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Pakistan: Taking toll of the trade deficit

29/12/11  www.pakistantoday.com.pk

SBP

Due to favourable conditions in the international market Pakistan’s external account has shown an unexpected improvement during FY11. It provided some breathing space to the economy. It also indicated that domestic business environment has remained the same, i.e. no improvements recorded. However, the increase in the demand and prices of Pakistani exports products along with healthy growth in remittances helped to bring about an improvement in country’s external position, said a recently published SBP report.

Despite good performance of the external sector no change in the production mix and the destination of exports has taken place. A continuous decline in capital and financial flows was also alarming. The financial account surplus declined for the fourth consecutive year in FY11 and the projections for FY12 show that this trend may continue in the future. Inflows of foreign direct investment (FDI), equity securities and loans have remained lower than last year.
The poor macroeconomic conditions and the deteriorating law and order situation, an improvement in either FDI or equity securities flows may not be possible in the near future, the report indicated. For instance, net foreign investment inflows in the country fell by 59.2 per cent to $305.4 million in first five months of fiscal year 2011-12 compared with $748.7 million in the same period last year. Out of total foreign investment, FDI depicted a decline of 27.1 per cent to $419.80 million as compared to $576.2 million in 5MFY11. Further, the suspension of the IMF program will also lower inflows from IFIs. Thus, if the current account deteriorates, support from the financial account will not be available, as was the case in 2006-08. In the absence of foreign inflows, financial account would be under pressure due to the repayment of the IMF loan.

During the last two years, the improvement in the current account continued in FY11 showing a small surplus of $0.3 billion, after depicting deficits for six consecutive years. The latest figures show that the current account deficit rose three times in the last four months, as against the same period last year, indicating difficulties ahead on the external front. The SBP reported that the current account deficit as percentage of the GDP reached 2 per cent was recorded at 0.8 per cent last year. The bank said that deficits rose to $1.555 billion during July-October while these were $541 million during the same months of the previous year. The overall scenario of the external front is depressing, except remittances that were 24 per cent higher. Trade and services gap rose to minus $6.227 billion, 32 per cent higher than last year, during the four months. The deficit may further affect value of Pakistani rupee, once the central bank stops supporting the local currency. Moreover, higher current account deficit will also compel SBP to carefully evaluate the interest rate decision. The central bank has already slashed the interest rate twice in the last two monetary policies, despite double digit inflation which again rose in October. Exports recorded a sharp rise of 28.4 per cent during FY11 against 9.1 per cent in FY10. Exports of $25.3 billion were the highest ever in the history of the country. This was achieved on the back of 35.2 per cent rise in cotton and textiles related exports.

Pakistan’s trade deficit continued narrowing down for the third consecutive year, in FY11. In 2010 a fall in imports caused a reduction in the trade deficit. There was a sharp increase in exports this year that contracted the trade deficit. Although imports have also increased by 14.7 per cent, the growth in exports outpaced the growth in imports.
Trade deficit was $294 million in 2001-02 that rose to $1,208 million in next two years, 2003-04, in 2004-05 it further rose to $4,352 million, $8,259 million in 2005-06, $9,495 million in 2006-07, $14,970 million in 2007-08 and reduced to $12,492 million in 2008-09. The trade deficit during 2009-10 was $11,536 million that further decreased to $10,500 million in 2010-11. The increase in exports was mainly the result of higher international cotton prices and better unit prices of textile products. Although the quantum of textile exports rose marginally, but the price impacted the earning.
The increase in exports was quite encouraging but energy shortages and law and order situation remained a big constraint in the country’s exports and competitiveness. In 2010-11 Global Competitiveness report, Pakistan’s ranking has dropped to 123 from 101 last year. In the region, its overall competitiveness ranking is lower than that of India’s 51, Bangladesh’s 107 and Sri Lanka’s 62. The export earnings were historic that increased to $793 million in FY11 as against to $422 million in FY10. The trade deficit is likely to increase due to the slowdown in exports particularly, textiles and cotton exports. The overall import bill may also be higher in FY12, due to increase in both quantum and average prices of petroleum products. According to the SBP figures, commodity prices started rising in FY09, Pakistan’s terms of trade (ToT) have also shown a continuous improvement. This was due to an increase in the unit value of exports than imports. The share of finished goods in total exports was about 71 per cent compared to 88 per cent in Bangladesh. In India and Sri Lanka it is 67 per cent.

Textile exports demonstrated an increase not only because of higher prices of cotton yarn and cotton fabrics that showed an increase of 20 per cent, but also due to high value added products such as bed wear, towels and readymade garments. Moreover, Pakistani exporters are now increasingly targeting relatively smaller importers in export markets. This strategy is being applied by India, Bangladesh and Sri Lanka, while China is shifting to supply established brands. This strategy is quite successful as orders can be filled by the existing set up.
The food exports growth comprising of wheat, fish, meat, fruits, and vegetables with improved production and higher prices of these commodities helped earn substantial amounts of foreign exchange. In the food group, wheat exports accounted for more than 55 per cent growth followed by vegetables 9 per cent, fish 6.7 per cent and meat 5.1 per cent. The exceptional rise in wheat exports can be attributed to higher international prices due to production losses in Russia, USA and Canada and the availability of an exportable surplus from last year’s carryover stocks and strong expectations of a bumper crop in FY12 in Pakistan. It is expected that exports of meat would continue to grow for the fifth year that has already increased four fold since FY07. This growth was due to both an increase in quantity and in prices. The rise in meat and meat preparation exports is on account of higher demand from Saudi Arabia, after the Saudi government banned meat imports from some African countries. Realising the potential in the Halal meat industry, which has worldwide sales of over $1 trillion, the Sindh Board of Investment (SBI) took a number of initiatives for the promotion of the Halal meat industry in Pakistan at the start of FY11. Their efforts resulted in higher production and exports of meat. The report said, the production of meat and its exports are likely to rise further in FY12. After declining during FY10, fish and fish preparation exports increased to $297 million despite the loss of the European market. Pakistan managed to fetch higher prices for its shrimp exports from Egypt and other markets such as China, UAE, Thailand, Korea, Saudi Arabia and Indonesia which not only reversed the loss – about $30 to 40 million per annum, of Europe as an export market but also increased export earnings. Overall, fish and related exports rose to 131,700 tonnes, worth $297.3 million, as against 106,000 tonnes, estimated at $227.0 million last year.

A number of initiatives are under way to further increase the exports of fish and fish preparation, including the expansion of the existing laboratory infrastructure to provide testing and certification facilities acceptable to destination markets; the provision of financial support to revamp fish jetties at Gaddani, Dam, Pasni and Jewani; ensuring the provision of facilities such as landing stations/jetties/ports along the Makran coast in partnership with the provincial government of Balochistan and supporting Korangi seafood processing companies in developing a traceability system for smoked, canned, fresh and frozen fish products.

The report also pointed out that despite higher prices in the global market, rice exports declined due to production losses, about 1.7 million tonnes of paddy, caused by the floods. Rice production was only 4.82 million tonnes as compared to 6.61 million tonnes in FY10. The decline in rice exports was mainly due to the lower export volume of non-basmati rice, whereas basmati rice export increased in quantity. Non-food and non-textile exports increased by 16 per cent as compared to 13.3 per cent last year. The factors responsible for growth were petroleum products, leather raw and manufactured, footwear, medical and surgical instruments, chemicals and pharmaceuticals, and engineering goods.
There was a fall in the exports of fertiliser, jewelry, cement and molasses. Chemicals and pharmaceutical exports grew 21.8 per cent during FY11. Other sub-sectors, such as, plastic materials earnings were 50.4 per cent and from other chemicals increased by 20.5 per cent. This rise can be attributed to an increase in import demand from India for chemicals like polyethylene and pure terepthalic acid (PTA). Manufactured leather exports grew by 17.3 per cent. The main contributors were leather garments followed by leather gloves. During the year, export of footwear also increased by 16.5 per cent. Among footwear products, the exports of leather footwear increased 26.4 per cent and that of canvas footwear by 51.0 per cent. The higher export was mainly due to rise in demand in traditional markets and relatively better export prices.

After declining for the last two years, imports grew by 16.4 per cent in 2011 as against a decline of 0.3 per cent last year. The growth was due to increase in food, petroleum, textile, agricultural and chemicals. The imports of machinery, transport goods and metals fell.
The factors responsible for the increase in imports include increase in international commodity prices, especially in petroleum products, that rose by 51 per cent after declining by 20.6 per cent last year. The quantity wise import of petroleum products grew 6.1 per cent.
The reason behind the lower import quantity of petroleum products was the increase in domestic production of high speed diesel (HSD), furnace oil (FO) and motor gasoline (MS).
Palm oil prices also increased. There were shortage of pulses, sugar and cotton, due to floods in August 2010, compelling the country to import these commodities. The prominent factor in inflating the import bill was the rise in the prices of petroleum products, palm oil and sugar. In the food group, the import of palm oil and sugar was about 72 per cent of overall growth in food imports.
The increase in sugar imports was due to domestic shortages. However it is expected that sugar imports would decline in FY12 due to the expected rise in sugar cane production after the floods and favourable weather conditions in Punjab and Sindh. The rise in the import bill of raw cotton was due to higher prices in the international market, and a marginal increase in quantity. It is expected that the import of raw cotton will decline in FY12.
Although imports in the machinery group shows a decline but import of textile machinery rose by 53 per cent in FY11 as against 41.3 per cent rise last year. Higher import of textile machinery was due to replacement of old machinery mainly in the weaving sector and imports of new machinery in spinning and stitching sectors.
The imports of transport group declined by 3.9 per cent, however, the import of motor cars and motor cycles increased sharply. Especially, the import of CBU units of cars grew by 41.5 per cent compared to 29.5 per cent last year. This growth was expected after the government’s decision to increase the age limit of imported cars from 3 to 5 years in December 2010. The imports of CBUs are directly proportional to the age limit. A major fall was seen in the import of other transport equipment, wheat, agricultural machinery, fertilizer; construction and mining machinery and power generating machinery.
It was said in the report that Wheat imports continued to decline for the second consecutive year, dropping by 87.3 per cent during FY11. The fall in wheat imports was the result of better domestic crop and carryover stocks from FY10.
The imports of fertilizer significantly declined because less quantity was imported as its unit price increased by 20 per cent. Pakistan has increased fertilizer production capacity by 1.4 million tonnes in FY11.
The decline in the imports of construction and mining machinery and iron and steel may be the result of lower construction activities. In the case of power generating machinery, inventories carried forward from previous years that declined imports during the year.
It is to be noted that during the last eleven years trade deficit has increased 3571 per cent that depicted a worrisome phenomenon that should be remedied urgently by increasing exports.

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