Pakistan’s economic woes worsen with dwindling foreign exchange reserves, rising inflation, historic currency devaluation and worsening current account deficit, again forcing the country to borrow from external sources such as the IMF and Saudi Arabia.
The trade deficit has recorded an alarming increase of over 117.25% in the first five months of the current fiscal year. The merchandise trade deficit reached $ 20.746 billion in July-November 2021, compared to $ 9.549 billion in the same period last year. Between July and November 2021, the country’s current account deficit (the broadest measure of trade) reached more than $ 5.08 billion, or 4.7 percent of GDP, with imports exceeding exports.
One of the main reasons for the sharp rise in import bills is the disruption of the global supply chain, which has resulted in soaring commodity prices. In addition to this, the import of raw materials, capital goods and food group products with inelastic demand have strongly contributed to this downward trend. Despite this, exports rose 27% to $ 12.365 billion in July-November 2021, from $ 9.747 billion in the same period last year, but the effect of this increase potentially did not. managed to improve foreign exchange to facilitate imports.
This raises a fundamental question, how to balance the imbalanced trade structure? Further efforts are needed to correct this destabilization of long-term economic growth.
First, short-term economic growth is accelerated by an increase in aggregate demand, while long-term or potential economic growth is enhanced by an increase in the productive capacity of the economy. In order for production capacity to increase, savings and investment must also be increased. The expansion of national production capacity is at the center of this paradigm to keep growth stabilized; otherwise, demand-driven industrial growth will trigger trade and current account deficits, respectively.
Second, Pakistan lags regional giants in terms of labor productivity. According to the ILO, China’s per capita output increased by 388% between 2000 and 2019, while that of India increased by 177%, that of Bangladesh by 109% and that of Pakistan by only 32%. Industry leaders in the export sector rely heavily on obtaining concessions, tax exemptions, subsidies or low borrowing rates, which keeps them dependent on government crutches and entangles them in the current status of low productivity. . They should unleash the hidden potential of the industry by improving the training and skills of the workforce, treating the workforce fairly, hiring professionals, reforming internal operations, acquiring new ones. technologies, creating joint ventures, attracting foreign direct investment and raising funds for expansion.
Third, the influx of foreign direct investment (FDI) in manufacturing and agriculture is another source of productivity and efficiency. Overall, however, investment flows are very low and mainly attracted to telecommunications, banking, oil and gas, which has a short-term effect on economic growth. The manufacturing industry being the economic backbone of Pakistan has received negligible foreign investment, therefore missed a huge opportunity to access global supply chains, technology, know-how, design, manufacturing branding, marketing channels and management practices. Accordingly, policies must be oriented in such a way as to inspire investment in the primary and secondary sectors of the economy for long-term economic growth.
Fourth, under the umbrella of CPEC, Chinese companies are all ready to choose special economic zones in Pakistan due to access to the new port and close political ties. The government should strive to take advantage of this unique opportunity by providing a vast pool of human capital and connecting domestic industries. This will create jobs, speed up production and ultimately improve exports. In addition, under the second phase of the free trade agreement with China, 83% of Pakistan’s world exports have been liberalized, including textiles, clothing, leather, chemicals, fruits and vegetables. sea and meat. Pakistan is expected to take advantage of duty-free status and cheaper transport costs to access Chinese markets and enjoy increased competitiveness. According to economist Ishrat Husain, a 1% market share of Chinese imports would increase our overall exports by $ 20 billion.
Fifth, the current exceptionally large trade deficit is mainly due to an increase in the price of imported items; the quantity imported has not significantly increased as much. It also implies that imported products are price insensitive and will not be much affected even if a further devaluation of the currency occurs. This requires the replacement of imported goods with locally produced goods in order to alleviate the pressure on import invoices. For example, we may choose to replace gasoline engines with electric motors.
In summary, declining export competitiveness is the key driver of the trade deficit, as the share of exports in GDP fell from 16% in 1999 to 10% in 2020. Pakistani exports lack diversification, sophistication and competitiveness. A long-term strategy to improve business productivity that stimulates competition, innovation and maximizes export potential is needed to increase competitiveness. To stimulate exports, a gradual reduction in effective rates of protection through a long-term tariff rationalization approach is also necessary.
A more insightful and logical approach is needed to replace the widespread discourse that “imports are harmful and should be discouraged”. There should be no reluctance as long as imports can be supported by export earnings, FDI and remittances, and positively contribute to production and exports.
The writer is an assistant professor at Abdul Wali Khan University in Mardan. He can be contacted at [email protected]