The soaring trade deficit

The situation in the external sector of the national economy is certainly getting from bad to worse with the passage of every month. Latest official figures released by the Federal Bureau of Statistics (FBS) reveal that Pakistan's trade deficit has risen to an all time high of dollar 16.08 billion in the first ten months (July - April) of FY08, indicating a huge increase of 50.78 percent over the deficit of dollar 11.17 billion recorded in the corresponding period of last year.
The import bill increased by 28.28 percent to dollar 32.06 billion in July-April, 2007-08 as against dollar 24.99 billion last year, while exports grew by only 10.17 percent to dollar 15.26 billion from dollar 13.85 billion during the first ten months of 2006-07. The relevant data indicate that increasing crude oil prices as well as higher imports of luxury items like mobile phones and cars and sluggish growth in exports have combined to push up the trade deficit to a record level.
The import of wheat, edible oils and fertilisers, has also witnessed the highest-ever increase. The purchase of a jet for PIA last month also put an unusual burden on the import bill. On the export side, rising oil and energy costs together with other inefficiencies are believed to have rendered Pakistani exportable goods less competitive in the world markets.
The more worrying aspect is that authorities of the country seem to be largely indifferent to the evolving situation in the external sector which continues to be highly discouraging. With imports showing an alarming increase of 59.32 percent, the trade gap reached as high as dollar 2.29 billion in April, 2008.
It is not difficult to visualise the impact of such a deteriorating situation in the external sector. If the present trend continues, and there is no obvious reason to assume otherwise, the trade deficit during 2007-08 could reach the highest-ever level of nearly dollar 21 billion in the country's history as compared with the deficit of dollar 13 billion last year.
Such an outcome would be much worse than the expectations of a dollar 10 billion-11 billion deficit, in the beginning of the year which would have been manageable only if other items in the current account of the balance of payments would have recorded surpluses to an extent so as to neutralise the impact of growing trade deficit.
Since this has not happened as indicated by the equally worsening trend in the current account, the government is going to face an uphill task to overcome the challenge of bringing back the country to a sustainable position in the external sector.
Obviously, exports have to be increased rapidly by overcoming various constraints like energy shortages and imports must be curtailed to ensure that the trade gap remains within reasonable limits and may be easily financed through normal inflows under other heads like home remittances and foreign investment.
Ishaq Dar has talked about foreign inflows to the tune of dollar 3-3.5 billion to bridge the gap in the external sector this year but such sources of funding are either debt creating or temporary in nature and cannot be relied upon as a reliable/permanent source of funding for the country. The need of the hour is to strive hard and make concerted efforts to arrest the worsening trend in the trade deficit by putting in place a policy framework, binding the country to live within its own means which would necessitate a balance between foreign exchange receipts and payments of the country.
The basic thrust of the new strategy should be to contain domestic demand by implementing appropriate fiscal and monetary policies. There is no doubt that lax fiscal policy in the recent past has not only spurred price pressures in the economy but has also increased import demand in the country to a great extent.
An effective policy shift must be complemented by reducing the level of less essential imports drastically through administrative measures like outright ban or imposition of high regulatory duty. The country is obliged to import necessities like basic foodstuffs but can live without the import of mobile phones and cars for some time.
At the same time, the powers that be must involve themselves more in highly burning issues like the one we are talking about now and concentrate less on non-economic matters for the larger interest of the country. The State Bank and other relevant authorities would find it much more difficult to narrow the gap in the external sector, stop the flight of capital, counter the onslaught on the rupee in the foreign exchange market and maintain the existing level of reserves etc if political uncertainty in the country is allowed to persist.