EDITORIAL: The trade deficit in 4MFY21 shrunk by a mere 2.1 percent. There is nothing to take home from this improvement. Imports marginally declined by 0.9 percent while the exports are up by 0.3 percent. If the benefit of low oil prices is taken out, the imports are in fact up. The oil prices in Jul-Oct 20 are on average down by 32 percent as compared to the similar period last year. Imports - barring petroleum, are up by 9 percent. With low interest rates, imports are picking up whereas exports are yet to show any promising growth. The imports were moving up even in pre-COVID days - the 12-month moving average of import decline had changed direction in Nov last year. One can safely say that in Nov 2019, imports were at the inflection point.
The high powered numbers are reflecting that imports are to pick up further. Cement sales in October are at the highest level ever. The construction package has started yielding results. The CPEC round 2 is generating demand. And there was a pent-up demand due to COVID-19 and the demand was expected to pick up after the two years of slowdown. Apart from cement, steel and other construction allied industries are showing growth too. This all would have some impact on imports. Low interest rates have generated a fresh wave of demand in the automobile sector. Motorbike numbers were already high, and now cars sales are growing too. According to industry experts, 35 percent of cars sold in this fiscal year are financed; it's the highest ratio since 2007-08. The capacity to assemble cars has increased by 100,000 to 415,000 and this may further go up to 450,000 once EV policy is in. Car sales are expected to grow further and will put pressure on imports.
Industrial expansion is taking place in various sectors. The SBP's concessionary financing Temporary Economic Refinance Facility (TERF) - long-term financing (mainly) for plant and machinery imports - is attracting an overwhelming response. To-date, Rs388 billion loans for 372 projects have been requested to commercial banks and out of it Rs157 billion worth of 203 projects have been approved. This is good for capacity expansion - both for exports and domestic consumption. But will surely put pressure on the machinery imports bill. Agriculture is proving to be the weakest link in the current scheme of things. Climate change, locust attacks, lack of investment in seed technology, poor governance and ill-planned government level decisions have resulted in shortage of wheat, sugar and cotton. Within these, the import bill of cotton would be substantially high. But the cotton or yarn/fabric being imported would mostly be exported after value addition.
All these economic activities would result in higher energy consumption. Pakistan imports majority of its primary energy consumption. Till oil prices are around $40/barrel, the story is manageable. Things could go haywire when oil prices move up. The story is simple. Imports growth cannot be curtailed, and so it should not be, if the government's aim is to support growth. Today, apart from low oil prices, upbeat remittances growth is the savior. The currency has appreciated by 5 percent in the past two weeks. This will increase the demand further. The window is small for reforms. According to an industry expert, Pakistan's current export potential is $26 billion. For that the monthly exports can go up to $2.2 billion from existing $2.1. The capacity expansion in exporting or import substituting sectors cannot be overemphasized. Some expansion is taking place but is not enough. If the remittances' growth continues and low oil prices remain a reality, the growth momentum can sustain for 18-24 months. Without it the party would be short-lived. And beyond 24 months, the capacity expansion has to be significant to enhance exports or substitute imports.
Copyright Business Recorder, 2020
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