MIAN ABRAR
While the federal government is making tall claims of record economic gains, the official figures reflect interesting state of affairs as the country registered an increase of 8.42 per cent in trade deficit.
The official documents available with Pakistan Today stated that the country recorded a trade deficit of $23.96 billion during the financial year 2015-16 as compared to $22.1 billion in previous year. However, it reflects that heavy borrowing and foreign and local loans, thick foreign investments under the China-Pakistan Economic Corridor (CPEC) have helped the economic outlook have a rosy look. Moreover, another interesting factor to be noted is the sharp decline in the foreign remittances which may hit the country hard in the next few years.
The documents showed that the factors contributing to the trade deficit included a major increase in the country’s import bill. Pakistan’s imports have grown by nearly six per cent mainly owing to various reasons.
The demand of many imported items is inelastic e.g. petroleum products, food items and machinery.
Due to the shortfall in cotton production in the country, larger quantities of raw cotton are being imported from abroad to meet the demand of the textile industry. The CPEC has been a key factor for increase in the import bill of the country. Due to the augmented development activity in the country due to CPEC, the imports have significantly increased due to import of machinery and equipment for CPEC-related projects being undertaken by Chinese and local companies.
Moreover, the low petroleum price was another major factor for increase in the imports in 2016. The import of Liquefied Petroleum Gas (LPG) during the past ten months has reached to 286,000 tons, which is likely to touch 500,000 tons showing a 100 per cent increase due to reduced international prices.
Due to gas shortage, Pakistan imported a total 62,000 tons of LPG which in the year 2015 jumped to 145,000 tons. In first six months of 2016, the import of LPG had reached 286,000 tons which by the end of year was likely to cross 500,000 tons.
With Pakistan’s cotton sowing remaining 25 per cent lower this year compared to the last year, its cotton production likely to face a shortage of around 2.5 million cotton bales during the current year, leading to an increase in import of cotton.
The government had increased duty on wheat imports from 25 per cent to 40 per cent, but it had failed to deter the importers, leading to no benefit but increase in import.
The economic slowdown in the global market has been a major factor in the drop in exports. Moreover, the global commodity crisis; currency devaluation by competitors and Pakistan’s low position in global competitiveness index have been other factors.
The Ministry of Commerce has identified soaring cost of doing business, energy shortage, increasing gap between real effective exchange rate and nominal effective exchange rate, falling global commodity prices, heavy taxation including regulatory duties, liquidity crunch, and inordinate delays in refunds, and declining private sector credit as the key reasons for the decline in exports.
The country’s exports have declined by 14.4 per cent during the first seven months of current fiscal year and the Commerce Ministry has time and again argued that the reasons for the decline did not fall within its jurisdiction.
The Commerce Ministry’s experts have divided export performance into four categories: (i) commodities reflecting price and quantity; (ii) commodities which show increase in price but decrease in quantity; (iii) quantity increased but price decreased; and (iv) decline in quantity and price. Pakistan’s major export products fall in category four i.e. decline in both quantity and price. This does not substantiate the government’s claim that the global economic downturn is responsible for the decline in exports.
The imports declined by five per cent during the first seven months. It was observed that as petroleum prices declined massively, non-petroleum products have not shown negative growth. For instance, if the price of palm oil dropped, its import increased implying that its consumption increased. The import of machinery, food items and cotton has also increased.
Remittances play a major role in stabilising the country’s external sector, as they make up for almost half of the import bill and cover the deficit in the trade of goods accounts.
With the financial crisis in the Gulf, there was a sharp decline in the foreign remittances too. Overseas Pakistani workers remitted $1,609 million during September 2016, down 9.3 per cent as compared to $1,776 million in the same month of last year.
Moreover, the remittances had dropped to $4,698 million in the first three months (Jul-Sept 2016) of the current fiscal year, down 5.3 per cent compared to $4,966 million during the same period of preceding year.
In July, the foreign remittances recorded over $1.3 billion, down by 20.2 per cent from the same month of 2015. Experts believe Pakistan could face a balance of payment crisis if the substantial drop in remittances persists in coming months. Pakistan received remittances amounting to $19.9 billion in year 2015-16, up 6.4pc from the previous fiscal year.
The recent job cuts in Saudi Arabia constitute one of the many reasons for the sudden drop in remittances. The drop in global energy prices has hurt oil-producing economies, especially in the Middle East. This has resulted in a decline in government spending, which is causing job losses, particularly in the construction sector.
Inflows from Saudi Arabia were the largest source of remittances in 2015-16 with the total remittances clocking up at $5.9 billion for the last fiscal year. The trend continued in the first month of 2016-17, with Saudi Arabia-based Pakistanis sending home $378.7 million in July. However, the inflows from the Kingdom dropped 20.2pc and 35pc in July on an annual and month-on-month basis, respectively. Remittances from the United Kingdom remained $143.6 million in July, down 38.2pc and 53.6pc on an annual and monthly basis, respectively.