Growing regional trade deficit

Pakistan needs to diversify its trading partners but its dwarfed by India due to raw size and growing middle class

Pakistan's trade dynamics with regional countries are raising alarms among economists and policymakers. The recent surge in the trade deficit with nine neighboring countries - climbing by 62% to $2.917 billion in the first quarter of the current fiscal year - underscores the challenge. This rise was driven primarily by increased imports from China, India and Afghanistan. It is worth noting that China is Pakistan's biggest import partner overall, while India is the second-biggest in the region, although the volume of trade is negligible compared to China. Meanwhile, export growth was comparatively sluggish - sales to Afghanistan, Bangladesh and Sri Lanka grew notably, but exports to China were down.

The SBP data also serves as a reminder of the outsized influence that China has on out trade balance - imports from China grew by a whopping $3.89 billion in the first quarter of the current fiscal year, representing a 42% increase. Imports from India grew by just $57.48 million, but this represented a 771% increase. Exports to India, however, are still very low - $277,000 in the first quarter, and even in all of the previous financial year, the figure was a paltry $3.669 million. This is despite the government's huge interest in increasing trade with India. A contributing domestic factor is that while successive governments have publicly and privately pushed for improving trade ties, regardless of which party has been in power, those same parties politicise trade by railing against it when they are in opposition - PML-N governments especially have always touted the benefits of trade with India and separating trade from the Kashmir dispute, but just a few years ago, the PML-N was mocking the PTI government for wanting to the same thing.

The fact is that Pakistan desperately needs to diversify its trading partners. Bangladesh, Sri Lanka, Iran and Afghanistan are all potential markets, but they are dwarfed by India due to its raw size and growing middle class. Also, unlike China, which remains the world's factory, India could become a significant export destination if trade ties can be normalised while respecting national sentiments.