News from the external sector of the economy continue to be discouraging. According to the latest data released by the Federal Bureau of Statistics (FBS), Pakistan's trade deficit ballooned to $12.433 billion in the first eight months (July-February, 2008) of the current fiscal year, up by 39.05 percent over $8.942 billion recorded in the corresponding period last year, mainly due to surging crude oil and food prices.
The import bill jumped by 21.95 percent to $24.141 billion in July-February, 2008, against $19.796 billion in the same period of 2006-07. The sharp rise was largely due to the import of costly crude oil and edible items, particularly wheat which witnessed highest-ever increase.
The import bill of certain non-essential items like mobile phones, gold and cars also witnessed a substantial increase during the period. On the other hand, exports grew by only 7.86 percent to $11.707 billion in July-February, 2008 compared to last year. A rather unusual development was an unprecedented increase in both exports and imports during the month of February, 2008. While exports grew by 22.5 percent to $1.55 billion, imports witnessed an alarming jump of 42 percent to $3.659 billion as against dollar 2.572 billion in the same month last year.
Judged from the developments during the current fiscal year so far, there seems to be no doubt that Pakistan is heading fast towards highest-ever trade deficit in its history. The trade gap of over $12 billion during the first eight months could easily cross $17 billion during 2007-08 which will be another record over the deficit of $13.5 billion in the preceding year. It may be mentioned that in the trade policy for 2007-08, the government had fixed an ambitious export target of $19.2 billion but had refrained from projecting the level of imports and the overall trade gap during the year.
The fact that now our exports cannot even finance 50 percent of the import bill is a matter of great concern. The trade deficit of this magnitude could have been tolerable if inflows like home remittances, foreign investment and privatisation proceeds had been sufficient to narrow the current account gap to sustainable levels, which is not the case as current account deficit is also widening simultaneously. As if to indicate their helplessness, the economic managers of the country some times attribute the widening gap in the external sector to the increase in the international prices of petroleum products, food and edible oils to record levels.
However, it needs to be pointed out that it is the importing countries which have to adjust to the evolving situation and achieve a sustainable balance in their current account by reducing the level of imports and/or expanding exports. Of course, it will be painful to adjust to the new reality as it would mean reduced level of domestic consumption, but there is no alternative.
Saudi Arabia has granted $300 million for balance of payments support but countries experiencing external sector deficits cannot survive on doles and have to find the resources of their own to finance the import bill. This is a tough task and another challenge for the incoming government. Inaction on this front would be no option as foreign exchange reserves of the country, though at a comfortable level at present, are not adequate to sustain the haemorrhage of fast deteriorating external sector developments for long.