Trade deficit widens

According to recently released data, Pakistan's trade deficit widened to 9.3 billion dollars in the first four months of 2016-17 (July-October); this should be a source of serious concern to the government. Reports carried by Business Recorder less than a month ago indicate that the government is fully cognizant of this worrisome trend and a set of recommendations has been prepared by the Ministry of Commerce, under the chairmanship of Commerce Minister Khurram Dastgir. These recommendations are said to have been approved by the Minister of Finance which is necessary as they would have revenue implications. However, these recommendations are awaiting approval by Prime Minister Nawaz Sharif who, it has been reported, would announce these measures anytime soon.
What is unfortunate is that during the third tenure of the Sharif administration several critical measures requiring key policy decisions, particularly those with fiscal implications, are being delayed simply because they are regarded by the relevant cabinet colleagues as having potential positive political implications that merit an announcement by none other than their party leader - the chief executive of the country. This has caused delays in the implementation of many a critical decision given the chief executive's busy schedule. Thus the concept of collective responsibility or collective decision-making remains alien to the current administration. In this context it is relevant to note that the government recently challenged a court's verdict that the Prime Minister cannot take decisions alone but is required to take his cabinet on board; a review petition that it filed in the apex court was also dismissed.
Be that as it may, there are several impediments to exports that have been identified by exporters in meetings with relevant decision-makers that include the Minister for Finance. The question, however, is whether fiscal incentives alone would be sufficient to increase our exports? While these incentives would no doubt be a step in the right direction yet there are some other impediments to exports that merit government consideration. First and foremost is the over-valued rupee, to the tune of around 20 percent as per the International Monetary Fund's review reports under the recently completed 6.64 billion dollar Extended Fund Facility, that automatically makes products from Pakistan more expensive relative to other countries. Secondly, costs of production in Pakistan are also higher than those of our regional competitors especially with respect to utilities including energy. This necessitates reconsideration of the steadily rising reliance on fuel and energy as sources of government revenue in the short run and a careful analysis of the cost of energy in projects that are currently in the pipeline.
Be that as it may, the government relies heavily on remittances to partially bridge the gap with outflows (imports and repayment of external loans - interest and principle as and when due). Remittances as per the State Bank website, declined by a negative 3.83 percent year on year growth July-October. The reason: while a lower international price of oil has provided fiscal space to Pakistan in recent years yet at the same time it has shrunk the surpluses of oil producing countries from where a significant portion of our remittances are sourced. The biggest decline (in terms of percentage) has been from Sharjah at negative 37.78 percent followed by Bahrain at negative 21.23 percent, and the UK at negative 17.25 percent, no doubt as an aftermath of the Brexit. Or in other words, remittances are declining as oil producing nations continue to lay off foreign workers and this would imply that our current account deficit would worsen in months to come. In this context too, there is a need for the government to focus on incentivizing exports to ensure that our total foreign exchange reserves are backed by earnings instead of external loans - be they through direct borrowing form multilaterals/bilaterals/commercial banks or through sale of sukuk/Eurobonds.