Trade deficit has widened by 29 percent in July to January 2017 compared to this period last year, mainly because exports have not recovered at all, despite some breathing space provided by value-added textile. Data reported by Pakistan Bureau of Statistics (PBS) which differs slightly from the central bank data shows an escalation in the foreign exchange bill in the face of growing machinery and oil imports. Greater imports are not the real adversary.
Indeed, the real problem remains the stagnancy in the exporting sectors that seem to have settled in a quiet lull despite provisions offered by the federal government to many of these sectors in the budget. The government also announced Rs180 billion worth of an export package in January with export rebates as well as removal of sales and customs duty on machinery and inputs. These benefits could translate into earnings over the next few months.
Total textile exports fell by 2 percent because of decline in cotton, yarn and cotton cloth exports while ready-made garments and bed-wear that find a market in European countries through the GSP-Plus are the countrys only saving grace- but barely. They have reduced the pressure on earnings, growing by 4 percent and 5 percent respectively during this time period. Knitwear exports that contributes to nearly 12 percent of the total exports are crumbling under the pressure and are starting to decline.
Perhaps the textile package will help by providing cheaper inputs, financing, and give better rebates but what happens after 18 months when the benefits end? The sector should use this package to focus on technology, innovation and expanding value addition. Thats the only way to capture highly competitive and innovative markets and utilize schemes like the GSP Plus.
Despite being a major rice producer, rice exports fell by over 200,000 tons because of higher competition from Indian basmati, particularly in the Iranian market. Non-basmati rice had been increasing but have taken a hit in 7MFY17. It seems the pattern is similar in most cases, lack of innovation in the face of competitors that are fast evolving.
Other manufacturing goods that together contribute to about 15 percent of total exports fell by 5 percent and write a somber story. Carpets, sport goods, leather, footwear, surgical goods are all not finding market access despite many featuring in the multiple free and preferential trade agreements Pakistan has signed with countries.
Imports on the other hand paint more or less an optimistic picture despite the higher bill. Machinery imports have taken over the top spot. They constituted 19 percent of total imports in 7MFY16, grew by 42 percent year-on-year and stand at 24 percent of the total import share. Bulk of these imports are power generation and electrical machinery that grew by 91 percent and 16 percent respectively and are increasing because of the power projects across the country under construction.
Textile machinery has also grown which is encouraging as it would seem the sector is revitalizing old technology. The duty benefits provided in the export package will further boost machinery imports going forward. Construction and mining machinery have also increased because of greater infrastructure demand. These imports will grow as the economy expands.
Food imports were up primarily due to palm oil imported from Indonesia and Malaysia, both countries with which Pakistan has a trade agreement with. The income cooking oil is cheaper as a result and Pakistan is one of the largest market for these oils with locally produced oils catering to only a quarter of the growing market.
The second biggest head in imports is oil which is 20 percent of total imports now, but used to be 35 percent prior to FY15 before oil prices dropped. Due to a rise in RNLG plants that the country is building, liquefied natural gas imports will continue to rise (grew by 136 percent in 7MFY17) and the rebound of oil prices will continue to put pressure on the total import bill.
The activity in the auto sector is also boosting auto imports, not only in CKD form but also in CBU. Car demand has been going up for a while, but greater imports point toward existing carmakers importing new models to test the market in CBU form. These imports are likely to further inflate as new carmakers and joint venturesprominently Renault, Lucky/Kia, Nishat/Hyandaikick off their operations and launch their cars in the Pakistani market. Transport imports are about 16 percent of total imports but they are sure to skyrocket in the near future.
This column cannot discuss every little head but it would remiss not to talk about steel imports. Despite regulatory duties and a preliminary anti-dumping duty on Chinese steel bars, imports have grown in 7MFY17. Meanwhile, NTC recently announced another anti-dumping duty, this time on galvanized steel.
This is a necessary remedial measure when a product is being dumped but it is crucial to remember that there is a regulatory duty too on a number of products that may or may not be dumped, and are needed. Pakistani steel makers are not producing enough to cater to the entire steel demand; while some steel items are necessary inputs for other industries such as auto parts. It is a conundrum indeed. One thing is for sure: steel imports will become more expensive in coming months.
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