As the new Shehbaz Sharif-led government took office last month, the baton of command swapped hands, but the economic challenges continue to remain the same. When the PTI government came into power in 2018, it was engulfed in a balance of payment crisis.
This eventually was mitigated after the negotiations of an Extended Fund Facility with the IMF. The economic conditions remains the same as the government negotiates another package with the IMF. Another challenge on the external front looms.
The current account deficit, as reported by the State Bank of Pakistan, in the first nine months of FY22 was $13.2 billion. The current account deficit in the first quarter of 2022 was $4.08 billion. The deficit in the balance of trade in goods and services in the first nine months of FY22 was $12 billion larger than that in same time period previous fiscal year.
The worker remittances, which are useful in countering the balance of trade deficit, only increased by $1.5 billion. Import payments through banks increased by $13.8 billion in the first nine months of FY22 over the same time period last fiscal year and ‘other imports’ increased by $1.9 billion. However, ‘other imports’ have decreased from $430 million in March 2021 to $230 million in March 2022. This was followed by a sharp decline month-on-month in February 2022.
The current account deficit, too, had decreased to $500 million in February 2022 from $2.5 billion in January 2022. Interestingly, the payments made on imports of the petroleum group, at $1.65 billion, are the highest since July 2018, driven by payments on finished petroleum products. Import payments of the textile group are approximately $600 million, $175 million more than the payments in February 2022.
Read more: How will the new Govt. deal with the fiscal deficit? – Adil Nakhoda
Import payments on raw cotton have increased by $110 million. The statistics on external trade provided by the Pakistan Bureau of Statistics (PBS) suggest a surge in the quantity of imports of petroleum products as it has increased by 72.7 percent month-on-month in March 2022. This followed a decline of 30 percent in February 2022. However, the price effect still dominates and drives the import value.
The foreign exchange reserves held by the State Bank of Pakistan are reporting a downward trend. The foreign exchange reserves were at $20.07 billion in August 2021, the highest level reported. The previous highest was $19.5 billion in October 2016. The reserves decreased to $10.9 billion on 16th April 2022.
A decline of more than $4 billion was reported between 18th March and 16th April 2022. With imports averaging more than $6 billion each month this fiscal year, the foreign exchange reserves held by SBP cover less than two months of imports. This sharp decline in foreign exchange reserves has severe implications for the economy, particularly as global commodity prices fluctuate.
At a time of a looming balance of payment crisis, the dollar inflows have become increasingly important. Exports and remittances are two channels that have often contributed to the biggest proportion of dollar inflows in Pakistan. According to the data published by PBS, exports of goods from Pakistan averaged $2.8 billion in February and March 2022.
The trade deficit in March 2022 was $3.6 billion, up from $3 billion in February 2022. Exports were $23.4 billion in the first nine months of FY22, up 25 percent from $18.7 billion in the same time period previous fiscal year. If exports continue to increase at 25 percent year-on-year for the next three months, exports for the FY22 may likely close at around $30 billion.
Read more: US aid to Pakistan and its repercussions
Exports of services, driven by the strong growth in the Information, Communication and Technology (ICT) sector, were $4.5 billion in the first eight months of FY22. If this trend continues, exports of services may likely total $6.5 billion. The dollar inflow from exports of goods and services is likely to cross $36 billion, the highest ever reported in Pakistan’s history.
Remittances in the first nine months of FY22 were $22.9 billion, 7.1 percent higher than the amount received in the same time period previous year. Although there was a slowdown in remittances in February 2022, it recovered in March 2022. Even though the inflows are showing a positive change, the import payments have increased and are exerting pressure on the foreign exchange reserves.
The government has undertaken several measures to restrict imports. The question remains whether such measures are useful as imports continue to increase, primarily driven by the increasing commodity prices and global challenges. The vicious cycle involving the balance of payment crisis, which is often susceptible to shocks in the global commodity market, is likely a result of challenges that involve low capabilities and poor levels of productivity domestically.
Pakistan has one of the lowest levels of exports as a percentage of GDP in the world. Even though the recent surge in exports is welcome, given the shortage of inflows of dollars into the economy, the historical inability to generate export growth is likely to suggest that local producers are uncompetitive with respect to regional and global competitors.
Read more: Thoughts on political imbroglio in Pakistan -Part 1
With the help of data from the World Bank’s World Development Indicator, the per capita value added in the manufacturing sector, a measure of the level of industrialization within a country, is analyzed for Pakistan and some of its regional competitors. The value for Pakistan has increased marginally in the last twenty-five years compared to regional competitors such as Vietnam, Bangladesh and India.
While the values for Vietnam and Bangladesh have increased about five times, that for Pakistan has increased less than two times. Pakistan had higher MVA per capita than Vietnam, Bangladesh and India in 1996. It had the lowest in 2019. Pakistan has also experienced lower levels of GDP per capita growth.
Similarly, Pakistan had the highest GDP per capita at purchasing power parity in 2000 among the four aforementioned countries. It had the lowest GDP per capita in 2020. These are clear indications that the poor levels of domestic capabilities led to stagnation in economic activity within the country.
Pakistan is a laggard in terms of the growth rate experienced in the trade. According to data on exports and imports of goods extracted from the International Trade Center’s Trademap.org, Pakistan had $11.9 billion worth of exports, India had $59.4 billion, Bangladesh had $6.4 billion and Vietnam had $20.1 billion in 2003.
In 2020, Vietnam and India both had more than $275 billion worth of exports of goods, Bangladesh had $42.8 billion and Pakistan lagged at $22.2 billion. Vietnam managed to increase its exports more than 13 times, while Pakistan failed to even double it between 2003 and 2020. This is disconcerting by any measure.
Read more: Shariat Court declares interest based banking system un-Islamic
More interestingly, Vietnam reported trade deficits between 2003 and 2011 as it restructured its economy into one that would be defined by export-led growth. For instance, it was able to become a manufacturing hub for several electronic goods as it attracted investors by providing favorable conditions focused on improved efficiency and productivity levels.
Although several macroeconomic indicators perform relatively poorly in Pakistan, factors such as lack of trade openness and high tariffs on several goods imported into the country do little to boost domestic productivity and improve the competitiveness of local producers. Pakistan has one of the highest weighted average tariff rates in the region, as reported by the World Bank’s World Development Indicators.
While Pakistan reports a rate of 8.67 percent in 2020, Vietnam has reduced it to 1.34 percent. It was above 10 percent for both countries in 2006. The average weighted tariff rate for primary products imported into Pakistan was above 5 percent in 2020. This was less than 3 percent for Vietnam and less than 5 percent for India.
The average weighted tariff rate on manufactured goods was above 10 percent for Pakistan in 2020, while Vietnam has reduced it to about 1 percent. Often, high tariffs imposed by Pakistani policymakers have failed to result in improved competitiveness of the targeted industries. Pakistan imposes one of the highest tariffs on the imports of automobiles in the world.
However, it has failed to produce globally competitive products in this industry. Several economic experts believe that the mobile manufacturing policy may result in a similar fate as it is driven by a stringent protectionist policy rather than seeking improvement in efficiency in different stages of value addition within the industry.
Read more: IMF says will work with new govt
Several East Asian countries adopted technical non-tariff measures to ensure that the quality of goods imported meet certain standards and specifications as defined by these measures. Unfortunately, the adoption of non-technical measures (NTMs) in Pakistan is relatively low.
According to World Integrated Trade Solution, the coverage of imports facing NTMs and the frequency of products facing NTMs in Pakistan is considerably lower than other regional countries. Pakistan imposes non-technical licensing for non-economic reasons as the most common measure. On the other hand, technical NTMs are more common in countries such as Thailand and Vietnam.
The lack of NTMs may result in the imports of substandard products. Pakistan imports more than $1.6 billion worth of waste and scrap of iron and steel. It does not impose any technical barriers to trade measures on the imports of metals, while other major importers ensure that the imports meet certain standards and specifications.
The same can be said for the imports of fuel as Pakistan imposes quantitative restrictions on the imports. The risks of importing and producing substandard products may impact the export competitiveness of the domestic producers. Hence, it is crucial to ensure that policymakers improve the quality of products produced and imported into Pakistan.
Read more: CPEC: Once a game-changer, always a game-changer?
In essence, Pakistan must address the challenges that lower the level of productivity within the country. This is likely to be an important factor to the increasing trade deficit, which exacerbates the balance of payments. As the government negotiates with the IMF for yet more financing, the issues highlighted in this article become ever more crucial.
Dr. Aadil Nakhoda is an assistant professor at the Institute of Business Administration, Karachi, and a research fellow at the Center of Business and Economic Research (CBER) at IBA. He holds a PhD in international economics from University of California, Santa Cruz, and specializes in international trade. He tweets @EconomistAadil.
The views expressed in this article are the author’s own and do not necessarily reflect the editorial policy of Global Village Space.