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In July-October 2004, Pakistan's trade deficit increased fourfold to $1.432 billion from $315 million in July-October 2003. Most observers tend to link this dramatic rise in the trade deficit to higher international oil prices.
But imports data indicate that the higher cost of oil import was just one of the several factors responsible for a phenomenal growth in the total import bill that, in turn, pushed up the trade deficit.
Imports totalled $5.894 billion in the first four months of this fiscal year from $4.289 billion a year earlier, showing an increase of $1.605 billion. On the other hand, exports totalled $4.462 billion, up $483 million from $3.974 billion in a year ago period.
Let's now analyse the import bill.
Oil imports: Pakistan's import bill of crude oil and petroleum products put together rose to $1.36 billion in July-October 2004 from $902 million in July-October 2003, showing an increase of $458 million. But import data show that a smaller part of this increase i.e. $194 million was due to the increase in the prices of oil and petroleum products and a larger part of it i.e. $264 million, was due to the additional imports of these items.
So, it is incorrect to suggest that a big rise in international prices of oil and petroleum products was the most important factor behind a phenomenal growth in imports that, in turn, widened the trade deficit.
Machinery Imports: Pakistan imported eight broad categories of machinery in July-October 2004 at a cost of $1.348 billion. These included power generators, office machines, textile machinery, construction and mining machinery, electrical machinery and apparatus, motor vehicles, aircraft, ships and boats and agricultural machinery and implements.
In July-October 2003 the country had imported the said types of machinery at a cost of $1.045 billion. Thus, the import bill rose by $303 million in the first four months of this fiscal year due to higher imports of machinery.
Food Imports: Pakistan imported nine broad categories of food items in July-October 2004 at a cost of $415 million. These included milk, wheat, dry fruits, tea, spices, Soya bean oil, palm oil, sugar and pulses. In July-October 2003 it had imported the same food items at a cost of $327 million. Thus, the import bill increased by $88 million due to higher food imports.
Textile Imports: In July-October 2004, Pakistan also imported three broad categories of textile products at a cost of $108 million. These included synthetic fibre, synthetic & artificial silk yarn and worn clothing.
In July-October 2003, the country had imported the same categories of textile products at a cost of $85 million. So, the import bill expanded by $23 million due to increase in textile imports.
Chemicals Group: In July-October, the import bill of fertilizer, insecticides, plastic products, medicinal products and other agricultural and chemical items totalled $1.183 billion.
In a year-ago period, the import bill of these items stood at $891 million. This means Pakistan's overall import bill rose by $292 million in the first four months of this fiscal year due to higher imports of above items.
Metal Group: Pakistan's import of iron and steel, scrap of iron and steel and wrought and worked aluminium totalled $308 million in July-October 2004, up from $202 million in July-October 2003. That is, the import of metal group raised the overall import bill by $106 million.
Miscellaneous Group: In July-October this year, Pakistan spent $149 million on the import of five broad categories of items clubbed under miscellaneous group. These included crude rubber, rubber tyres and tubes, wood and cork, jute, paper & paperboard and their products.
In July-October last year, the country had spent $123 million on the import of these items. Thus, the import of miscellaneous group alone raised the overall import bill by $26 million.
Other Items: The import bill of all other items not covered under the above-mentioned groups rose to $1.023 billion in July-October 2004 from $713 million a year earlier. That is, the import bill went up by $310 million due to additional imports of miscellaneous items not grouped elsewhere.
The above analysis shows that the additional oil import bill of $458 million accounted for 28.5 per cent of the $1.605 billion increase in the total import bill in July-October this year. But the contribution of the higher oil prices in this phenomenal growth in the total import bill was 12.1 per cent. On the other hand, the contribution of additional imports of crude oil (524,552 tonnes) and petroleum products (701,006 tonnes) was 16.4 per cent.
Other categories of imports that contributed to the expansion in the overall import bill in the first four months of this fiscal year included individual import items clubbed under "Other Items," (19.3pc); machinery (18.9pc); chemicals (18.2pc); metals (6.6pc); food items (5.5), miscellaneous items (1.6pc) and textiles imports (1.4pc).
In the metals group, the increase in the import bill of iron and steel is rooted more in larger import volumes and less in their higher prices, as is the case with the imports of crude oil and petroleum products.
In July-October 2004, Pakistan imported 511,000 tonnes of iron and steel at a cost of $226 million. In a year-ago period, it had imported 383,000 tonnes at a cost of $146 million. Thus, the country spent $79 million more on the import of these items in the first four months of this fiscal year. But the import of additional 128,000 tonnes of iron and steel inflated the import bill by $49 million, whereas the higher prices of these items pushed up the bill by $30 million.
Future Outlook: As the above analysis shows, higher oil prices have contributed only 12.1 per cent of the increase in total imports in July-October 2004. Chances are that higher oil prices would contribute 10-15 per cent of the increase in the total import bill for this full fiscal year, depending upon whether the prices continue to increase or remain stable or fall further.
Heads of oil companies say import bill of crude oil and petroleum products may range between $4.2-4.5 billion during this fiscal year, up from $3.2 billion in the last fiscal year.
This means that other factors including higher imports of machinery, chemicals, metals, food items, rubber, jute and paper, food items and thousands of other items not grouped together would account for 85-90 per cent of the increase in total imports in the current fiscal.
Since, the import bills of these items have increased more because of larger import volumes and less because of increase in their prices, the increase in Pakistan's total import bill presents a positive side. That is, the additional import bill is attributable, in most cases, to the growing need of imported items in the economy as the economy itself is growing.
One big exception is the food import bill. The imports of food items have consumed $88 million more in the first four months of this fiscal year and are likely to consume more in the months to come.
In July-October 2004, monthly food imports bill averaged at more than $100 million. Indications are that food import bill during this fiscal year may easily reach $1.5 billion from slightly over $1 billion in the last fiscal year. Import of 1.5 million tonnes of wheat alone would push up the food import bill by $350-400 million.
Trade analysts say the trend seen in the first four months suggests that Pakistan's total import bill would be in the range of $18.2-18.4 billion during this fiscal year against the initial target of $16.7 billion.
They say that the exports may range between $13.7-14.2 billion, depending upon how efficiently Pakistan can benefit, in the second half of this fiscal year, from the elimination of textile quotas from January 2005. So, the trade deficit may rise to $4.2-4.5 billion against the initial target of $3 billion.
Balance of Payments: This being a likely scenario, Pakistan's balance of payments would come under immense pressure during this fiscal year and its current account surplus would turn into deficit.
The current account surplus fell to $123 million in the first quarter from $1.117 billion in a year-ago period and overall balance of payments remained negative. In July-September 2004, overall BOP deficit stood at $559 million, against $578 million surplus seen a year earlier. Indications are that data for July-October would show a nominal current account deficit that would rise gradually in the coming months.
Forex Reserves: A four-fold increase in the trade deficit in the first four months of this fiscal year has also taken its toll on foreign exchange reserves. Though overall liquid reserves fell by $76 million to $12.252 billion at end-October from $12.328 billion at end-June 2004, the fall in the official reserves was much larger.
At end-June, the State Bank had $10.554 billion forex reserves that came down to $9.778 billion at end-October, showing a big decline of $776 million within four months. This fall in the official reserves occurred as the central bank sold around $1.4 billion between July-October 2004, through interventions in the inter-bank market to keep the rupee stable. The rupee, however, lost 5.5 per cent value against the dollar.
From November 1, the SBP also started selling dollars to the banks to help them finance oil import bills of their clients. This helped the rupee recover 2.6 per cent against the dollar within one week but it depleted the SBP's forex reserves by another $258 million to $9.519 billion on November 6.
