The worsening trade deficit

The haemorrhage continues. According to the official figures released by the Federal Bureau of Statistics (FBS) on 12th November, Pakistan's trade deficit swelled to 5.578 billion dollars during the first four months (July-October) of the current fiscal year, indicating a sharp increase of 38.03 percent over 4.041 billion dollars registered in the same period last year.
The deterioration resulted from a large increase in imports in the face of a marginal rise in exports. While imports climbed by 19.74 percent to 11.443 billion dollars during July-October, 2007 compared to 9.775 billion dollars in the corresponding period of 2006-07, exports went up only marginally to 5.865 billion dollars from 5.515 billion dollars in the same period last year.
Particularly worrying was the latest trend in the trade gap which widened by 129 percent to 1.945 billion dollars in the month of October, 2007 as against 0.849 billion dollars in the corresponding month last year.
The widening trade deficit was the outcome of more than 54 percent growth in imports in October, 2007, which was the highest in a single month of the current fiscal year, while growth in exports stagnated at around five percent only. The surging trade deficit was attributable mainly to an unprecedented increase in oil prices in the international market and rising cost of imported food items.
Whatever the reasons of phenomenal growth in trade deficit, the worsening trend during the recent months is alarming. Pakistan had already been facing an increasing trade deficit for the last couple of years owing to lesser export growth and steep increase in imports, but this was manageable due to certain other favourable factors like sharp increase in inflows of home remittances and foreign investment which kept the current account deficit within reasonable limits.
The situation developing this fiscal year is, however, much more disturbing. Exports during 2007-08 were targeted at 19.2 billion dollars by the government and the trade deficit was estimated at around 10.631 billion dollars, but if the present trend continues, the gap in merchandise account could be as high as 16 billion dollars. Even this figure could be exceeded because international oil prices, now hovering around $99 a barrel, are not likely to decline or stabilise anytime soon.
The normal flow of foreign exchange from other sources would obviously not be adequate to cover this gap and this will have severe implications for other areas of the economy. There are already some signs of pressure on the exchange rate of the rupee and outward flow of portfolio investment which could exacerbate price pressures in the economy and undermine the confidence of foreign investors in our ability to pursue the reform agenda.
Unfortunately, the deteriorating situation on the external front is likely to be more complicated after the announcement of emergency plus on 3rd November. "Pakistan country risk" had declined during the last few years as investor confidence improved and the investor community was prepared to come to the country in search of attractive opportunities. After the latest action of the government, pressures are building up in Washington, London and the capitals of other developed countries to force their administrations to adopt punitive financial measures.
The Commonwealth has given Pakistan a 10-day deadline to revert to the old position failing which the country will be suspended as a member. Two important credit rating agencies have already reduced their ratings on Pakistan. All such steps to force the Pakistani leadership to correct the course are likely to have a serious impact on the external sector of the economy. Not only foreign investors would try to pull back their investments and try to avoid the country in future, even the Pakistani Diaspora, deeply troubled by the events taking shape in their homeland, would be inclined to reduce their remittances to the country.
Obviously, it is very hard to restore the confidence in the country and its economy once it is shattered. All of this calls for more concerted efforts to reduce the trade deficit to the minimum so that the adverse impact of other negative factors is neutralised to the maximum extent possible and the position of external sector remains sustainable.
In its recently released annual report, the State Bank had warned the government that growing current account deficit, led by sharp slowdown in export growth, was posing a key challenge to macroeconomic stability in the country. With the latest developments, the enormity of this challenge has increased manifold and it would be foolish not to take bold decisions to adjust to the evolving situation for the stability and solvency of the national economy.