The outlook for Pakistan’s trade deficit


MUHAMMAD FAROOQ DADABHOY

The excess of imports over export, or trade deficit, has received considerable attention from policy makers. Increasing trade deficit is a natural consequence of fiscal imbalances. As recorded by SBP trade deficit recorded a sharp 32.3 percent expansion during July-November FY08 and reached US $7.2 billion. Trade deficit for the same year during July-February FYO8 recorded a sharp US $3.5 billion increase.

Trade deficit has reached highest ever during the last five years as compared to 3 billion in the year 2003-04. Stunning increase in trade deficit during the five-year period will transfer domestic wealth abroad.

The deficit during the six months of current fiscal year indicates that it will be further enhanced in the current fiscal year. Soaring import is the main reason for imbalance in the Pakistan economy and rapidly increasing trade deficit as well.

Falling export and staggering trade deficit of the country has reached alarming levels. Even with complicated conditions in domestic and global fronts, export oriented industries have succeeded to maintain export target at a growth rate of 4 percent. However, the rate of growth in import was much higher – 14 percent- as compared to the four percent growth in exports. If the current surge in trade deficit is not capped, it may hurt the country’s economic growth. Inadequate electricity supply given to industrial sector, too, has hampered production, requiring high maintenance cost, which in turn has eroded product competitiveness.

Although, there exists a surplus labour force in Pakistan, the quality of such a labour is relatively poor in terms of productivity. A good quality labour with technological, innovatory and managerial capabilities and organisational competencies is considered to be significant in improving the competitiveness of countries for inward FDI. But there appears to be a lack of such qualities and skills in labour force in Pakistan.

Low return on capital, low productivity of labour and high rate of bank interest, increased wastage of inputs are the other factors which have made Pakistani products more expensive than those from neighbouring countries. The higher trade deficit leads to outflow of capital resources from the country on one hand and indicates the economic dependency on the other hand.

‘Import substitutions’ and ‘export growth’ are the two alternative strategies to curtail the trade deficit. The history of trade policies in Pakistan shows that both the measures have been experimented in different political regimes. However, in the era of globalisation and free trade regime, it is not possible for the developing countries to adopt ‘import substitution policy’. We cannot stop the import of machinery, high tech instruments, medicines, and oil and food items not being produced in Pakistan.

To control the budget deficit, we will have improve the competitiveness of the domestic industry. This strategy will not only improve the exportability of the industry but also provide substitution of the imported products, as it was observed that a large part of imported products belong to the luxury items.

As the current trend indicates, it seems difficult to post a balance of payment surplus during this fiscal year without borrowing from abroad. Pakistan’s trade deficit can be easily controlled but what is needed is concrete planning and remedial measures to enhance exports to control the trade imbalances which are a serious threat to the economy. Investment should be encouraged in the industrial sector where there is lot of opportunities to improve our export. Pakistan is a state with abundance of natural resources, the northern parts of which are covered with lush green valleys. God has blessesd the country with natural sceneries, world’s second top most peak which has a natural attraction for visitors.

But it is a matter of great concern that despite the enormous potential and attractive business opportunities in Pakistan, the potential investors did not come out with money at the desired level due to various reasons, especially the unpredictable policies and law and order situation in the country. As the trade rule says, “Investment in any business, any area and any country calls for careful judgement and conducive environment. Recently, the size of the Foreign Direct Investment (FDI) decreased drastically to 2.1 billion (July to January) as compared to the previous couple of years.

Sources in business circles are attaching great importance to the current scenario of economic activity including Chinese investment in the deep-sea Gwadar port, power generating units at Lakhra and hopefully Thar coal fields, and political stability in neighbouring Afghanistan as these two factors have every potential to create infinite economic activity not only for Pakistan but in the entire region.

(The writer is Vice President FPCCI)

Courtesy: Business Recorder, 13/5/2008

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