KARACHI, Sept 6: Pakistan's trade deficit totalled $298 million in August 2004 as imports reached to $1.474 billion but exports remained at $1.176 billion, according to data released by the Export Promotion Bureau.

Details of the trade statistics would be out later this week, but the deficit has risen from $191 million in July to $298 million in August, apparently because world oil prices in August-September delivery had soared to levels seen 14 years earlier at the time of Kuwait-Iraq war.

Trade deficit in July-August 2004 stood at $489 million as the country earned $2.359 billion through exports but it had to pay $2.848 million for imports. The high deficit in just two months of this fiscal indicates that Pakistan may not be able to keep the deficit at the targeted level of $3 billion.

The country has projected that its exports would reach to $13.7 billion and imports to $16.7 billion. Officials in oil marketing companies say that oil import bill may total $4 billion or more during this fiscal year, up from $3.1 billion last year.

That alone may result in trade deficit reaching to $4 billion against the target of $3 billion. Given the fact that the country is also importing 150,000 tonnes of wheat to overcome the shortage in domestic supply, the trade deficit may still rise to $4 billion even if higher oil prices have a not-so-hard impact on the Pakistan's import bill. But much would depend on whether machinery imports keep rising or not. In the last fiscal year, Pakistan spent $4.1 billion on imports of machinery, up from $2.94 billion a year earlier.

This also included $781 million spent on part payment of some aircraft purchased by the PIA, and $586 million on the import of textile machinery. Chances are that heavy import payments would be made on these two heads in the current financial year, also.

Besides, as the economy is set to grow faster this year, import of other machinery, including the agricultural machinery and implements, as well as the construction and mining machinery and road motor vehicles may also see growth.

So, chances are that the import bill of machinery, the largest component of the total would remain all the same, if at all it does not register an increase during this fiscal year.

The second largest component i.e., oil imports may expand to become the biggest component of the total import bill, or at least reach closer to machinery imports of $4 billion plus. In both cases, the overall trade deficit would reach far beyond the targeted level of $3 billion.

The Asian Development Bank has also warned in its latest economic update on Pakistan that in view of the booming oil prices the country will have to revise upwards its projections for trade deficit and inflation.

Exchange Rate: As the trade deficit rises from $191 million in July to $298 million in August 2004, the rupee is likely to remain under pressure during this month. The reason is that banks and businessmen respond to the trade deficit figures with a time lag of one month.

That is, when the trade deficit figure for the previous month is announced, they use it for projecting possible movements in the exchange rates. As a rule of thumb, a higher trade deficit in August than in July means that the rupee would remain more under pressure in September than in August.

But projections made by banks and businesses about rupee-dollar parity have only a limited impact on the exchange rates. Some other factors exercise a greater impact.

These including the actual inflow and outflow of foreign exchange from the inter-bank market during a certain period and the ability of the central bank to contain exchange rate volatility on daily basis through timely interventions.

So far, during this fiscal year, the rupee has lost 70 paisa or more than 1.2 per cent of its value by coming down to 58.82 a US dollar on September 6 from 58.12 at the end of June.

An increase in monthly average trade deficit may weaken the rupee further. But if the money sent home by the overseas Pakistanis and foreign private investment rise faster than expected then the impact of a higher trade deficit would be offset to some extent.