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One way to bridge Pakistan's widening trade

deficit - Pakistan

Muhammad Ashraf

In a bid to retard imports in the face of a gaping external account, the government
has recently levied regulatory duty on import of around 300 non-essential items
mainly vehicles, tyres, footwear, cosmetics, nuts and fruits in addition to 430 items
already subject to regulatory duty.

The first four months of the current financial year have added $9.2 billion on the
FY2017 deficit of $32.6bn. Though the external account imbalance has been endemic
to Pakistans economy, the spike during the last three years is unprecedented and
startling.

The deficit had remained around 80 per cent of exports till 2013-14 but has gradually
climbed to 94pc, 115pc and 159pc during the last three years. A candid analysis of the
structure of imports and exports is required to understand the causes of the widening
chasm in the external account.

Imports had remained stable at around $45-46bn from FY2012 to FY2016, but
swelled in FY2017 by $8.3bn, out of which the increase in import of machinery,
petroleum and food products has jointly contributed $6.5bn.

The major contributors to the import surge are (a) the investment-driven import of
machinery, industrial raw materials and intermediate goods, (b) 12pc additional
consumption of petroleum products due to 19pc price decline, (c) 13pc increase in
import value of palm oil due to 17pc hike in price, and (d) increase in import of pulses
and cotton by 60pc and 7pc respectively owing to shortfall in domestic production.

Unlike imports which have surged mainly during the last year, the erosion in exports
has taken place during the last three years due to multiple challenges. Firstly, the
19pc decline in Pakistans exports since FY2014 has coincided with 16pc contraction
of the global market from $19 trillion in 2014 to $15.9tr in 2016.

Secondly, the annual production deficit of nearly 5 million bales of cotton has
compounded the impact of global price crunch of major export commodities cotton
(18pc), non-basmati rice (17pc), basmati rice (42pc) and leather (30pc).

Structural transformation of the export sector is unavoidable to plug the

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unsustainable trade deficit. The earlier we reform, the lesser we bleed

Thirdly, the 20pc overvaluation of Pakistani currency (according to IMF estimates)

has been effectively taxing exports and subsidising imports by the same percentage
points.

During the last three years, there have been competitive devaluations by all major
competitors; swimming against the tide, the Pakistani Rupee has appreciated.

Fourthly, the competitiveness of the Pakistani export sector has gradually eroded due
to high energy costs, ever-increasing wages, increasing import tariffs on critical
inputs and liquidity crunch due to held-up refunds.

Besides the short-term competitiveness crisis, the export sector has chronic structural
ailments narrow export basket with excessive reliance on textiles, lack of product
sophistication, outdated technologies and lack of research and development, low
labour productivity, management inefficiencies, rent-seeking entrepreneurial culture
and fragmented economic policy framework with an anti-export bias.

A closer look at the import profile reveals that there is not much space available to
restrict imports. More than 85pc of imports are non-manoeuvrable.

The imports of $12bn machinery and $16bn industrial and agricultural inputs are
productive imports required for economic development; any quantitative or tariff
restrictions on $11bn petroleum imports would affect the entire economys
competitiveness; around $6bn imports of food items e.g. palm oil and pulses, though
outrageous for an agrarian country, are essential food products.

The import value of the 300 non-essential import items subjected to additional
regulatory duty last month is only $2.7bn. Even if it is optimistically assumed that the
new tariff barriers will succeed in reducing the imports of these items by 50pc, the
total saving in import bill will be a meagre 2pc of the annual trade deficit.

With limited space of restraining imports, the only viable strategy to arrest the trade
deficit is to boost exports. The gap of $4.8bn between the peak export performance in
FY2014 and the current export levels demonstrates that surplus production capacities
to fill this gap exist in the country, should the exports become competitive.

To increase the competitiveness of the export sector in the short term, the Prime
Ministers Incentive Package, which has been successful in stemming the decline in
exports during the last nine months, has been made available with relaxed conditions
till 30th June 2018. The cash handouts, however, are neither a lasting solution nor an
alternative to the intrinsic competitiveness of the export sector.

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Competitiveness can be restored through (a) gradual rationalisation of value of

currency, (b) reduction in energy tariff for the industrial sector to make it comparable
with the regional competitors like Bangladesh and India, (c) redirection to export
sector, the subsidised natural gas being currently provided to the fertiliser sector for
producing surplus urea for export, (d) withdrawal of import tariffs on the major
inputs of top-200 export products (which constitute 80pc of Pakistans exports), and
(e) the immediate release of sales tax refunds at the time of realisation of export
proceeds.

The long-term growth of the export sector, however, depends on structurally

transforming the export architecture gradual replacement of sunset sectors with
sunrise sectors like engineering, ICT and pharmaceuticals, integration into global
value chains, market diversification, product sophistication, standardisation, value
addition and branding.

Structural reforms have traditionally faced twofold challenge lukewarm support

from policy makers due to long gestation period and dogged resistance from the
vested interests of the incumbent sectors which the reforms seek to supplant with
futuristic ones.

Structural transformation of the export sector is unavoidable to plug the

unsustainable trade deficit. The earlier we reform, the lesser we bleed.

The writer is Director General, Ministry of Commerce

Published in Dawn, The Business and Finance Weekly, November 27th, 2017

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