Re­duc­ing trade deficit

The Pak Banker - - FRONT PAGE -

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.

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