Grappling with a chronic trade deficit

While rising domestic production did not address growing dependence on foreign goods and services nor did exports move fast enough to keep the trade deficit from taking an unsustainable path, policymakers are now considering regulatory measures to curb surging imports.

According to State Bank of Pakistan (SBP) data, the import bill rose 62.2 per cent to over $13 billion during July-August, up from over $8bn in the corresponding months of last year. Though steep rupee devaluation has made foreign goods expensive, it has failed to curb rising imports. And trade deficit has sharply increased by 93.5pc during the first two months of 2021-22.

The proposed regulatory measures, officials say, will not affect the growth target of 4.8pc for this fiscal year.

Simultaneously, Finance Minister Shaukat Tarin has assured the International Monetary Fund (IMF) of Pakistan’s commitment to the IMF’s programme when nominated Fund’s resident representative to Islamabad Esther Pervez Ruiz called on him on September 27.

The Asian Development Bank (ADB) however, sees Pakistan’s economic growth for 2021-22 at 4pc provided private investment and business activities pick up with steady Covid-19 vaccine rollout.

Meanwhile, concerned ministries are preparing lists of luxury/non-essential imported items on which regulatory duty will be increased in order to curtail the rising import bill, say official sources.

After scrutiny, the Tariff Policy Board is expected to send the proposals to the Economic Coordination Committee and the Cabinet for approval.

Bankers say the Rs172bn increase in borrowings is a clear indication that the private sector has been chasing annual economic growth faster than anticipated by the government and the SBP

Inheriting a record trade deficit of $37.6bn in 2017-18, the PTI government had raised tariff barriers to slash imports. It turned out to be a temporary regulatory measure as growth started to pick up. Pakistan has also not succeeded in reducing adverse imbalances in bilateral foreign trade.

The State Bank of Pakistan (SBP) has also decided to slow down the growth of imports and moderate domestic demand by bringing about changes in prudential regulations, beginning with curbs on the financing of imported vehicles.

With the inter-bank market in the grip of speculative reports and observations, the rupee plunged to an all-time low of Rs169.97 against the dollar on September 28. “Panic buying has caused the rupee’s slide,” says Ismail Iqbal Securities Head of Research Fahad Rauf.

Anticipating the SBP policy rate hike by 25 basis points to 7.25pc, the private sector stepped up its borrowings from banks. Between September 3 to 17, the borrowings increased by Rs172bn against a net retirement of Rs133bn recorded in the same period last year.

Bankers said it was a clear indication that the private sector has been chasing the annual economic growth faster than anticipated by the government and the SBP.

According to the Pakistan Bureau of Statistics, (PBS) in August import of some major groups as compared to the same month of last year shot up as follows: petroleum 127.51pc, machinery 52pc, chemicals 122.51pc, metal 83.04pc, food 82pc and transport 234.74pc.

Media reports suggest that the cash margin for opening on Letter of Credit for imports will increase soon.

The food import bill, PBS figures show, also increased by over 50pc to $1.473bn in the first two months of the current fiscal year against 0.980bn in a year-ago period in an official effort to bridge the gap in production. The main items of imports were sugar, wheat, palm oil and pulses.

To build strategic reserves, the government has also decided to import six million tonnes of sugar and 4m tonnes of wheat in the coming months.

There are however positive indicators in respect of some crops in this fiscal year About 2.69m bales of cotton have reached ginning mills so far — nearly 160pc higher arrivals against 1.04m bales of last year. The National Food Security and Research Minister Syed Fakhr Imam says the country’s cotton production will exceed the earlier estimate of 8.46m bales.

The government had set an intervention price of Rs5,000 per 40kg which officials said encouraged growers to invest in crop management and harvest higher yields.

In the first crop estimate, the country has become self-sufficient in the production of mung beans. The output has been estimated at 253,000 tonnes against the domestic demand of 180,000 tonnes, according to an announcement in a meeting organised by the Pakistan Agricultural Research Council on its project ‘Promoting Research for Productivity Enhancement in Pulses.’

On the supply side, ADB sees the outlook for agriculture as ‘encouraging’ in view of the government’s ambitious Agriculture Transformation Plan. Noteworthy, the Bank says, are also efforts to augment bank credit and introduce Kissan Card as a digital wallet for direct and swift transfer of subsidies for seed, fertiliser and pesticides.

The government is eying wheat production of 30m tonnes during 2021-22, against an output of 27.5m in 2020-21.

Besides reducing imports, the expected improved farm harvests will provide an impetus to the manufacturing sector and exports.

Advisor on commerce and investment Razak Dawood says the target for exports for this fiscal year for goods and services has been raised to $40bn against the initial projection of $38bn. He believes the only permanent way to stop returning to the IMF is through exports.

SBP data shows that the export receipts for goods posted a 55pc jump in August at $2.881bn, up from $1.860bn in the same month last year. Exports in August were slightly higher than in July.

But according to PBS data, textile and clothing shipments recorded an impressive growth of 28.67pc to $2.93bn during July-August compared to $2.28bn over the year period.

Mr Dawood is of the view that exports will not only fetch foreign exchange but will also generate employment opportunities and aid in import substitution which is another government target.

Quoting an example, he elaborated that the government has facilitated local production of mobile phones which has surpassed imports while exports of cellular phones have also started.

Now, says the advisor, we are trying to enter the global value chain by diversifying export products in terms of sectors, spectrum and geography. The focus is shifting to exports of engineering goods, marble and minerals, pharmaceuticals, processed food and beverages, gems and jewellery, chemicals, meat and poultry, food and vegetable.

To encourage businessmen to set up engineering units, a 5pc tax rebate is offered against 2pc on textiles. And special importance is being accorded to exports of services in IT, transport, logistics and tourism segments.