ISLAMABAD, 14 August 2006 — Pakistan is planning to finance imports that are overshooting all targets, as the trade deficit widens. There is no plan to curb imports that are feeding the rising growth rate of the economy. The imports and the growth are meeting he increasing domestic demand for a variety of products and services. Partly, the increased imports of machinery, capital goods and industrial inputs are also aimed at enlarging exports which missed the target during fiscal 2006 that ended June 30. Larger exports, if the present efforts by the government and the business succeed, should help reduce the trade gap.
The immediate concern over the growing trade deficit arose when the State Bank of Pakistan (SBP) the central bank, flagged it as an area to be watched. Exports during 2006, totaled $ 16.468 billion — $532 million short of the official target of $17.0 billion. The shortfall is small, but it did indicate a reversal of the growth trend in exports in recent years. The onset of WTO regime and opening up of the competition, particularly at the end of the textile-quota regime, is one of the key causes. Imports at the same time overshoot to $28.581 billion, as a result of the continued liberal import policy.
The government has no plan to check imports, because it is committed to a liberalized foreign trade, as reflected in the Foreign Trade Policy-2007 (FTP). The FTP projects imports at $28 billion and exports at $18.6 billion in 2007. The business is of the view that the imports will rise beyond the 2007 target because of the strong domestic demand and plans to produce more and export more. Last year’s foreign trade trends will continue. Costly imported oil particularly raised imports and widened the trade gap. While the international prices of oil are moving up, the quantity of its imports is also rising, as consumption grows, and energy deficit widens for Pakistan. Larger import of industrial machinery and capital goods, industrial inputs, autos, electronics and food also are being imported in larger quantities.
SBP has just unveiled that the actual trade deficit soared to a record $12 billion in 2006. In view of the firm demand for imports, analysts foresee, the trade deficit officially projected at $9.4 billion for 2007 will widen further, unless there is a major push to export more, and ensure competitiveness of Pakistani products abroad. Raising export earnings is on top of the plans. But international competition, heightened by full implementation of the WTO regime is making it difficult, due to the increased competition for Pakistani products.
The key item facing this competition is the textile group. Comparatively cheaper and subsidized products from China, India and Bangladesh are restraining Pakistani export of textiles. At the same time, unit prices of textiles also declined last year. In spite of this environment, textile exports in fiscal 2006 rose 18.4 to $8.972 billion up from $7.575 billion in 2005.
Larger multilateral and bilateral aid flows are another source of funding growing imports, official say. Pakistan will like to pick up low-cost assistance to fund imports, to keep the cost of production down. Overseas Pakistanis, especially those working in the Gulf, Saudi Arabia, and US are expected to continue sending increased amounts of home remittances. The remittances, after exports, are the second biggest source of forex earnings for Pakistan.
Home remittances totaled $4.136 billion in fiscal 2006,and are expected to rise to $4.7 billion in 2007. Remittances in 2005 were $3.809 billion. FDI inflows rose to $3.376 billion in 2006, up from $1.027 billion in 2005. The government projects FDI to rise to between $ 4.0 to 5.0 billion in 2007. There may, however, be a slowdown in dollar proceeds on account of sale of state owned enterprises. Gulf and Saudi Arabian investors, over the last three years, have particularly been active in buying these units, ranging from telecom to electricity and energy.
The receipts from privatization, last year, were close to $2.0 billion. The Supreme Court of Pakistan, in a recent judgment, has asked the government to be more transparent in selling state-owned units and to ensure the best price. In view of this, the privatization process may slowdown. However, a number of big-ticket state units, from oil marketing to electricity and banks are scheduled to be sold this year.
SBP’s official foreign exchange reserves are $12.990 billion, strengthening balance of payments, but the central bank would have to ensure that there no significant draw down on them. However, SBP will protect and fund essential imports like oil, while other imports are financed by the interbank forex market.
Pakistan will need a major effort to make its exports rise faster than even projected for 2007 in order to reduce its trade gap, rather than merely trying to finance the deficit. The government and the businesses had placed big hopes on expansion of its regional trade and signing up of Free Trade Agreements (FTAs) with countries ranging from China to Malaysia and Sri Lanka. Exports have started moving, but larger turnover will still take time.
Major potential for Pakistan and several regional countries was foreseen in the seven-nation South Asian Free Trade Agreement (SAFTA), signed by Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka, on Jan. 6, 2004, in Islamabad. After its much-delayed launch SAFTA became operative only six weeks ago — July 1. It is too early to forecast how for will SAFTA be help full in expanding regional trade. But, SAFTA’s two major signatories and the largest economies of the region — India and Pakistan — persist in their age-old political and business feuding. It is adversely affecting fledgling SAFTA.
India, at the foreign ministers’ conference of South Asian Association of Regional Countries (SAARC) at Dhaka, last week accused Pakistan of “jeopardizing the SAFTA process.” Islamabad has rebutted it by saying that it is “committed to the process.” “The foreign ministers of the seven SAARC nations have agreed that the dispute between India and Pakistan over tariff concessions, access, and other contentious issues, and harmonization of standards, will be referred to the next SAFTA ministerial council, comprising the commerce ministers of SAFTA,” Bangladesh Foreign Minister M. Morshed Khan said.
“When you enter into a contract, there is an obligation. The Pakistani move is a negation of the contract and it will effect the entire SAARC process in future,” E. Ahamed, India’s minister of state for external affairs said. Pakistani Foreign Minister Khurshid Mahmud Kasuri, insists “ Islamabad has conferred the Most Favored Nation (MFN) Plus status on India. When we say it is MFN Plus, it is because the tariff is lower in the case of SAARC countries and that includes India.” Kasuri said that Islamabad has reduced tariffs on 90 percent of the goods India exports to Pakistan. These tariff cuts have boosted Indian exports growth to Pakistan by as much as 300 to 400 percent. Our deeds are louder than words,” Kasuri said. While regional controversies have to be sorted out, and FTAs fully fructify, Pakistan’s efforts, all round are, to raise its exports, allow liberal imports, and narrow its trade deficit through more business — not restrictions.