The country's trade data for the first two months of the current fiscal year are highly disconcerting. According to the latest figures released by Federal Bureau of Statistics on 19th September, the cumulative trade deficit for the July-August 2005 period was recorded at $1.551 billion as compared with $566.44 million in the same period last year, indicating a mammoth increase of 176 percent.
The reason for this negative development was a much larger increase in imports than in exports. The import bill shot up by 44.27 percent to $4.231 billion, while exports recorded only a modest growth of 13.02 percent to $2.680 billion. The surge in imports was attributable to the large increases in the purchase of machinery, metal group and petroleum products. A matter of serious concern is the consistent increase in the trade gap.
The trade deficit during August 2005 was up by 187.47 percent at $826.5 million as against $287.5 million in the same month a year earlier. It may be recalled that the trade gap had almost doubled from $3.278 billion to $6.213 billion during 2004-05 and if the trend witnessed in the first two months of 2005-06 is allowed to continue, the deficit could amount to a staggering level of about $9.0 billion during the year.
Such a high level of deficit would have been sustainable if it was likely to be partly offset by foreign exchange receipts on other accounts like home remittances, foreign direct investment or official transfers, which certainly is not the case.
Even if we assume some increase in receipts from these sources, the country would still experience a larger current account deficit during 2005-06 as compared to the previous year. This would be unfortunate and result in increased debt burden. Already, the authorities are negotiating for loans from multilateral agencies and looking for other ways to bridge the trade gap, like floating of Sukuk bonds.
Though all kinds of positive spin can be given to such initiatives, the fact remains that these are loans which have to be repaid with interest. Any adverse developments in the external sector would, therefore, force the government to backtrack on its policy of foreign debt retirement. It is also argued that higher import of machinery and raw materials was an encouraging trend that would spur economic activity in the country and increase exports correspondingly.
Whether such an assumption would ultimately prove to be right, only time can tell. In our view, however, exports could rise but the magnitude of increase may be much lower than expected due to higher consumption demand in the domestic market.
We feel that the matter of widening of trade deficit by such a huge margin should not be taken lightly. At present, the country has an adequate level of foreign exchange reserves but these could evaporate quickly if policy measures are not taken to address the trade deficit problem.
There is definitely a need to increase the quantity and improve the quality of exports in order to narrow the deficit and most of the policy measures to do that are well known. Among other problems, exporters face micro obstacles almost at every step, and these need to be removed without further loss of time.
Of course, exchange rate policy is the best instrument to increase exports and contain imports, and the State Bank should not try to defend the currency in the foreign exchange market without sound reasons and only to show that "all is well" on the economic front.