Rising deficit in services

The country's services sector posted a trade deficit of 2.95 billion dollars during the first seven months of the current fiscal year (July-January) - higher than 2.685 billion dollars during the comparable period of the year before. In 2008, the services sector deficit was 6.5 billion dollars with the major contributor being sea transport (freight) to the tune of a negative 2.49 billion dollars, personal travel a negative 1.3 billion dollars (with education accounting for negative 1.3 billion dollars) and financial services negative 141.4 million dollars. By the last year in the tenure of the PPP-led coalition government, the services trade deficit had declined to 3.3 billion dollars with sea transport registering a negative 2 billion dollars, personal accounting for nearly one billion dollars (with education accounting for a negative 917 million dollars) and financial services declining to a negative 53 million dollars.
In the last fiscal year (2016-17), the services deficit rose to 4.2 billion dollars with sea transport freight accounting for a negative 2 billion dollars, personal travel a negative 1.6 billion dollars (education registering a negative 124 million dollars) and a new entry referred to as other business services with a negative 2 billion dollars as per the SBP website which, in all probability, may be sourced to the China Pakistan Economic Corridor (CPEC).
The services sector's relevance to the overall economy peaked during the 1960s and 1980s at 6.7 percent of the Gross Domestic Product (GDP) - higher than 6.3 percent of GDP in the 1970s. It declined to 4.6 percent of GDP during the 1990s and rose to 5.1 percent of GDP during the 2000s as per the Economic Survey 2016-17. During the tenure of the PPP-led coalition government, the services sector's contribution to GDP was a low 1.3 percent in 2008-09 and thenceforth rose to 3.2 percent in 2009-10, 3.9 percent in 2010-11, 4.4 percent in 2011-12 and 5.1 percent in 2012-13. During the first two years of the PML-N government, the contribution of the services sector to the GDP declined to 4.5 percent in 2013-14 and to 4.4 percent in 2014-15 rising in the following year to 5.6 percent in 2015-16.
The Survey further claimed that "performance of services sector remained broad-based as all components of services contributed significantly in positive terms, as wholesale and retail trade grew by 6.8 percent, transport storage and communication by 3.9 percent, finance and insurance by 10.7 percent, housing services by 3.9 percent, general government services by 6.9 percent and other private services by 6.2 percent". However, while there was a significant increase in domestic activity under the services sector yet, at the same time, there was no attempt to implement import substitution policy reforms that would have enabled the country to reduce its dependence on service imports. This accounts for services imports rising from 8.8 billion dollars in 2016 to 9.8 billion dollars in 2017 - a trend that is clearly continuing given that the July-January figure for 2018 was 5.9 billion dollars compared to 5.5 billion dollars in the comparable period of the year before as per the SBP website. Exports of services have risen by less - from 2.8 billion dollars to 2.95 billion dollars between July-January 2017 and 2018 widening the deficit.
To conclude, one may assume that like the worsening trade balance in goods the services sector is facing a similar trend no doubt attributable to the CPEC. This is worrying as the overall trade deficit continues to widen and with foreign exchange reserves diminishing, the incumbent government is increasingly relying on borrowing from abroad to plug the gap. One would have hoped that the government had begun to formulate a long-term strategy to deal with these extremely disturbing trends instead of pushing them under the carpet by arguing that once CPEC begins to generate economic activity all will be well. Unfortunately, with CPEC deals not up for parliamentary scrutiny, it is impossible to say how long such a state of affairs would last.