Widening trade deficit
Pakistan’s trade deficit widened to record levels over the last two months, and with exports continuing to slide, we can expect some difficult policy decisions in the coming weeks. The government’s own data, released by the Pakistan Bureau of Statistics, shows that previous attempts to address the situation clearly failed, with heavy export subsidies and currency devaluation doing nothing to improve the numbers. The numbers are well beyond the government’s worst-case expectations for the balance of payments situation. Although exports appeared to be on track to meet the annual target, they were well below the government’s projection for July and August. Meanwhile, we are already a quarter of the way to the annual import target.
This raises serious questions over the capacity of the SBP and the ministries of Commerce and Planning. Questions also need to be answered as to what the export subsidies accomplished, and who benefitted, because it certainly wasn’t the exchequer. Just last month, the PM called on his financial team to find ways to reduce imports of non-essential goods, including automobiles, yet the number of ads for new imported cars suggests that nothing has come of this proposal. While we started the year with significant foreign currency reserves, that cash will disappear remarkably soon if this massive spike in imports continues. In addition, since remittances are not projected to grow significantly, the government may be forced to borrow to shore up foreign exchange reserves. Given the existing debt problems, that would be disastrous.
Pakistan is not in a position to pursue import-oriented growth strategies. Experts say the unusual increase in imports is due to a reduction in controls aimed at encouraging economic growth after the sluggish first half of the PTI’s term at the Centre. If this is the case, the approach needs to be reexamined post haste. Pakistan is in no position to opt for consumption-based growth unless the products being consumed are local. But the only way to do that would be to bring back heavy import tariffs and restrictions while transferring some of the failed export subsidies to manufacturers targeting the domestic market.
Published in The Express Tribune, September 12th, 2021.
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