Pakistan, Export, GDP

One of the perennial features of the economy of Pakistan has been the duet of the trade and fiscal deficits. In addition to the economic factors behind these lacunae, there are various socio-cultural factors too. Indeed, the populace of the third world countries tends to be inspired by the lifestyle of the rich west. And in a bid to imitate their way of living, the people drive the demand for luxury goods, hence the higher imports of such goods. Meanwhile, the nexus of various constraints in the supply and a burgeoning population ensure that the exports fail to keep up with the imports.

The stats paint a bleak picture in this respect to Pakistan. The trade deficit during the first six months of the current fiscal year rose to $18 billion, recording an increase of 24.5% overall.

The stats paint a bleak picture in this respect to Pakistan. The trade deficit during the first six months of the current fiscal year rose to $18 billion, recording an increase of 24.5% overall. ‘Pakistan’s exports had registered at $11 billion during July-December of the year 2017-2018 as compared to $9.9 billion of the corresponding period of the last year showing a growth of 11.24 percent,’ as per a report in Dawn. Meanwhile, the inflows of foreign currency are rapidly drying up, as is evident from the drop of over $4.5 billion during the past year. In addition to this, the current account deficit has also doubled during this time as it rose up to $6.430 billion.

Here is where we focus on the economic factors responsible for the persistent trade deficit of the country. To start with, Pakistan has been historically inclined towards import substitution policies rather than export promotion ones, in a stark contrast to many East Asian nations. As a result, the country continues to rely on textiles as its main export owing to its failure to broaden the export base. Today, textiles and related products constitute 60% of our exports, while other items have taken a big hit: the decrease ranging from 2 to 22%. A large share of such exports hail from either the agriculture sector or some small and medium enterprises. However, these sectors have suffered unfortunately due to many factors ranging from over-taxation of inputs to a restricted availability of credit from commercial banks.

The government needs to come to terms with the fact that the expanding imports are not due to the promising economic growth of the country, rather it is due to the overvaluation of the national currency.

A second factor that has crippled our economy is the overvaluation of the Rupee. Since the year 2014, Pakistan’s exports have dithered as they are not competent enough in the international market, thanks to the overvaluation of the Rupee by over 20%. The government needs to come to terms with the fact that the expanding imports are not due to the promising economic growth of the country, rather it is due to the overvaluation of the national currency. It is high time for the country’s policymakers to realise that the loss of the international trade’s buoyancy has translated into a small-scale trade war that is waged through a competitive devaluation of currencies.

To add to the burden, the home remittances along with the money sent by the Pakistanis abroad have been the only source that have financed a majority of the country’s trade deficit for the past many years. But in the past financial year, there has been a lack of growth in remittances which has reduced the amount of financing to only about 50% of the total deficit. Hence, the resultant gap in financing has amplified Pakistan’s current account deficit which would have to be financed either by borrowing from external sources or by emptying our foreign exchange reserves.

It is projected that Pakistan may have to contend with a financial crisis over the upcoming year and half if the trade deficit is left unchecked. As a result, the country may be forced to turn to the International Monetary Fund (IMF) for another bailout which would probably necessitate prior action, including a devaluation of the national currency. This was the case the last time Pakistan went to the IMF with pleading eyes and empty pockets.

Another area that needs attention is the imports. The national basket of imports can be classified into three categories namely: essential items like food and petroleum related products; capital equipment and raw materials; and luxury goods. For obvious reasons, it is not desirable to restrict the imports of the first two categories. However, the government can keep a check on the imported luxury items. As is the case with other developing nations, Pakistan has a large gap between the applied and its bound tariffs on imports. Nonetheless the issue that pops up is that much of the demand for luxury items comes either from the politically influential, affluent elites or the government itself. Hence, restricting such imports presents various political dilemmas.

Instead of imposing further regulatory duties on imports which may result in under-invoicing, a more suitable course of action would be to introduce a policy of lower-caps on prices of imported items as was done with sugar. Moreover, if any good is imported at a level more than the specified level, the tariff on the import may be doubled. This would also reduce the amount of speculation by the importers given an overvalued exchange rate and plunging interest rates.

Such a gradual depreciation would save the national economy from a sudden drop in the price of Rupee in the future which may spur inflation to possibly venture into double digits.

The policymakers in Islamabad also need to urgently secure its balance of payments. In today’s times where the feelings against globalisation are taking root and many of the economic giants are inclining towards protectionism, increasing the level of exports seems a daunting task. The need seems quite urgent especially considering that there is a need to bridge the trade gap by almost $10 billion over the next three years by employing prudent trade policies. The right path to pursue would seem to be a gradual depreciation of the Rupee. Such a gradual depreciation would save the national economy from a sudden drop in the price of Rupee in the future which may spur inflation to possibly venture into double digits.

Turning our attention to the other side, Pakistan has quite a narrow export base. Its exports are restricted to the primary products and some semi-manufactured ones, including textiles and leather. The national exports lag behind not only in value addition, but are also sold to the lower end of the global markets. And to top it off, the agro-based nature of the national exports make it a function of the vagaries of weather – a risky bet. A bad turn in the weather can significantly hurt Pakistan’s economy, as was witnessed by the bad turnout of the cotton crop during the current fiscal year. This reflects a dismal state of the country’s industrial sector. Pakistan needs to actively exploit its GSP-plus status, bestowed on it by the European Union. It needs to draw as much as it can from the free trade agreement with China and the South Asia Free Trade Area (SAFTA) agreement. It needs to develop new markets for its products in nations like Turkey, Iran and the Central Asian Republics (CARs).

Another structural flaw of the country is a fatal neglect of national human resource development which has resulted in abysmally low labour productivity. The corporate sector is under the illusion that the key to competitiveness lies in low wages. Instead, they fail to realise that the answer lies in higher productivity of labour. The country needs to develop its education sector by not only increasing the share of national GDP on education, but also ensuring its efficient use. In addition, there is a severe deficiency of an entrepreneurship culture in the national economy – a factor that is among the most important cogs in an economy’s economic growth and industrial sector development. Most of Pakistan’s businesses are headed by a select few families who have no interest apart from making huge profits and taking no risks. Such an environment stymies innovation and technical development which stunts the economic growth of the country. Such a culture must be promoted in order for the national economy to develop and venture out of its dependence on the agriculture-based exports.

Muhammad Saad

is a graduate of School of Economics of Quaid-i-Azam University, Islamabad. He has specialized in the field of development and political economics with additional non-credit courses of Environmental Economics and Monetary Policy. Currently, he works at the CSCR.

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