PAKISTAN’s export performance has weakened and imports continue to soar that has resulted in record trade deficit. In 2005-06, the trade deficit crossed the $12 billion mark.

Now, in July this year (2006-07), the trade deficit stands at a staggering $1.24 billion. At this rate, the deficit for the whole of the fiscal year 2006-07 should work out to about $15 billion.

Figures released by the Federal Bureau of Statistics (FBS) show that imports in July 2006 stood at nearly $2.46 billion, whereas exports were at $1.22 billion – reportedly lower by about four per cent than exports in the corresponding month last year. The trade deficit of $1.24 billion in July 2006 was higher by about 70 per cent as compared to July 2005.

The Trade Policy 2006-07 envisages imports of $28 billion, exports of $18.6 billion and a trade deficit of $9.4 billion. The projections are based on strong growth of exports in 2005-06 and declining trend in the imports of machinery in the later part of 2005-06.

The share of machinery in imports growth had reportedly gone down from 29 per cent in July-January 2006 to five per cent in February-May 2006. About 80 per cent of the imports growth in the February-May period was attributed to just two broad categories namely, ‘petroleum’ and ‘other imports’.

The international oil prices jumped to over $78 per barrel (due to Israel’s attack against Lebanon) when machinery imports were showing a declining trend. Imports are likely to remain on the higher side until the oil prices come down. On the other hand, a relative weakness in export growth witnessed in the later half of FY 06 – which made achievement of the export target of $17 billion impossible – seems to persist up to this day.

The government had hoped that with the recent reduction in the anti-dumping duty by the European Union (EU) on bed wear exports (from 13.1 to 5.8 per cent, effective May 7, 2006) and restoration of some GSP benefits, export growth would revive in FY 07. However, the hope has not materialised so far, as would appear from the July export figures.

While the government was quite optimistic that the trade deficit could be brought down during the current fiscal year, the State Bank of Pakistan (SBP) has remained skeptical in the matter, as would appear from the following observations made by it in its third quarterly report for FY 06:

The current account deficit is envisaged at $6.3 billion or 4.3 per cent of targeted GDP in the annual plan for FY 07. While this deficit seems high, privatisation receipts and strong aid inflows are anticipated to offset much of the impact during FY 07. This, however, would primarily depend on the realisation of the anticipated moderation in import growth, as foreseen in the annual plan, and continued strong export growth.

If, as suggested by SBP projections, the current account deficit proves to be substantially higher, it would be extremely difficult to sustain without either substantially raising external debt, recourse to an undesirable drawdown in reserves, or strong measures to contain aggregate demand or a more focused policy of containing external demand.’

The SBP has been following a tight monetary policy for some time to deal with the demand-pull inflation. Whether or not these measures would help in bringing down the demand for imported goods should be known in about 3-6 months time.

The government has taken certain steps recently to boost exports. In addition to the export promotion measures included in the trade policy, the government has announced a package of Rs20 billion exclusively for the textile sector. However, the textile exporters are not happy, since they had approached the government for a package of as much as Rs50 billion. The Export Promotion Bureau has been asked to prepare a road map showing how it plans to achieve the export target of $18.6 billion in 2006-07.

While some export promotion measures have been initiated, the government seems to have done little so far to contain its rising import bill. Sale of blended fuel (90 per cent gasoline plus 10 per cent ethanol) in selected urban centres has been launched recently to save some foreign exchange. In addition, the Central Board of Revenue (CBR) is understood to be making some efforts to do away with under-invoicing and over-invoicing to plug leakages of hard currencies.

Many think that the import bill could be brought down significantly by weeding out the less essential imports. A look at the last year’s import figures shows that import of road motor vehicles stood at $1.61 billion, import of consumer durables stood at $2.1 billion, whereas the import of items other than petroleum, food, machinery and raw materials (categorised as ‘others’) stood at as much as $7.4 billion.

It indicates that sufficient scope exists to trim the import bill by removing less essential consumer items without touching essentials such as food or development-related items such as machinery and raw material. In the short run, this seems to be the only option available for containing the rising import bill.

In the long run, however, many other measures aimed at improving the trade balance can be taken. Efforts are already being made to diversify exports as well as exports markets. It is hoped that in the coming years, the export of engineering goods and IT products may also pick up considerably. The development of the local engineering industry on modern lines may help in reducing the imports of machinery used by the local industry. Similarly, if we can achieve autarky in agricultural products, imports can be eliminated.

Some quarters believe that devaluation can be an option in the present situation to address the growing trade imbalance. They argue that high inflation rate of the last two years has made our export goods more expensive, due to which there is a need to devalue the rupee, in order to make our export price competitive.

But devaluation is opposed by the majority of independent economists on the following grounds: (a) Past record shows that devaluation has never helped in improving the trade balance in the past. This is because both our exports and imports are inelastic. There are limited items to export. The number of exportable items has not undergone any significant change so far.

Similarly, the imports are also inelastic in the sense that the import of oil, machinery and raw material and food items can not be curtailed; (b) In case of devaluation, the country will receive less for the exports, while it will have to pay more for the imports; (c) devaluation will raise the cost of all imported commodities including machinery and raw materials as well as the food items; (c) it will raise the country’s external debt burden in rupee terms and reduce our per capita income in dollar terms; and (d) due to higher inflation rate during the last two years, the rupee has already depreciated from Rs57-58 to over Rs60 to a dollar in the inter-bank. There is no need to further devalue the rupee.