Trade and poor economics

The trade deficit continues to soar as the toll reached a whopping $30 billion in 11MFY17, as per latest PBS data. The economy is growing and imports both for consumption and expansion are on the rise—bills are up by 20 percent in Jul-May reaching $48.5 billion—the full year number would surely cross $50 billion mark for the first time in country’s history. On the flip, exports kept on falling despite five months are into the PM export package. They dropped by 3 percent to $18.5 billion in 11MFY17.

The picture is gloomy as trade deficit increased by 42 percent or $8.9 billion in Jul-May and that partially explains why reserves fell by around $3 billion in the same time. The question is how to arrest the alarming trend of trade deficit. On obvious policy answer is to adjust exchange rate which has on REER basis shown an appreciation of 27 percent. But it’s a no-go area; neither SBP nor the commerce ministry dare to even think of this option. All what policy level measures are on either to announce hollow export package/subsidy or to have higher duties amid enhanced cash margins for non-essential imports.

It is intriguing to explore what are essential and what are non-essential imports, how they are linked and how to correct the upward trajectory. The economy is on an expansionary phase and that is why the biggest increase in machinery imports which are up by 40 percent stand at $10.8 billion. According, to SBP data, the machinery imports recorded at $ 5.9 billion in 10MFY17.

The gap between the SBP and PBS is widening and this column has covered the anomaly—higher gap than previous years’ average is due to non recording of CPEC related imports whose payment are made outside the domestic banking system. Apart from power generation machinery which are up by 71 percent, electrical machinery (27%), construction (70%) and agriculture machinery (48%) are the highlights—the trend is encouraging and portraying the expansion in energy, agriculture, and construction.

But once these machineries are installed with plants up and running, the petroleum imports would increase substantially to feed them. The petroleum and gas group is already growing fast as the surge under this head is 33 percent in 11MFY17 to reach $9.9 billion with lions share going to petroleum products which are up by 31 percent ($6.2bn). In terms of tonnage, the toll is up by 50 percent which is implying that prices are in favour of imports whilst the demand is upbeat. There is also a new head of RLNG imports, up by 134 percent to stand at $1.2 billion. With new RLNG based power plants coming online, the imports would keep on moving at steep curve.

Why are petroleum products increasing so fast? This is exactly what happens when consumption based oil importing economy exhibits growth. The power generation are at their peak while number of vehicles both locally assembled and imported are at all time high. The transport group imports are up by 22 percent to $3 billion.

The biggest chunk in the vehicle imports are of motor cars—imported cars (CBU) are up by 23 percent to $365mn while locally assembled cars (CKD) parts imports increased by 32 percent to $617million. The localization of assembled cars are far from ideal scenario and with more assemblers coming to the market, the import number ought to increase—car assembly is expected to reach 600,000 by FY23 from the current levels of FY17. It would result in both higher transportation and petroleum products imports.

The domestic demand is upbeat—white goods sales are breaking all records; though, mostly manufactured in the country, but they consume imported fuel to run.

This sums up the story of rising consumption demand on imports. At this stage, machineries are being imported, and once, they are fully functional and have its spillover on economic growth; imports of fuel, transport, and other products ought to increase further.

The point is that once the expansion cycle is over, consumption based imports would increase at a much higher pace. Even today, total imports minus machinery are up by 16 percent and minimum both machinery and petroleum group are up by 11 percent. One may wonder, where is the impact of 100 percent cash margin on imports of non-essentials?

Even the food imports are up by 16 percent for agrarian economy to reach $5.6 billion with palm oil and pulses combined are almost half of food imports. The sad part is that our food exports are three-fifth of same group imports. This speaks for the inefficiencies in our economic system. Imports of cooking oil, pluses, tea, dairy products etc are moving up faster than economic growth while, on the flip, exports of rice, spices, vegies and all are on the decline.

The exports of textile group are down by 2 percent to $11.2 billion—within it, the misery of cotton yarn and cotton cloth continues. The fall in cloth volume at 13 percent is higher than the decline of 5 percent in value implying that there is no gain from some upward reversal in prices. The savior high value added textile exports are showing mixed trends. Some subgroups marginally increased while others fell to nullify overall impact. Thus, no more incremental benefit of GSP plus status.

What about the generous PM package announced in Jan17? Let’s see what numbers say. On average the monthly textile exports are at $1,066 million in Feb-May versus $1,033 million Jul-Jan. Yes, nothing yielded from the PM package; no wonder, both APTMA and PTEA are mourning black day. The issues of refunds are hurting exporters most; but Dar has too optimistic tax targets to achieve.

The story of other manufacturing exports is even worse. Now SBP is trying to record IT related exports actually in exports receipts which are mostly recorded in remittances - the gap between exports claimed by PSEB ($2.8 bn) and those reported by SBP ($770mn) was estimated at $2 billion in 10MFY17. This is implying that around three-forth of IT receipts are not remitted back. The need is to target IT sector through policy incentives which would not only enhance the remitting back ratio but also boost IT exports.

The order of the day is to look for fresh avenues of exports. And, also do some market based correction in currency. It seems unlikely at this point that either of this can be accomplished.