Reducing trade deficit
The latest figures show that Pakistan's trade deficit remained at $3.19 billion in July even as the rupee lost its value against the US dollar, suggesting that the move to let the currency slide will not be enough to control the burgeoning gap between imports and exports. According to the Pakistan Bureau of Statistics (PBS), the country's exports stood at $1.646 billion against imports of $4.838 billion last month, putting the trade deficit at $3.19 billion, up 0.31% compared with $3.18 billion in the same month of the previous year.On a month-on-month basis, exports decreased from $1.887 billion in June 2018, while imports came down from $5,694 billion.It is relevant to point out here that in a bid to control the deficit that has eroded the country's foreign exchange reserves, the State Bank of Pakistan (SBP) has let the rupee go on free flotation on four separate occasions since December 2017. As a result, the rupee has lost close to 18 percentof its value against the dollarin the last eight months.
As per economic experts, analysing one-month data will not be enough to see the effects of rupee devaluation and that a weaker currency will not be enough to resolve Pakistan's crisis.They suggest that the authorities must take measures to curtail imports and boost exports.For example, Egypt failed to bring positive changes in its external trade despite depreciating its currency to boost exports and curtail imports. It means that Pakistan needs to cut imports by $6-7 billion to narrow down the trade deficit in real terms. In addition to rupee's devaluation, the previous government imposed regulatory duty on hundreds of items, and extended an export package to the textile sector.While exports did rise, the increase was not enough to narrow down the trade deficit.Resultantly, the deficit eroded the country's foreign exchange reserves to alarming levels before China extended a $1 billion loan.The SBP also made credit to the private sector expensive by 175 basis points to 7.5% since January 2018, to tame aggregated demand and fix the current account deficit.
Expert opinion is that rupee devaluation may not help reduce the deficit as a majority ofimports are used by export-based industries as raw material. So the measure may never achieve the desired results.If the impact on balance of trade was to come, it would have in the last 3-4 months, as authorities have been devaluing rupee for about eight months now. In other words, beyond devaluation the country needs structural changes, like diversifying exports instead of heavily relying on the textile sector, lowering cost of production and rationalising taxes on imports and exports.
In the previous fiscal year (FY2017-18), imports stood at $60.86 billion, which was 2.6 times of exports of $23.22 billion, resulting in a historically high trade deficit of $37.64 billion in the year.Imports were heavily dominated by energy (oil and gas) and machinery purchases amounting to $14.43 billion and $11.56 billion, respectively, in fiscal 2017-18. On the other hand, the textile sector drove exports with its share coming to 54% in the total during the previous year. Clearly, a new strategy is needed to reduce the current trade deficit. On the one hand, we must put a ban on all unnecessary and luxury imports such as expensive cars and gadgets as well as on food imports because the country is surplus in food production and we do not really need the food that we are at present importing. Simultaneously, we should take steps to diversify our exports and find new destinations for them.