Pakistan’s resurging trade deficit isn’t surprising given the nation’s heavy reliance on imports and the limited range of products it can sell to the world. This was expected to increase in the wake of new growth in import demand with the pick-up in economic activities and consumption. Few believed that the government and central bank could reduce the trade gap by holding down the import demand for a very long time to keep the pressure off the country’s current account.
The new trade data published by the Pakistan Bureau of Statistics (PBS) shows that the February trade gap expanded by almost 24 per cent to $2.5 billion year-on-year, mainly owing to the rebounding imports and the falling exports, which luckily continued to grow by above $2bn for the fifth consecutive month. The gap, however, declined by about 5.9pc from January on a month-on-month basis.
The data for the first eight months of the current fiscal year shows that the trade deficit posted a double-digit growth of 10.6pc during the period between July and February after the gap between what the country paid for its imports and what it earned through its exports swelled to $17.5bn from $15.8bn a year ago. This is in spite of the 4.3pc growth in exports to $16.3bn from $15.6bn a year ago.
Trade deficit will likely remain wide in the last four months of the current fiscal year as imports will continue to post growth as the global economy reopens while domestic demand for food products, cotton and industrial machinery is expected to stay high
Imports, on the other hand, rose by 7.5pc to $33.8bn from $31.5bn.
The continuous drop in imports on suppressed domestic demand helped by the declining global oil prices in the wake of the Covid-19 crisis had provided some breathing space to the central bank in managing external accounts despite stagnating exports. Last fiscal year, the country’s import bill shrank sharply by $10.3bn or 18.8pc to $44.5bn from $54.8bn in the previous year.
However, the rebound in imports is likely to again create pressures on the external side in case the workers’ remittances sent home by non-resident Pakistanis also start dropping going forward.
Elaborating on the factors leading to import growth, commerce minister Abdul Razak Dawood tweeted that most of this growth had come from an increase of 7.8pc in the import of raw materials and intermediate goods (which is reflected by an increase in the manufacturing output in recent months) even though the imports of capital goods declined by 0.2pc. The imports of consumer goods also went down by 7.3pc.
Besides raw materials and intermediary goods imported by the industry, the increased purchases of food products — especially wheat and sugar — this year owing to domestic shortages also increased. The rising cotton imports on the back of the failure of the domestic crop at a time when the textile and clothing industry is operating at its full capacity to meet the export orders also forced the import bill to go up. The cumulative expenditure on the import of wheat, cotton and sugar alone stands at $1.95bn in the July to February period. In addition to them, the spike in the energy prices — oil and liquefied natural gas (LNG) — too played its part in raising the dollar value of the import bill and consequently the trade deficit.
Analysts agree that the trade deficit will likely remain wide in the remaining four months of the current fiscal year as imports will continue to post growth as the global economy reopens while the domestic demand for food products, cotton and industrial machinery is expected to stay high. Driven by food imports and domestic economic activity, imports are projected by the central bank to surpass their annual target of $42.4bn.
According to the State Bank of Pakistan Governor Reza Baqir, the industry has already opened letters of credit worth $1bn for importing machinery for new projects or expansion and balancing, modernisation and replacement of the existing ones under the bank’s concessionary, long-term Temporary Economic Refinance Facility (TERF), implying that the trade gap will continue to expand. However, he recently told Dawn that the increase in exports and remittances would offset the impact of the rising imports on the current account (for the time being at least). The banks have so far approved TERF loans of over Rs430bn or equal to 1pc of the GDP. The rising global oil prices and commodities like palm oil etc may further swell the import bill and, in turn, the trade gap.
While imports are likely to rise, Pakistan’s overseas shipments are anticipated to decline in the next four months as its regional competitors — India and Bangladesh — reopen their economies and the textile and clothing importers from the US and Europe return to their old suppliers. However, the textile industry, which comprises almost 60pc of the nation’s total export revenues, is confident of retaining a larger share of the new export orders despite reopening India and Bangladesh.
The recent widening of the trade deficit has indeed raised concerns about sustainability of the country’s external sector. Although we have been managing the balance-of-payment situation with the help of unanticipated growth in workers’ remittances as well as foreign loans, this is not going to sustain for a very long time and we may face a new economic bust in next few years. The only sustainable way forward is to boost exports through expanding the product range, finding new markets, as well as attracting foreign direct investment in export industries by escalating work on the development of special economic zones with plug-and-play facilities.
Published in Dawn, The Business and Finance Weekly, , March 8th, 2021