KARACHI, July 17: External trade policy is an extension of national agenda geared to the needs of a domestic economy. Foreign trade brings prosperity to the local market. Yet, given the narrow industrial production, export and import base in a developing economy, trade and current account deficits often tend to choke foreign trade.
Many countries depend on remittances, external debts and foreign investments to make up for the shortfall in domestic savings and to tide over trade and fiscal deficits. But this does not bring stable and long-term outcomes.
The best way to contain trade deficits is to boost indigenous production where it is feasible, first to meet the domestic demand and later to exchange trade surpluses in the more sophisticated global market.
This has happened over time in case of Pakistan. The composition of exports and imports would indicate that foreign trade has, by and large, assisted the industrialization process. Ninety per cent of the imports are accounted for industrial raw materials and capital goods. Only 10 per cent is spent on consumer items.
Similar is the situation in case of exports. The share of primary goods is 10 per cent, semi-manufactured items 12 per cent and manufactured goods 78 per cent.
Industry as a whole now contributes 25 per cent of the GDP as compared to just over 23 per cent coming from a much neglected agriculture sector considered as the mainstay of the economy. It is industry that leads to growth in all sectors of the economy. Foreign trade policy must help quicken the pace of industrialization. And globalization should not be allowed to destabilize the industrialization process.
With a major drive towards globalization of the economy, a sustainable growth is not possible with widening trade deficit. This is true in case of the most developed market economy like the United States whose trade deficit has not only devalued sharply the dollar but stifled the inflow of foreign investment. The American foreign debt is about the size of total external debt of rest of the world, though its debt servicing is comparably nominal. Pakistan is just coming out of the debt trap. Unless the balance of payments is managed well, it will sooner or later have to go for another IMF facility.
During July-April 2003-04, exports were up by 13.1 per cent to reach $10 billion but imports moved faster by 19 per cent, exceeding over $12 billion. Imports are highly concentrated in categories that constituted 72 per cent of the total import bill. These comprise machinery, petroleum and petroleum products, chemicals, transport equipments, edible oils, iron and steel, fertilizer and tea.
While the government has succeeded in attracting foreign investment in the oil and gas sector, fertilizer is on the agenda. Investment prospects to substitute imports of other imported items need to be explored. Cultivation of crops like sunflower, cannola, etc., could be encouraged more aggressively.
Like imports, exports are also highly concentrated in cotton and synthetic textiles, rice, leather and sports goods and these account for 79.8 per cent of the total foreign exchange earnings from merchandise in nine months of the out-going fiscal year. Exports need to be diversified by broad basing domestic production. There is no doubt that significance of value-addition can never be over emphasized.
The current account surplus for July-March 2003-04 dropped by 50 per cent to $1.37billion from $2.7billion during the comparable period of the last fiscal year. The capital account has turned from a surplus of $1.7 billion to a deficit of $425 million because of pre-payment of $1.17bn debt.
And despite the pre-payment, the external debt has increased by $0.95 billion over the fiscal 2004, implying that new debt of at least $2.12 billion has been incurred. These changing trends have to be kept under constant watch.
In developing economies on a growth path like Pakistan, imports exceed exports. The trade deficit can be covered by remittances, external debt and foreign investments but more prudently, by a policy of national self-reliance. It means producing for domestic demand and exchanging trade surplus in the international market. It must be recognized that an export-oriented growth has evaded us.