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High production costs and imports widen trade gap

HIGH production costs and booming imports have widened the trade gap which is moving towards a worrying record.

Besides foreign competition, there are several domestic reasons for this poor performance. Both imports and exports are moving up, but there is no sign of the trade deficit narrowing during the current fiscal 2008. This is indicated by the latest official statistics unveiled this week for the Quarter-1 -July to September of fiscal 2008.

There is a marginal increase of 4.77 per cent in Q-1 exports that moved up to $ 4.456 billion up from $4.253 billion in the like period of fiscal 2007. Exports have a lot of catching up to do to get even near the governmentˆset target of $ 19.2 billion for the whole year.

Exports

Exports in 2007 were $17.01billion — short of the actual target of $ 18.6 billion. This is in spite of the fact that exports of traditional items like rice went up. But the Federal Bureau of Statistics (FBS) also says export of pharmaceuticals, auto-parts, engineering products and primary commodities are declining.

Textiles, the country's biggest industry, that earns two-thirds of all forex on account of exports are not putting up a good performance despite a number of official measures, subsidies and incentives. Its key rivals -'China and India'-now dominate the global textile trade show. The Pakistani textile industry is so used to spoon feeding by the state that is loosing well in face of the growing competition since the onset of WTO and abolition of the quota regime. Such lack of inaction can cut down, further, the growth process of the industry in future.

Textile exports during July- August had inched up a mere 1.18 per cent, compared to the like period of last year. Its performance is not improving any significantly, as data for the last three years indicate.

The Q-1 imports rose rather sharply, as compared to exports, a phenomenon the government is trying to discourage in order to contain the widening trade deficit. Imports in Q-1 were up 8.51 per cent, rising to $ 8.058 billion -up from $7.425 billion in the like quarter of 2007.

Deficit

The trade deficit widened to $ 3.601 billion during Q-1, is 13.53 per cent higher than the like quarter of 2007 when it was $ 3.172 billion. At this rate, the deficit can total up to a historic worst of $ 14.404 billion, for the whole of 2008, if imports are not restrained, or exports do not get a quick boost.

The business and industry have nine more months to go to improve the situation, until June 30, 2008 when the current fiscal will close. The Ministry of Commerce, in its Traded Policy for fiscal 2007 had projected imports at $ 28 billion, exports at $ 18.6 billion, and a trade deficit of $ 9.4 billion. However, the deficit had overshot all projections and ended at a record high of $13.53 billion, straining the country's external balances. Pakistan also had failed to attain its export target and had ended up merely with $17.01billion. But had overshot the import target by $ 2.54billion for that year.

There is no immediate sign of a significant turnaround in foreign trade, if September is any indication. September alone saw the trade deficit widen 20.65 per cent, compared to September 2006, because exports were down and imports up, FBS data show. September imports at $ 2.73billion rose 12 per cent, compared to the like month of fiscal 2007 when these were $2.44 billion. On the other hand, September exports were marginally rose to $1.49 billion, up from $ 1.41billion in the like month of fiscal 2007.

Slow growth

The slow growth in exports has led to a virtual running feud between the Ministry of Commerce on the one hand and several economic Ministries and Prime Minister Shaukat Aziz on the other. Commerce Minister Humayun Akhtar insists that the government policies are not conducive to speed up an export push. The government, principally, is focusing all its energies and policies on maintain a 7.0 per cent plus GDP growth that pushes up imports, and widens the trade deficit, he maintains.

The government, however, is unlikely to change its high-growth focus in order to generate employment and boost the economy in general. It is particularly catering to the requirements of an election year. The October 6 Presidential election has generated considerable controversy, but more heat is likely to hit the economy by the onset of national parliamentary elections, due in the first half of January, Aziz announced this week.

Akhtar says, despite several challenges in the foreign trade field, "exports growth has continued in September, which saw nearly a 5.0 per cent increase after a negative trend in August. In order to expand exports, Islamabad is currently engaged with several countries, negotiating larger export excess on a preferential basis. These negotiations were started nearly four years ago, and have partially succeeded. Akhtar says, as a result, export of industrial, and farm products to North America, China and South Asia, is up.

Advantage

However, the fact is that trade with countries like China looks more to the advantage of the later. Influx of cheap, and low quality Chinese electronics, consumer goods, footwear and shoes, and toys has shuttered down many of Pakistani industries manufacturing these products. There is a growing threat of Chinese textiles, especially women‚s clothing, which are cheap and offer variety. Countries like Thailand, Indonesia and Malaysia are exporting an enormous quantity of goods ranging from tomato ketchup to ready-to-wear garments, which are reasonably priced, and offer a great variety besides giving the consumer satisfaction of buying foreign goods.

Industrial production in Pakistan has missed most targets over the last three years, which resulted in generating smaller or no exportable surpluses. But Akhtar is still upbeat over export prospects. "I have every hope, the export growth trend will continue to improve in the upcoming months. We will attain the export target for fiscal 2008, he says. On the widening trade deficit he says, "It is the result of the overall economic policies of the government. I set only the export target, not import projections," he says.

What restrains the export growth? High and rising inflation, officially estimated at 8.6, but much higher in fact, is one. Financial costs are up and rising bank lending rates are the other. Then prices of state-supplied energy and utilities are rising. Industrial production is declining owing to competition from foreign smuggled goods and liberal imports in the wake of WTO. The situation requires long-term policies, which the present government doesn‚t seem to adopt. This, in fact, may mean that exports and the economy can continue to move in the same old groves˜at least in the foreseeable future.