How to improve Pakistan’s trade balance?
THE Covid-19 crisis was actually a blessing in disguise for the Pakistani foreign sector. In 2021, the current account deficit turned into a surplus after a long period.
However, from the start of FY2022, the current account deficit began to widen again and despite the dramatic increase in exports this year, the current trend indicates that by the end of this FY, the current account deficit current could be an all-time high.
Data from the SBP website shows that between July 2021 and January 2022, exports were 27% higher than the same period last year.
However, despite this dramatic increase in exports, the trade deficit remained at a record high.
The increase in exports during the period was recorded at 49%, which not only offset the increase in exports, but also led to a record increase in the current account deficit.
In response to this development, last month the Prime Minister announced a package for export-oriented industries.
There is no doubt that the measures taken to boost exports need time, but these measures are unable to cover Pakistan’s trade deficit.
In fact, the main cause of the deficit is not exports, but the main reason is the increase in imports, so we must find ways to reduce imports.
In the case of the current account deficit, the government has given top priority to exports, but the government should know that increasing production capacity for domestic demand is also very important.
Each unit of production for the country’s domestic demand actually reduces the demand for imported goods and saves valuable foreign currency.
Currency devaluation or similar measures have never improved foreign trade in the past and will not improve trade in the future.
Despite a good increase in exports during the current financial year, the trade deficit widened sharply.
For a permanent solution to this deficit, we must take steps to improve the trade balance in the long term.
As mentioned above, each unit of goods produced to meet domestic needs saves money by reducing the demand for imported goods, but policy makers distinguish between the two and have no such incentives to be produced for national needs.
If you look at the local market, you will find that there are goods and services that are produced or can be produced in Pakistan, but the markets are always full of imported materials.
Among the construction industry materials, you will find many things that can be produced in Pakistan and are among the good quality products, but it is very difficult to find them in the markets of Rawalpindi and Lahore.
Pakistan is developing a tile brand called Master Tile, which is considered a good quality product, but in 90% of the ceramic markets, you will not find this tile available for purchase.
On the other hand, you will find the market filled with Chinese tiles and ceramics. Many electronic products made in Pakistan, such as refrigerators, fans, televisions, etc.
meet international standards and are considered good brands, but markets are still full of imported products.
If a locally made TV is purchased from Pakistan, it reduces the demand for imported TVs and saves valuable foreign exchange.
Therefore, we need to increase production capacity for domestic use, so that Pakistani products can improve their quality, be easily available in local markets, and people can buy Pakistani products with confidence.
If a person manufactures goods for domestic use, he should be entitled to the same privileges as the manufacturer of goods for export.
On the other hand, international brands that wish to maintain their presence in the Pakistani market must be taxed to produce in Pakistan.
Those who manufacture goods in Pakistan should have a clear advantage over those who export to Pakistan.
For example, if Huawei and Samsung want to continue their presence in the Pakistani market, they should set up a production unit locally.
Otherwise, the privileges granted to these products should be reduced on a monthly basis so that those who produce locally can have a clear advantage.
Third, we need to change energy technology so that imported fuels can be replaced by locally produced fuels.
Petroleum products currently account for the largest share of Pakistan’s imports, accounting for around 40% of total imports.
The prices of petroleum products have risen sharply over the past 15 months, increasing the import bill.
To reduce this bill, we need to change fuel technology so that locally produced fuel or energy can be used.
The government has repeatedly said that the former government had signed energy agreements far beyond the country’s current demand and that excess energy could be used to convert the transport system into electricity.
We must embark on a campaign of massive electrification of the transport system and we must provide automotive infrastructure for vehicles in all major cities of the country.
Every megawatt of electricity used to produce automobiles will reduce import demand by millions of dollars.
These are measures that could lead to a lasting improvement in the trade deficit, and the government should pay attention to them.
—The author is Director, Kashmir Institute of Economics, Azad Jammu and Kashmir University