EDITORIAL: Notwithstanding repeated claims of success in curtailing the danger posed by the 20 billion dollar historically high current account deficit inherited by the Khan administration, of which the trade deficit is a significant component, trade deficit July-September 2020 is higher than the comparable period of the year before - at negative 5.8 billion dollars against negative 5.6 billion dollars. The rise in trade deficit reflects a marginal decline in exports – from 5.5 billion dollars in July-September 2019 to 5.47 billion dollars in the comparable period of this year while imports rose from 11 billion dollars to 11.3 billion dollars.
In July-September 2018, the trade deficit registered negative 8.7 billion dollars with imports of 14 billion dollars and exports of 5.3 billion dollars. Unfortunately, the decline in imports from 14 to 11 billion dollars between July-September 2018 and 2020 reflects more a decline in the international price of oil, Pakistan’s major import item, as well as a decline in import of raw materials and semi-finished products (due to an extremely harsh contractionary monetary policy reflected by 13.25 percent discount rate and an unprecedented erosion of the internal and external rupee value) that led to negative large scale manufacturing growth with a subsequent negative impact on Gross Domestic Product (GDP).
What must be of serious concern to the Ministry of Commerce at present is the fact that the European Union has agreed on a Free Trade Agreement with Vietnam which is projected to have a major negative impact on our exports to the EU especially after Pakistan’s GSP status expires in 2023. Analysts argue that since buyers place their orders a year or so in advance Pakistan’s exports to the EU would decline significantly by 2022. There are emerging political lacunae in the way of successfully seeking either an extension of the GSP Plus status or a request for Least Developed Country status after the EU criticism of alleged victimization of members of the opposition as well as Pakistan’s recent principled stance with respect to Islamophobia displayed by the French President. Be that as it may, one would hope that the government can successfully resolve all outstanding issues through talks.
There have been some months when the Advisor to the Prime Minister on Commerce Razzak Dawood has claimed a rise in exports, a desired form of earning foreign exchange for any country, however as the above data indicates they have not been sustained. The linkage between exports and an undervalued currency has not been evident in Pakistan given that since late 2017 the country’s economic managers have been reversing the flawed policy of the then Finance Minister Ishaq Dar to support an overvalued currency. The Khan administration has taken some measures to incentivise exports, including cheaper credit, lower taxes and provision of cheaper electricity to exporters; however, these measures are being opposed by the Finance Ministry on the grounds that they would compromise reaching a staff-level agreement with the International Monetary Fund (IMF) which, reportedly, is insisting on full cost recovery of the energy sector as well as very limited subsidies.
So what is the most appropriate way to boost our exports? The government must focus on import substitution policies while ensuring that raw material and semi- finished products’ imports remain unaffected. The government would do well to emulate the successful export promotion policies in Vietnam where export processing zones do not have a land price tag well above the market rate nor a ‘bribe’ for a utility connection over and above the fee.
Copyright Business Recorder, 2020
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