Widening trade deficit

EDITORIAL: It ought to be a matter of some concern that everybody in the government is harping on about exports earning more than $2 billion for seven months in a row even as the trade deficit widened by 20.1 percent in the first 10 months of the outgoing fiscal year. That means there is increasing pressure on the Balance of Payments (BoP) at a time when the government is bending over backwards to keep the International Monetary Fund (IMF) bailout programme running and prevent friendly countries from rolling back billion dollar loans made only to make our reserves look pretty. It’s a good thing that remittances continue to surprise to the upside, also bringing in more than $2 billion for 10 straight months now and keeping reserves stable, otherwise the current account would not have been in the green and the much hyped upward march of the rupee would have been halted by now and replaced most likely with a very steep fall. That’s hardly the best case scenario for Twitter-friendly ministers who like to project the strengthening rupee as something of a miracle that only PTI could conjure up, even though it is more a product of frenzied carry traders exploiting our high interest rate environment than any policy novelty on the part of the State Bank.

The bulge in export earnings, up 13 percent year-on-year in July-April 2021 to $20.879 billion, is encouraging especially since Pakistan’s exports to nine regional countries were down almost six percent in the first nine months of the current fiscal because of border closures and other hassles caused by the pandemic. This trend, now going strong for more than half a year, clearly needs to be nurtured and strengthened. Surely, the commerce ministry has had enough time to chalk out a detailed programme to exploit the post-lockdown international trade environment because our industry was able to get back on its feet ahead of many others. And from the looks of things it seems the ministry had indeed done at least some of its homework in time because results are already starting to come in.

The second most important thing is trimming imports, of course, which is exactly what the Pakistan Tehreek-e-Insaf (PTI) government got to doing as soon as it came to power and succeeded pretty quickly. Now the situation is very different and it needs to be worked out very minutely just how much of the 17 percent y-o-y growth in imports over the last 10 months, and the 53 percent y-o-y jump in April 2021 in particular, owed to machinery imports to feed into higher production and how much went to other things like vaccines and even luxury items. This is a very fragile moment, after all, because if the trade imbalance is not checked it will squeeze reserves, drive down the rupee and force the government to go begging in the money market all over again. Keeping exports high at a time when hawkish fiscal and monetary policies struggle to breathe life into an environment of low growth and high unemployment will require targeted incentivisation that will eat into reserves and upset the IMF, but it will be one of the most important things that this government will do in the remainder of its term. Because the bullish graph of remittances will plateau sooner or later and unless exports are in a position to fill that gap the current account will take a plunge and leave the government even more vulnerable to sudden fiscal shocks.

That no doubt is not a very safe place to be in as the third wave of the coronavirus intensifies and threatens to milk yet another stimulus package out of the federal government. The last one ran into $8 billion, more than the entire three-year $6 billion IMF bailout package, which explains the government’s desperation to avoid a total lockdown this time; even if it means calling out the troops to force people to follow safety rules. At stake is the very foundation of the economy and how the government is able to balance imports and exports in the immediate to medium-term will tell a lot about which way it will tilt.

Copyright Business Recorder, 2021