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October 24, 2016

Balance of trade


October 24, 2016

Pakistan has suffered from deficit of trade right from the very start, and this trade deficit kept increasing with time. The trade deficit, which was Rs1.2bn in the early 1960s, rose to Rs27bn in the early 1980s and then to Rs90bn in the 2000s.

By 2015 this trade deficit had risen to Rs2,275 bn. The terms of trade have never been favourable to Pakistan since imports have always been higher than exports with the exception of a few early years. Thus, there has always been a demand on foreign exchange.

One of the important factors that contributed towards generation of foreign exchange has been remittances from abroad. Though the balance of trade has been negative throughout, the current account became positive after 9/11 when workers’ remittances became an important part of foreign exchange reserves. Aid has also played a significant role.

Developing countries try to supplement their foreign exchange by obtaining loans and grants from developed countries. The aid rendered by the developed countries is, in essence, a new form of capital export to the developing countries or suppliers credit. At the same time, even when the developed countries make grants without stringent political conditions, they pursue goals which have nothing to do with the national interests of developing countries.

Foreign aid did not have any substantial impact on the acceleration of economic growth or the solution of the crucial national problems of the recipient countries. The experience of international cooperation unequivocally suggests that the only yardstick to measure the contribution of the industrially developed nations to the economies of the developing countries is the effectiveness of their aid – ie its impact on the development of productive forces and the consolidation of the economic independence of the recipient country.

Pakistan has to rely on external loans and grants to meet the foreign exchange requirements of the country. Because of negative balance of trade, the quantum loans and grants kept on rising. As a result, external debt has kept on rising.

There was a tendency to take more loans in order to pay for the installments and interest of earlier loans. As a matter of fact, the interest figures also kept on rising. Debt servicing was being done to cater for both principal and interest.

In order to boost local production and have better control on foreign exchange reserves, government intervention is used through quotas, tariffs, exchange rates and interest rates. When these controls are applied, there is a general tendency to find ways around it.

When law enforcement is weak, it gives rise to smuggling and under-invoicing, wherein an undocumented economy is developed. According to a report of the World Bank, Pakistan’s parallel or black economy is 56 percent of the GDP and the FBR chairman puts it in the region of 79 percent. This undocumented economy does not contribute to government revenue and, hence, if this undocumented economy is brought under the tax net, then as per the World Bank’s estimates, this would generate additional Rs1.97 trillion revenue and as per the FBR’s estimates, Rs5.83 trillion. Pakistan would need not borrow any foreign exchange then.

The question that arises is: what needs to be done in order to put the economy on track? One of the most complex problems that Pakistan faces today is the attainment of external balance and self reliance. In order to keep the country’s foreign indebtedness within reasonable bounds, Pakistan has to be more discriminating in accepting foreign aid, loans and credits which, as experience shows, have hurt the economy. Specific policy measures and institutional structural changes have to be implemented and focused on certain initiatives.

The production structure of the economy needs to be diversified further. The increasing viability of the domestic industry requires a determined focus rather than ill-defined demands for greater aid and perpetual spoon-feeding by IFIs and developed nations. Even today, the main exports from Pakistan are textile and textile products. Other sectors need to be explored, which may include engineering goods, processed food products, chemicals etc.

A strong emphasis on heavy, basic and engineering industries should become the key-note of our industrial policy rather than relying on aid, loans and credits.

The writer is the chairman of the Atlas group of companies.

Email: [email protected]


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