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Pakistan hit by growing trade deficit

/ 23 January 2012

Pakistan is hit by a burgeoning trade deficit at a time when the country is likely to face numerous problems of external balances. The big question now: Is Pakistan heading towards a record $22 billion trade deficit in the current fiscal-2012 that ends June 30?

Costly commodities, and high prices of oil are pushing imports up as exports are sticky and foreign aid inflows are shrinking. The situation only worsenes as nearly $ 4.2 billion foreign debt repayments is scheduled in the months ahead. 

Pakistan Bureau of Statistics (PBS) and State Bank of Pakistan (SBP), the central bank, have just unveiled the scenario in the context of continuing low appetite for Pakistani export products in United States and Europe, with financial and business crisis continuing there. The deficit may further widen because of the continuing rise in the prices of commodities and imported oil, and the increase in demand for imported energy, and industrial machinery and inputs, if the manufacturing sector continues with the present spike in its output. The trade deficit in the first half of fiscal year-2010 that ended December 31, widened 38.5 per cent to $11.476 billion as against $8.287 billion in the like period of fiscal year-2011. The trade deficit for fiscal year-2012 to June 30, this year is now being projected by independent economists and analysts at a record $22 billion. However, the government is projecting it for fiscal year-2012 $17.232 billion. This is based on its assessment that the economy will look up, raise the demand for imported industrial inputs, capital goods and machinery, petroleum products, and food.  

Exports, in six months to December 31, the first half of the current fiscal year 2012, rose just 3.9 per cent, to $11.237 billion, up from $10.815 billion in the like period of fiscal year-2011. Exports are stagnating due to massive shortage of electricity and natural gas, as the producers are losing foreign orders.  

The deficit in the services sector widened to 18 per cent in the first five months of fiscal year-2012, compared to fiscal year-2010 because of a slowdown in exports and rise in imports. The deficit widened to $1.166 billion compared to $984 million in the like period of fiscal year-2011, PBS says. During fiscal year-2011 services export was $5.495 billion as against $5.229 billion in fiscal year-2010. 

The government has set an export target of $25.618 billion for fiscal year-2012, but Tariq Iqbal Puri, Chairman of government’s Trade development Authority of Pakistan (TDAP) estimates “exports will remain between $23 and 24 billion , compared with $25 billion in fiscal year-2011 because of the worst financial crisis in EU and economic slowdown in US. The ongoing domestic energy crisis and low productivity are also responsible for decline in exports.” 

Exports put up a good show in fiscal year-2011 when the world wide commodity prices — including cotton — were ruling high and Pakistani textiles had greatly contributed to total export volume as well as forex earnings. The government projects the fiscal year-2012 imports at $42.910 billion. The actual imports rose 18.9 per cent  to $22.713 billion — nearly double the exports — during the first half of fiscal year-2012. Imports in the like six months of fy-2011 were $ 19.10 billion .

The export slowdown is heavily straining the balance of payments, due to the fact that imports are simultaneously are rising, as import bill for oil, food and commodities is going up.   

The Current Account Deficit (CAD) in July-November, the first five months fiscal year-2012 widened to $2.104 billion up from just $ 589 million recorded in the like period of fiscal year-2011. SBP notes, since January 2011 the trade deficit was narrowing, compared to 2010. It is attributed to regular growth in month-to-month exports, coupled with a slowdown in imports which went on to June 30, 2011. But those months were followed by a surge in demand for imported raw materials and industrial inputs, as the industrial output witnessed a spike. This is owed to the fact that demand from the industrialists and manufacturers witnessed a revival of appetite for bank credit as the interest rates declined somewhat following lowering of the bench mark Discount Rate by SBP. Quantitatively, larger amount of bank credit was also available for the business and industry. But looking at the demand side of the industry and consumers, the news for Pakistan’s business partners is that they should look forward to export more to this country. Islamabad is confident it can, and will, foot the bill for these larger imports.

Views expressed by the author are his own and do not reflect the newspaper’s policy.

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