Pakistan’s diminishing Trade deficit: Hard time is over?

The economic and financial condition of Pakistan is on the day-to-day slope and it has to be forced to spread its hands across the world. But in this situation, news that provides some relief to Pakistan also gets occasionally. According to latest figures from the recent reports by Pakistan Bureau of Statistics, that Pakistan's trade deficit has decreased by approximately 2 billion dollars in first half of present financial year commenced from July 2018 to the January 2019. Trade deficit between July 2018 and January 2019 this year was $ 19.24 billion, which was at the level of $ 21.32 billion between July 2017 and January 2018, just one year ago. In this period (i.e. July 2018 to January 2019), Pakistan's exports grew by 2.2 percent and it increased from $ 12.94 billion between July 2017 and January 2018 to $ 13.23 billion. In the same period, imports also decreased by 5.17 per cent and it came down from $ 34.27 billion to $ 32.49 billion.

The Ministry of Commerce of the Government of Pakistan says that this is the result of the effective policies of the new government. According to these figures, the trade deficit decreased by $ 1.14 billion in the single month of January 2019, because of a spill of $ 1.07 billion in imports in this month, which a clear 19 percent is drubbing in total imports. On the other hand exports also increased by 4 percent. Import of such products on which regulatory duty was levied, was reduced by 16 percent in January 2019. Electricity generation is Pakistan's most important economic and strategic projects, the imports of these related items also decreased by $ 724 million in January 2019. Exports of copper items and shoes have also seen handsome growth. From July 2018 to January 2019, the export of cement increased by 50 percent. Import of furnace oil has decreased from 3 million tons to 0.4 million tons. At the same time, there has been an increase in the export of many commodities in the past months. The manufacturing of cotton textiles is the major economic activity of Pakistan. During this period, there was an increase of $ 306 million in cotton textiles exports. During July 2018 to January 2019, the overall export reaching $ 13.2 billion by a rapid growth of $ 292 million or 2.24 percent.  Exports of items like wheat, rice, ethanol and potato reached to $ 248 million. Only the export of potatoes was observed in terms of quantity 120 percent and in terms of rate of at a increasement of 116 percent. Pakistan imports $ 3 billion of edible oil every year but it also plans to replace it by locally produced oil seeds such as sunflower and canola.

Catalyst of these events

There is a direct link between many positive and negative developments and Pakistan's growth in exports and reduction in imports. The exchange rate of Pakistan Rupee has severely declined by more than 33 per cent in the last one year and it has dropped more than 15 per cent since the start of the new financial year in July 2018. As well as for the promotion of exports, from last 3 years a large amount of concessions are being given. Erstwhile Pakistan Muslim League Government, with the leadership of Nawaz Sharif, had made a provision of 180 billion Pakistani rupees for the promotion of exports. Under the leadership of Imran Khan, Tehrik-e-Insaf Party led new Government of Pakistan made a provision of 30 billion Pakistani rupees for providing concessional gas and electricity to export-centric units at the beginning of its tenure.

Many experts believe that recent contentious trade relations between the US and China have beneficial for countries such as Vietnam, Bangladesh and Pakistan where importers from United states of America showing great interest.

Some Indicators

In the last financial year, Pakistan's trade deficit was $ 37.6 billion, which is also responsible for the worst case scenario of Pakistan's current account deficit, which reached $ 18.9 billion. The government of Pakistan plans to bring this trade deficit at a level below of $ 26 billion, which seems to be far away in the current circumstances.

If we look at by dollar terms then the export has increased only 4 percent in January, 2019. But if we look at exports from the perspective of the Pakistani rupee, then this increase has been more than 30%, due to which there is a rapid devaluation of Pakistani rupee. Similarly, in the situation of imports in January 2019, we  saw a decline of 19 per cent in terms of Dollar, whereas in terms of rupee it was 31.7 per cent decline in imports.

Look at the trade deficit inside

 Once Textile manufacturing and trade was a flagship business activity in Pakistan. But now Textile industry is not in very good condition in Pakistan and the increase in exports has come from the export of value-added textiles, for which cotton is being imported as there is a shortage of between 40-50 lakh bales per year, and the main reason behind this “that the cotton cultivation area is shrinking due to the sharp increase in the sugarcane cultivation areas. In such a situation, the weaker rupee can help in the growth of this export, but the rising cost of production is the biggest obstacle in such kind of path of profit. At the same time, the lack of liquidity in this area is also a major obstacle. Apart from the promises of tax refunds, the promises made to this sector were remained limited to the paper only. Along with this, lack of capital has become a great hindrance for the manufacturers, due to which the available capabilities are not being utilized.

Similarly, the shining area of another export is basmati rice. Pakistan has benefited from the impediments imposed on the import of Basmati from India by the European Union and it increased by 26% in the first six months of the new financial year. On the other hand, it is a surprising fact that the total rice exports of Pakistan have actually decreased. Pakistan's non-basmati rice export which was mainly used by African countries, has suffered a major loss due to the export from India and China.

Export of wheat and sugar is based on full export subsidy in which sugar has been given 100% subsidy to export, in such situation, these exports do not have the actual effect as it appears.

Realization of imports

The biggest share in Pakistan's imports are still petroleum products. The cost of import of Pakistan has increased due to heavy depreciation of the rupee and the rise in petroleum products. Restriction on Furnace oil has reduced the import of some volume of petroleum products, but the use of natural gas as its substitute has created a double size import bogey of natural gas.

The import of machinery remained a significant part of Pakistan from 2014 to 2017 but since then it has been declining because the work of important power projects under CPEC is almost completed. In the first 6 months of this financial year, decreasing of about $ 1 billion in imports of such imports has played an important role in reducing the import bill.

The devaluation of Rupee has severely hurt the automobile business in Pakistan. Along with devaluation, high interest rates have made import of vehicles highly expensive. Their import has decreased to about the value of $ 500 million, due to which the import bill has been reduced.

Conclusion

In Pakistan, reducing imports and the considerable growth of exports is a positive indicator for the economy, but the circumstances under which it is happening are not natural. Despite the existence of catalysts and measures taken, such as heavy devaluation in exchange rates of Pakistani rupee and some kind of export promotions, the results have seen can’t be said adequate from any point of view. Contentions between China and America have to be resolved with time. The devaluation of the rupee is not a quick benefit compared to the long-term losses for economy. At the same time, the fundamental structure of Pakistan's economy, which is terribly chaotic, when it does not have such resources, then how, will it cope with these situations, it is a matter of concern.