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Pakistan’s trade deficit under strain?

Is the trade deficit of the country coming under strain? This seems to be the likely trend, as external accounts for July-October, a third of the current FY-2011 indicate. The government, businesses and the central bank will have to act now to keep down the trade deficit and protect external balances.

The deficit had been contained last year on the back of the then declining import prices, and reduced quantitative imports as the domestic industry was not operating in full gear in the wake of business slowdown, reduced demand at home and abroad, and the ongoing energy crunch.

The trade deficit for July-October FY-2011 has widened to $5.08 billion, compared to $4.54 billion in the same period of FY-2010, Federal Bureau of Statistics show.

This is in spite of the fact that exports rose 19.17 per cent to $7.17 billion — up from $6.91 billion in the same period of FY-2010. It was almost offset by a 16 per cent growth to $12.25 billion in imports.

Imports in the corresponding period of FY-2010 were $10.56 billion. The full year exports in FY-2010 were $19.32 billion. The official export target this fiscal year is $20 billion. However, businesses estimate it can go up to $21 billion. Imports are estimated at $39 billion.

But is there hope for exports to grow during the remaining eight months of the fiscal year? Foreign trade analysts hope for the better. Their expectation is based on the fact that the recovery in economies of the advanced and Western countries is gaining momentum, improving the prospects of larger exports of Pakistani products. But in order to swing it around, Pakistan must overcome its energy crisis that is slashing industrial output. The present and planned power and gas outages must be contained. The industry and industrial workers, in major cities, are already protesting against energy cuts.

Imports recorded in FY-2010 were $34.71 billion. But this are likely to rise beyond that amount as the country will have to import a number of products in the wake of the vast destruction caused by the floods, now requiring rehabilitation and reconstruction of infrastructure and millions of homes. The current global trends may also mean higher cost of importing oil. These factors, pout together, are likely to widen the trade deficit further.

The foreign trade scenario for the whole of FY-2011 can turn negative as one reads initial indications. The trade deficit may widen because some imports are turning costly. The quantitative requirements are also going up. Imported oil is not only getting costlier, but its quantity also has gone up. Furnace oil imports, for instance rose to a record in October to meet the growing demand for thermal power plants which are not getting enough natural gas supplies.

Furnace oil import rose to 700,000 tonnes in October — the highest in a decade, and 40 per cent over the average monthly import in 2010.

“The future electricity mix is expected to be more oil-based, once new power plants start production,” a report by Topline Securities said. “Pakistan produces 35 per cent electricity using oil compared to only 16 per cent five years back,” it said. Pakistan imported $10 billion worth of crude oil and petroleum products in FY-2010. In July-September, the first quarter of FY-2011, it imported oil and petroleum products worth $2.594 billion, even before winter started.

Exports can improve if more textile products start moving to EU under the 75-category package,

Prime Minister Yusuf Raza Gilani said “the government’s next target is to gain access for Pakistani products to US markets.”

The original plan was that suspension of duty will affect about €900 million worth of Pakistani exports to the EU. It estimated Pakistan can boost sales to the EU by €100 million. Most of the trade concessions will be on textile products, but there are not tariff cuts for bed linen — Pakistan’s main export product — because the EU industry opposed it.

But Pakistani businesses are unhappy. The Pakistan Denim Manufacturers and Exporters Association, or PDMEA, terms the EU concessions as “peanuts,” which will “bring about a nominal increase in Pakistani exports.” PDMEA Chairman Shahid Soorty said the yearly growth of only 20 per cent is allowed in the duty-free items, exceeding which Pakistan will lose concession in any particular product. It has dampened growth prospects for export of women’s jeans, fabrics, towels, and socks among other items.”

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