Trade deficit narrows

September 14, 2019

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ONE of the two big deficits at the heart of the government’s problems — as well as the main target of its economic policy — is the trade deficit that in the past few years has devoured the country’s foreign exchange reserves, to the point where an emergency appeal had to be made to the IMF.

Read: Trade deficit falls sharply by 38pc in July-August

Last year, the trade deficit came in at $31bn, showing some decline from preceding years, but still far higher than what the country could afford. The latest provisional data now shows that the declines are gathering pace as the first two months of the fiscal year — July and August — have seen a rapid contraction of up to 38pc in the size of the trade deficit, compared to the same months last year.

The numbers will no doubt be received with relief by the country’s economic managers who have a tough target to meet to bring down the full year’s trade deficit to $27.5bn. This means on average the economy can afford to run a deficit of just above $2.2bn per month.

The provisional data shows that the first two months of the fiscal year have managed to stay within that monthly average.

The trade deficit for July and August, on a provisional basis, appears to be less than $4bn.But now comes the hard part of keeping it there.

What is not known at the moment are the factors driving this decline.

Oil prices have fallen slightly since July, and imports of industrial raw material could also be seeing declines. As per indications being put out by those invested in the data, the declines owe themselves to reductions in non-essential luxury items. This claim needs to be scrutinised because the size of the reduction at $2.4bn is too large to be driven solely by luxury items.

A closer look yields other important caveats.

The biggest of these is that the decline in the deficit number has been achieved entirely on the basis of a contraction in imports. Compared to the same months last year, exports have been stagnant, which is a very worrisome sign because it comes after a massive depreciation of the exchange rate of almost 30pc since last July.

If despite this, the dollar value of our exports has not changed, it means the decline in the trade deficit may help meet a target, but is otherwise an unhealthy development.

The trade deficit must be narrowed to restore health to the economy, but how this is done is also a critical ingredient in the mix of the economic policies being followed.

The provisional data suggests that the target is being met for the moment, but other than that it points towards signs of growing ill health in the economy. Celebrations must be muted once the final data is released.

Published in Dawn, September 14th, 2019