Trade deficit

The story of Pakistan’s economic recovery remains marred by significant downsides. One of the biggest economic stories of the PML-N government has been a sharp increase in the country’s trade deficit. The figures for last year are all the more alarming. Pakistan’s trade deficit has increased by 42 percent compared to last year, hitting a record of $30 billion in the first eleven months of the current fiscal year. When the PML-N came to power in 2013, the trade deficit stood at $20.4 billion. The inability of the government to address the decline of exports in the country has raised serious questions about its image as the country’s most pro-business political party. The reality is that the government has been unable to find a way of cutting down the import bill while increasing export of locally manufactured goods. If the statistics for the month of May alone are compared, Pakistan’s trade deficit for the said month increased by almost 61 percent. This shows the failure of the much-celebrated Rs180 billion incentives package for exporters, which led to tax breaks, removal of custom duties as well as cash-back incentives being announced last year.

None of these incentives has worked. The simple fact is that Pakistan’s exporters are unable to compete in the international market. This is despite the government’s claim that industries have been provided outage-free, subsidised electricity since late 2014. Exports fell to $18.5 billion this year compared to $19.2 billion last year. The continuous decline of Pakistan’s exports means that the government will be nowhere close to the $35 billion export target it set in the Strategic Trade Policy unveiled last year. If the decline continues as expected, Pakistan is likely to only hit half the figure. The challenge of increasing exports is a significant one. It is uncertain whether the government is up for meeting the challenge. The failure of last year’s export package was met with more of the same in this year’s budget. However, many incentives were made contingent on export-oriented industries being able to meet certain pre-set targets. While this may seem like a sensible policy, it ignores the simple fact that all exporters would happily increase their exports themselves without any extra incentives if it were within their capacity. The bigger problem is that new export-oriented industries are not being set up. In the same period, Pakistan’s import bill has continued to spiral out of control, showing a 20 percent increase to hit $48.6 billion. This confirms that Pakistan’s economy remains far from stable. Devaluing the rupee seems to be one solution but it comes with no guarantees. Instead, there needs to be a focus on introducing new technologies and – more importantly – new export-oriented and import-substituting industrialisation. Many of the economic sectors where imports are replacing local production, such as food, need to brought up to par on quality as well as price. Otherwise, the government may need to turn to international donors once again to cover the trade deficit.