The first half of FY19 is over with some respite on the external trade front, as per latest data from the Pakistan Bureau of Statistics. Exports have moved up sluggishly and imports have moved down languidly, resulting in an overall 5 percent yearly decline in the trade balance. The gain, however, is not commensurate with multiple PKR devaluations in the period under review. Perhaps the next half will come with more deficit reduction.
Comparing the first half of the last six fiscal years, broadly exports across all categories declined from FY14 till FY17 before rising in FY18. From FY18 to FY19 however, the growth has been mostly at a snail’s pace.
The major export groups have posted single-digit growth. Heavyweight textiles remained lackluster in part due to the China-US trade war. Since China is the main importer of Pakistan’s cotton yarn that is partially used for exports, its demand decreased as higher tariffs were imposed on Chinese goods.
Devaluation has done little to increase value-added textile exports as a lot of imported raw materials are used by the sector, including cotton and dyes. There is a deficit of 4-5 million cotton bales per annum as area under cotton cultivation gradually gives way to sugar cultivation, resulting in raw cotton imports. While in theory, a weaker rupee could make textile exports more competitive globally in the months to come, higher cost of production may offset the price advantage.
Furthermore, there is a liquidity constraint in the sector due to pending tax refunds. While many incentives were given on paper, the funds weren’t actually released. Firms are facing a capacity constraint because money is caught in back orders. (Read “Textile refunds – another circular debt?” published on January 9, 2019).
Basmati rice exports were the silver lining of the food category. Buoyed by EU’s restriction on Indian Basmati, exports saw 26 percent YoY increase in 1HFY19. (Read “Fungi, toxins, and basmati exports” published on January 15, 2019) Overall however, rice exports declined as Pakistan’s non-basmati rice exports were edged out of African markets due to auctioning off of old crop stocks by China and India.
Wheat and sugar exports story is one of subsidies. Wheat exports have led the food category courtesy ECC approval to export surplus stocks, supported by subsidy. Sugar was given a 100 percent subsidy to become export competitive. This lapsed in July and resulted in sugar exports declining to less than half their amount compared to the same period last year.
Pivoting to imports, the petroleum/gas group continued to lead imports, posting a roughly billion dollar jump in absolute terms. The ban on furnace oil (FO) has decreased the quantity of petroleum imports, but currency devaluation and higher international prices led to a jump in dollar terms. This is aggravated by nearly doubling of gas imports as substitution effect from FO to gas takes place.
While machine imports rose from FY14 to FY17, they have been tapering down since then. Declining by $1 billion YoY for 1HYFY19, they were the biggest contributor towards the cooling down of the import bill. Nearly 60 percent of the dip stemmed from power generating machinery which can be mostly attributed to maturity of CPEC projects.
For the first time in the first half of last five years, the transport group registered a decrease. As currency devaluation made automotive more expensive and higher interest rates has made financing more costly, the transport group imports decreased by half a billion dollars. Other than CKD/SKD kits of buses, trucks, and cars, all major line items of the group registered a decline in import numbers for the period under review.
The food group is largely impacted by international price of edible oil, its biggest component. As internationally palm oil and Soya bean prices decreased, pressure was eased off Pakistan’s imported food bill. (Read “CPO price – make hay” published on January 9, 2019).
The half-yearly trade data has set up the fiscal on a less-fragile footing. No time yet to celebrate for the government, however. The existing trends don’t seem near enough to steer the country completely out of its balance of payment woes.
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