Understanding balance of payments crisis

Current account deficit a major challenge that causes inflation, growth problems

KARACHI:

Balance of payments problem primarily in the form of current account deficit is one of the major issues faced by Pakistan’s economy.

It is the root cause behind the inflation and growth problems. Inflation rises when the rupee depreciates due to the current account deficit and similarly growth above 4% becomes unsustainable as the jaws of current account start to widen.

So, it seems very important to understand the overall evolution of Pakistan’s imports, exports and remittances.

For this purpose, let’s compare the numbers of FY2022 with FY2004. The reason for this comparison is that year 2004 is one of those rare occurrences wherein Pakistan experienced a current account surplus.

We need to see how trade and remittances progressed from this historical juncture onwards.

Let’s discuss imports of goods first. Total import bill during this period (2004-2022) has increased from $13.6 billion to $72.05 billion. This is a mammoth increase of 430%.

Pakistan’s population in this period has increased by almost 50% (156 million to 236 million). So, 430% increase in imports is largely out of line.

For further analysis, we will see the growth in per capita terms of significant import groups.

The largest absolute growth (728%) is in the petroleum group wherein imports increased from $2.3 billion to $18.7 billion. Although prices in this period increased by almost 200%, the remaining volumetric increase is still too much.

Per capita petroleum imports increased by 450%, which is extremely high given 50% rise in population. If we adjust for a 200% rise in prices, even then petroleum imports have risen by 250% in the last 18 years on per capita basis.

This is one of the major causes of the problem. The solution is maximum shift towards solar and other alternative energy avenues.

The most alarming situation after petroleum is to be witnessed in the food group. Pakistan being an agricultural country should not be importing food items amounting to $7.9 billion in FY22 (FY04: $1.4 billion). This includes palm oil imports of $3.2 billion.

On per capita basis, imports of this commodity have increased by 218%. The major contribution to this change seems to have come from prices, which have increased by almost 300%.

However, we need to substitute these imports with indigenous products. It may take a few years, but this is the only way forward.

Our per capita imports of dry fruits increased by 300%, per capita tea imports have increased by 105% and per capita pulses imports have increased by 550%. We can surely investigate import substitution for these items.

Similarly, imports of agriculture and other chemicals group increased to $10.7 billion, growing by 288% in absolute terms and by 158% on per capita basis.

Here it is difficult to assess the price or volume contribution as a lot of items from fertiliser to plastic are part of this group.

Pakistan’s machinery imports rose to $9.6 billion, up about 300% in the past 18 years. Although on per capita basis machinery imports increased by 167%, we can consider them good imports generally as they contribute to the productive potential of the country.

However, this import category also includes mobile phone imports, which have increased by almost $1.6 billion during the period under consideration.

Transport group imports in this period increased by 368% in absolute terms and by 211% in per capita terms. This is certainly something which we can try and minimise.

Cars’ CBU (completely built units) imports have increased by 600% in absolute terms and by 366% on per capita basis. Similarly, cars’ CKD (completely knocked down units) imports have increased by 384% in absolute terms and by 222% on per capita basis.

This is where it seems that we are lavishly living beyond our means. But the rise in these imports is partially caused by a lack of public transport system.

The government should give public transport to the people so that this bleeding can be arrested. The public transport system will help in reducing petroleum imports also.

Textile group imports have increased by 432% in absolute terms and by 254% in per capita terms. This is also alarming as textile exports in the corresponding period have increased by only 132% in absolute terms and by 50% on per capita basis.

This is something that must be probed. Previously, textile group was importing materials worth $1 for every $8 worth of exports. Now, textile sector is importing material worth $1 for every $3.2 worth of exports. This means that net exports of textile have declined significantly over time.

Total imports of Pakistan have increased by 450% in absolute terms and by 252% on per capita basis. This is the major problem causing balance of payments crisis. In the next article, we will try and understand the evolution of exports and remittances.

The writer is a banker and teaches economics

 

Published in The Express Tribune, August 15^th, 2022.

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