Analyze another trade deficit crisis
When the first wave of the pandemic hit Pakistan, policymakers were concerned about the contraction of economic activity and the uncertainties accompanying the closures and blockages announced by the government.
Various incentives have been given to different sectors to ensure that the impact of the Covid-19 shock is minimized. Economic indicators turned favorable after the initial shock.
Economic growth returned to levels above those reported before the pandemic, and industrial and commercial activities were at their highest levels in recent years.
The Large Scale Manufacturing Index (LSM) and the State Bank of Pakistan-Institute of Business Administration Business Confidence Index soared earlier in the year.
Today, the economic conditions are disconcerting. After peaking earlier in 2021, the trend reversed and indices began to drop.
The business confidence index was at 50 in October 2021 after peaking at 64 in June 2021. The LSM index fell 1.19% in October 2021 from its level in October 2020. The numbers ring a bell ‘alarm.
Import levels have increased, nearly hitting $ 8 billion in November 2021, the highest level on record. This is 84.7% more than the value reported in November 2020.
Likewise, exports reached $ 2.9 billion, about 33.7% above the declared value in November 2020.
The trade deficit, according to the Pakistan Bureau of Statistics (PBS), topped $ 5 billion in November 2021, up 29 percent from October 2021.
Imports in the first five months of FY22 were declared at $ 33 billion, 69.6% more than the value declared in the same period of FY21.
Growth was observed in all major product categories. Some of the important interest categories that have recorded higher growth levels are machinery, particularly textile machinery, transportation equipment, and petroleum products.
Imports of completely built units and imports of dismantled units increased.
While there is an increase in the quantity of petroleum products and crude petroleum products, the price effect seems to be dominant. In addition, raw cotton imports have increased in quantity and value.
Considering the growth in exports, both food and textile products contributed significantly to the increase in Pakistan’s total exports.
Total exports increased 26.9% in the first five months of FY22 compared to the dollar value declared for the same period of the previous fiscal year, with an absolute difference of about 2.6 billion of dollars.
Food products added $ 400 million and textile products contributed about $ 1.7 billion. The mesh industry alone has contributed about $ 500 million to this equation.
However, it is important to note that the quantity of knitwear exports actually fell by 14%, which suggests that the increase is dominated by the price effect.
In essence, both exports and imports are likely to be dominated by rising price levels, especially for the most basic commodities.
With the uncertainties over price levels likely to persist as the Omicron variant spreads across the world, it will be difficult to predict the trade deficit trend. However, the dollar value of imports, especially petroleum products, is likely to decline.
Central bank data
SBP data on receipts and payments in trade flows suggests that the trade balance is not as puzzling as the figures released by the PBS show.
The SBP reports that $ 330 million was paid for in drugs in the first five months of FY22, while the PBS reports that it stands at over $ 2.1 billion, an increase of 383% year over year.
Likewise, the payments made to the oil group, reported by the SBP, are about $ 1.3 billion lower than those reported by the PBS.
Overall, the total imports reported by the SBP in balance of payments data are $ 3.2 billion less than those reported by the PBS for the first five months of fiscal year 22.
Importantly, the SBP reports $ 2.4 billion as “other payments,” which will likely include funding from other sources, overland imports from Afghanistan, and imports from export processing zones.
However, it can be assumed that the sharp increase in imports of medicines and petroleum products, reported by the PBS, is financed by non-bank sources and counted as “other imports”, although the SBP does not make any direct reference to products. individuals in “other imports”.
Essentially, the difference between the numbers reported by the PBS and the SBP suggests that bank channel payments on imports in the first five months of FY22 are less than the value of goods imported into Pakistan. Although payment concessions through different modes of financing and delays are common in trade and can benefit importing countries, the trade deficit itself will be more alarming if the foreign exchange reserves held by the SBP take a hard hit and start to build up. a long-term downward trend. term.
Exports of services
Although exports of goods have continued to increase since the end of FY21 as the economy recovered from the pandemic, a paradigm shift is the increase in exports of services, driven by exports of ICT services. .
Exports of services in the first four months of fiscal 22 passed the $ 2 billion mark, registering a 24% year-on-year increase.
Exports of ICT services grew 39.2% year-on-year in the first four months of FY22, while exports of business services increased 25.4%.
It is reported that the startups have attracted more than $ 300 million in investments during this calendar year. This is important given that Pakistan received less than $ 2 billion in foreign direct investment (FDI) in the last fiscal year. ICT services have enormous potential and their development can help increase the sophistication of Pakistan’s export basket.
The ICT service industry has performed exceptionally well with minimal government intervention compared to other industries. It is mostly made up of startups and small businesses that have invested in their capabilities.
The government must facilitate their growth by providing adequate infrastructure and resources.
It is imperative to develop the discourse on export growth by building capacity at the firm level and improving productivity levels in all sectors rather than through direct government intervention.
The author is assistant professor of economics and researcher at the Center for Business and Economic Research, IBA
Posted in The Express Tribune, December 27e, 2021.