputes have little to nothing to do with us.

Until this is changed, we will be left to battle this yawning trade deficit with stopgap measures, such as the so-called Strategic Trade Policy of last year, which had nothing strategic about it. That policy envisioned providing some cash support to a few areas in a puny attempt to boost exports. Its failure is evident in the fact that nobody in the exporting community even applied for the benefits on offer.

The new secretary commerce is not in a position to rectify this imbalance in our trade outlook. Those decisions are made far above his level. But without addressing this imbalance in our policy priorities at the top, all successive commerce secretaries have been left with little more to do other than tinker at the margins — an incentive here, a rebate there — with no meaningful change in the larger picture, driving us inexorably deeper into the quicksand of growing deficits.

The secretary cannot change this by himself, but perhaps he can do something to sensitise the government and the military to the enormous price that Pakistan has always paid, and continues to pay today, for its failure to put trade on top of its external policy priorities.

The writer is a member of staff.

Twitter: @khurramhusain

Published in Dawn, April 13th, 2017