Withering economic growth?

World Bank stresses greater export participation by Pakistani firms to boost recovery

KARACHI:

The size of trade deficit and the resultant current account deficit has been a source of intensive debate in Pakistan.

According to the State Bank of Pakistan (SBP), the current account deficit had surged to $19.2 billion in FY18. It decreased to $13.4 billion in FY19 and to $3 billion in FY20. The current account deficit shrank from 4.8% of gross domestic product (GDP) in FY19 to 1.1% of GDP in FY20. This is one of the lowest levels in the past six years.

The current account turned into a surplus in May 2020 as decrease in import payments due to Covid-19 more than compensated for the fall in export receipts during the month. Interestingly, there was an increase of approximately 32% in month-on-month inflow of remittances into Pakistan in June 2020. It compensated for the subsequent rise in import payments as the easing of lockdown increased domestic demand.

The deficit in the balance of trade in goods, services and primary income decreased by $9.8 billion in FY20 over the figure reported in FY19. Remittances increased by $1.4 billion in comparison to the previous period. SBP’s net foreign currency reserves increased by approximately $4 billion.

The reduction in the current account deficit and the increase in foreign currency reserves have eased the pressure on the external front.

Although the reduction in the current account deficit itself was necessary as Pakistan was facing severe challenges on the external front, resulting in a balance of payments crisis, the policies adopted to reduce the current account deficit stalled economic growth.

The GDP growth rate, reported by the SBP, for FY20 as a percentage change in the gross value added by three major economic sectors, namely agriculture, industry and services, is one of the lowest in its history. The Covid-19 pandemic is likely to further intensify the challenges in terms of lower economic growth as the global economy braces for one of the worst economic crises in the modern era.

The large-scale manufacturing (LSM) index decreased by 10.32% between July and May in FY20 while the business confidence index reported in the SBP-IBA Business Confidence Survey was at 38 in April 2020, down from a peak of 52 in December 2019. On the other hand, the growth in export receipts in FY20 reported for every month till March 2020 was positive. It was negative in April and May 2020.

Maritime traffic

Covid-19 not only had a wide-ranging impact across different sectors of the economy but it also deeply uprooted global trade. As the lockdown was relaxed across major markets, demand for goods and services, which was severely curtailed during the crisis, began to recover.

Although short-term analysis of maritime traffic does not look promising, suggesting that the contraction in global trade is likely to linger, a recently published blog by the World Bank recommending actions to speed up export recovery emphasises greater export participation by Pakistani firms to boost recovery efforts.

The blog recommended the steps necessary to increase exports. These steps include smart promotion of exports, improving compliance and regulatory environment and easing import restrictions to boost productive capabilities. However, it is important to mention that shift towards an export-oriented approach will be unlikely if inward-looking policies are a preferred choice for policymakers during the Covid-19 era.

The trade deficit of Pakistan was more than 150% of total exports from the country in 2018. Exports were valued at 40% of imports. In 2015, the trade deficit was less than the total amount of exports. It is particularly disconcerting that imports of productive investments such as machinery and equipment for export-oriented industries were neglected.

Capital goods

According to the ITC’s Trademap.org, imports of textile machinery peaked in 2005 at $737 million and dropped to $155 million in 2009. They gradually recovered to $498 million in 2017.

In relative terms, imports of textile machinery accounted for 3% of total imports into Pakistan in 2005 but they comprised only 0.9% in 2017.

In comparison, Vietnam imported $280 million worth of textile machinery in 2005 but surpassed the $1-billion mark in 2018. Its textile exports increased from $5.3 billion to $36.7 billion during this period. Imports of textile machinery into Bangladesh also increased from $380 million in 2005 to $888 million in 2015. It too registered a significant growth in textile exports over the past 15 years.

On the other hand, Pakistan’s textile exports have increased from $10.3 billion to $13.7 billion between 2005 and 2019. The slow pace of export growth in the most dominant industry in Pakistan, the textile industry, points to the anti-export bias that has severely discouraged exports from export-oriented sectors of the economy.

Value addition

The value added manufacturing per capita is a useful indicator to determine the level of industrial development across countries. Unido uses the value added manufacturing per capita as a main indicator to assess the level of industrialisation.

Borrowing data on the value added manufacturing and population from the World Bank’s World Development Indicators shows Pakistan has had a rather flat trajectory for value added manufacturing per capita relative to Bangladesh, India and Vietnam in recent years.

Pakistan reported a maximum of $181 and a minimum of $161 per capita between 2011 and 2018. On the other hand, Bangladesh skyrocketed from $138 in 2011 to $361 in 2019. Vietnam too more than doubled its value from $204 in 2011 to $448 in 2019.

It is important to note that it is only until recently that India, Bangladesh and Vietnam have caught up with Pakistan in terms of urbanisation, that is, the percentage of population residing in urban areas. Labour-intensive manufacturing sectors are typically an important source of employment for migrants from rural to urban areas.

In essence, investments to improve productivity and industrialisation levels in Pakistan were limited relative to its counterparts at a time when the latter were investing to boost industrialisation.

Pakistan lags behind Bangladesh, India and Vietnam. Investments in textile machinery were negligible as well as the increase in manufacturing output per capita.

It is essential that policymakers focus on improving industry competitiveness in order to ensure sustainable economic growth and accumulation of much-needed foreign currency reserves.

The writer is the Assistant Professor of Economics and Research Fellow at CBER, IBA

 

Published in The Express Tribune, July 27^th, 2020.

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