Trade troubles continue

Pakistan Bureau of Statistics (PBS) reported shows that trade deficit has dangerously widened by 34 percent in the period July to February 2017 compared to the year-ago period. This is mainly because exports have plummeted further in February even though some cushion was provided by value-added textile while there is a marked increase in the foreign exchange bill in the face of growing machinery and oil imports.

One can hardly blame imports but it seems without finding any reprieve from exports; imports will once again come under fire. SBP recently introduced a non-tariff import restriction in the form of 100 percent cash margin on a number of luxury items including phones, cigarettes, jewellery, cosmetics, personal care, electrical & home appliance as well as vehicles. This is intended to discourage certain “non-essential” imports to potentially hedge against the rise in capital good imports.

The real focus ought to be exports. The government introduced several incentives to the exporting sectors during the budget announcement. Meanwhile, an export package of Rs180 billion was also ceremoniously launched in January. Are these measures working yet? The numbers are resoundingly saying no.

Total exports fell by 4 percent; food exports by 12 percent and textile by 2 percent. Except for bedwear and knitwear that find a market in the EU through the GSP plus scheme, the textile sector is dire straits. Knitwear exports that contribute nearly 12 percent of the total exports are crumbling under the pressure and starting to decline.

As this column has said before: “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 needs to focus on technology, innovation and expanding value addition. That’s the only way to capture highly competitive and innovative markets and fully utilize schemes like the GSP Plus”.

Other notable products not find market access are: carpets, sport goods, footwear, surgical goods, leather products and auto parts. Rice exports have also been falling, finding tougher competition with Indian basmati in importing markets such as Iran. Experts say it is the lack of innovation. Same problem, no solutions forthcoming.

Imports on the other hand are showing an interesting trend—machinery imports especially power generation and electrical are increasing due to the rise in power projects. In fact, according to PBS data, machinery constitute the highest share in total imports, with oil taking second spot (23% in 8MFY17, against 19% in 8MFY16). Construction and mining machinery have also increased because of greater infrastructure demand. These indicate an expansion in the economy in all the right ways.

Meanwhile, within food, palm oil imported from Indonesia and Malaysia, both countries with which Pakistan has a trade agreement with is increasing, as domestic producers cater to only a quarter of the burgeoning market.

Oil which is the second biggest head in imports 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 RLNG plants that the country is building, liquefied natural gas imports will continue to rise (grew by 144 percent in 8MFY17) and the rebound of oil prices will continue to put pressure on the total import bill.

Auto imports will also increase from here on, not just by existing carmakers but the new manufacturers (and joint ventures) that are planning to kick off their operations in the Pakistani market. The SBP does not think import of vehicles would get affected with the cash margin regulation but it is an added advantage for new entrants as no such imposition is levied on their imports.

Lastly, despite anti-dumping duties on steel bars as well as galvanized steel, steel imports have increased, further confirming that the economy needs steel that local manufacturers are not able to cater to. There is also a regulatory duty on a number of steel items (which this column believes should be removed. Read our story: Steel: Wrongful protection needs correction). For consumers, steel is (and will be) more expensive.