Trade and current account deficits
Hallmark of economy

By Shazia Mehmood Khan

According to official claims, the trade deficit was recorded at 17 per cent during the first five months of the fiscal year 2006-07 whereas it was 54 per cent in the same period of the previous year. But on the contrary, the trade imbalance has gone up sharply to $6.46 billion during the first half (July-December) of the current fiscal which is about 15.3 per cent higher than the corresponding period of last fiscal $5.604 billion. During the period, Pakistan’s exports totalled $8.436 billion and imports $14.896 billion against $8.047 billion and $13.65 billion, respectively. Pakistanís economy pulled in 9.1 percent more imports during July-December, while exports rose by 4.8 per cent only. Each month, the import growth exceeds exports steadily widening the trade gap.

Trade policy targets

The government targeted imports at $28 billion and exports at $18.6 billion with a trade deficit of $9.4 billion during the year.

SBP estimations and strategy to manage

The trade deficit will remain in the range of $9 to 10 billion. Pakistan had non-debt creating inflows of about $8 billion a year in the shape of remittances, privatisation proceeds, FDI and sovereign bonds. However, in the long-run the trade deficit will have to be effectively managed.

Latest achievements

The country achieved 45.36 percent of exports and 53.19 percent of imports target. The huge import pressure and low exports growth envisages that by the end of this fiscal, trade deficit would exceed the set target of $9.4 billion.

Fears and projections

It is feared that if the current trend persists, by the end June 2007, the
government may not be able to hit the exports target of $18.6 billion. Imports are likely to cross the target of $28 billion. During the last fiscal 2005-06, the government had missed its exports target of $17 billion by a margin of $531 million.

Federal Bureau of Statistics

FBS has indicated that in case exports did not pick up in the second half (January-July) FY07, the trade deficit was expected to cross the $13 billion mark. The government in the trade policy projected a trade deficit of $9.4 billion, exports at $18.6 billion and imports at $28 billion for the current fiscal year. A record trade deficit is expected for 2007, as per FBS forecasts.

The import bill

The import bill reached to record $14.895 billion during the first six months of the 2006-07 as against $13.650 billion the same period last year, indicating an increase of 9.12 per cent. Exports managed to record a marginal growth of 4.83 per cent to $8.436 billion during the July-December 2006-07 over $8.047 billion exports. Sorry to say that the performance of all export-oriented sectors was not encouraging despite having received huge cash subsidies from the government during the 2006.

Pakistan’s trade deficit with China

Despite too many trade agreements and FTAs, Pakistan’s trade deficit with China has increased significantly in the last two years from $865.211 million in 2003-04 to $1.488 billion in 2004-05, indicating a rise of over 72 per cent. 2006 proved to be no different

Reasons

The consistent increase in trade deficit with China was due to ever-increasing quantum of import of machinery and parts, textiles and chemical products from China particularly following the preferential trade agreement [PTA] effective from January 1, 2004 and FTAs.

Statistics

It showed that Pakistan’s trade deficit with China stood at $245.512 million during the year 1998-99; $291.201 million in 1999-2000; $225.781 million in 2000-01; $346.588 million in 2001-02 and $594.465 million in the year 2002-03. The trade deficit had increased to $865.211 million during 2003-04
and $1.488 billion in the year 2004-05. Only in the first quarter (July-Sept) of the current fiscal year, the trade deficit with China was recorded at $571.992 million.

The trade gap with China would further widen during the current fiscal year as the early harvest programme [EHP], zero rate of duty which would attract more Chinese products at cheaper price to Pakistani markets.

Comparative study

Pakistan’s export to China has increased by 22.8 per cent to $354.092 million during the year 2004-05 as against $288.259 million in the previous year after the implementation of the PTA. While Chinese exports rose by 59.75 per cent to $1.842 billion during the period under review as against $1.153 billion during the same period last year.

Management of rising trade deficit

* Increase in home remittances ($5.5-6 billion)

* Foreign investment & the portfolio investment ($3.5-4.5 billion)

* The foreign exchange reserves ($12.5-13.29 billion)

* Availability the soft loans

* Privatization ($ may fetch $ 2.5-3.5 billion, 13-15 % of  current account deficit)

Current account deficit

According to latest data of SBP (January 2006) the current account deficit has gone up by 22 per cent during the first five months (July-November) of the year while the pressure is mounting with rapid increase in trade deficit. It reached a total $3.753 billion. 

The country had witnessed a deficit of $3.068 billion during the same period last year, which means that the latest deficit rose by 22.32 per cent. The rising current account deficit is largely led by the widening trade deficit, which widened to $6.45 billion during July-December 2006, 15 per cent higher than the same period of last year.

Main concern

The widening current account deficits have been the real source of concern for the government, which financed the gap by selling its assets, workers’ remittances and the inflows coming as foreign investment.

Management of current account deficit

Issuance of GDR

The government has already issued GDR of OGDC to raise substantial amount that would help it finance the current account deficits. The government has raised $800 million through GDR of Oil and Gas Development Company (OGDC).

Issuance of bonds

Many options are under consideration to issue sovereign bonds in the international market to raise more foreign exchange. But it is feared that the borrowing would further burden the country’s balance of payment ability as debt servicing would increase. The government has already issued Euro Bonds and Sukuk Bonds.

Failure of trade policy

The rising trade imbalance is also a sign of government’s trade policy, which failed to push the export as per the target of 13 per cent and narrow the gap. The exports have so far increased by just over 4 per cent.

Main hurdle

The main hurdle in the way of narrowing the trade gap is the increasing oil bills - the import of fuel oil has gone up by 50 per cent during the first five months. The services sector was also on the negative side as the balance of goods and services reached minus $6.175 billion during July-Nov.

Concluding remarks

The IMF, WB, ADB, IFC and many other international agencies have already warned government to manage its widening trade and current account deficits which were remained uncontrolled during the 2006. Despite all the big claims, and smooth sailing of economy in the range of 6.4-6.5 per cent, both were on the rise and continue to do so.