Handling trade deficit is tricky

Published March 1, 2021
Pakistan’s merchandise trade deficit in January swelled to $2.67 billion, showing a whopping 24.4 per cent increase over January 2020. — Reuters/File
Pakistan’s merchandise trade deficit in January swelled to $2.67 billion, showing a whopping 24.4 per cent increase over January 2020. — Reuters/File

Pakistan’s merchandise trade deficit in January swelled to $2.67 billion, showing a whopping 24.4 per cent increase over January 2020.

According to the Pakistan Bureau of Statistics (PBS), the cumulative trade deficit in the first seven months of this fiscal year totalled $15bn — or 8.7pc higher than the deficit in the year-ago period. Fortunately, home remittances in these seven months grew 24.1pc year-on-year to about $16.48bn, according to the State Bank of Pakistan (SBP). That was more than enough to make up for the forex lost in the enlarged trade deficit.

Merchandise export earnings of Pakistan that constitute less than 50pc of imports are increasing slowly. And, import expenses that are double the volume of export earnings are growing fast. The trade deficit is expanding in dangerous proportions.

Traditionally, Pakistan has managed its trade deficit with remittances from overseas Pakistanis. It is still doing that. Luckily, inflows of remittances remain strong. But their future outlook is uncertain for many reasons, including the declining export of our workforce.

Big and sustainable gains in exports are impossible to attain without achieving economies of scale in export industries

Pakistan clearly needs a national policy to boost volumes of export earnings and keep the import bill in check. But that is not possible in the short term. The poor performance of merchandise exports is due to deep structural issues. And, imports cannot be contained much amidst a moderate economic recovery under a politically troubled government.

Structural issues of the export sector are so complicated that they cannot be addressed in the remaining two and a half years of the PTI government. Unless all political forces join hands — and the powerful establishment also supports them sincerely — no long-term policy for addressing structural issues like the need for redefining export development strategies can work. A long-term nationalistic approach is also required to develop a new import management strategy. The purpose of that strategy should be to gradually deepen the relationship with growth in imports to sustainable growth in the economy.

The ongoing overreliance on remittances will only complicate external-sector problems. These remittances are a source of non-debt–creating forex inflows separate from merchandise exports. Ideally, Pakistan should use these inflows to finance growth of human capital for future domestic use in an expanded and more modern base of the economy. The merchandise trade deficit, on the other hand, should ideally be managed by more volumetric gains in merchandise export earnings. But to develop a strategic framework for this purpose, it is first necessary to look at foreign trade details — because that is where the devil lies.

Pakistan’s trade deficit with China contributes significantly to the expansion in the overall trade deficit. In 2019-20, Pakistan’s Chinese merchandise imports totalled $9.55bn whereas its exports to China fetched just $1.66bn, according to SBP data. This created a huge trade deficit of $7.89bn. Obviously, all imports from China are not industrial or agricultural raw materials or intermediate goods that Pakistan can use for producing more value-added finished exportable items. Pakistan also imports lots of Chinese consumer goods. That is where some import rationalisation policy can be employed. On the other hand, Pakistan must seek from China more tariff and non-tariff concessions to boost its exports in Chinese markets — and at the same time prepare its own exporters to meet the requirements of those markets.

This example of Pakistan running a very huge trade deficit with one particular nation shows that our entire foreign trade regime needs to be reassessed. Serious efforts must be made for renegotiating trade deals accordingly and cut unusually large bilateral trade deficits.

But it is also equally important to reassess why Pakistani exporters fail to penetrate deeper into markets of a particular country or region and why they are often elbowed out by their competitors. That is where trade diplomacy counts as much as the quality of export products and their pricing and business ethics of exporters. The Ministry of Commerce, Trade Development Authority of Pakistan, our commercial counsellors abroad and exporters’ lobbies must jointly identify the reasons for below-potential export performance of key export sectors.

Big and sustainable gains in exports do not come unless export industries attain economies of scale. The government and the SBP must see to it how the fiscal and monetary support packages announced for export industries be used to push export-based industries towards achieving economies of scale.

Many countries, including the United States and China, are now increasingly participating in split-up value chains to boost their share in export markets. That is, countries are positioning themselves or augmenting already established positions in carrying out some particular activities from amongst the many involved in the production and marketing of a good. It is hard to find examples of Pakistani goods’ exporters participating in the split-up value chains — except for textiles and perhaps leather to some extent.

Low per-unit export prices of Pakistan’s food items in particular and other items in general also keep export earnings low. The average export price of our Basmati rice, for example, is around $1,000 per-tonne or just $1 per kg. Any strategy to contain the growth of trade deficit must also take into account this grim fact — and take corrective measures.

Trading more with the immediate neighbours creates economies of trade and offers exclusive advantages. But sadly, Pakistan’s exports to its immediate neighbours — i.e. Afghanistan, China, India and Iran — constitute just 11.5pc of its total exports although imports from these countries account for 24.5pc of the total imports.

The latest revisiting of the Pak-Afghan transit trade deal and Iran’s avowed willingness to re-energise border trade with Pakistan will hopefully help boost our exports to Kabul and re-establish trade with Tehran. Meanwhile, normal Indo-Pak trade remains suspended. And, domestic markets remain flooded with innumerable Chinese goods — from crop seeds, spices and medicines to industrial equipment and machinery.

Published in Dawn, The Business and Finance Weekly, , March 1st, 2021

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