Spearhead Analysis – 13.06.2017
By Farrukh Karamat
Senior Research Coordinator, Spearhead Research
“The only way that we can reduce our financial dependence on the inflow of funds from the rest of the world is to reduce our trade deficit”. [Martin Feldstein]
In a country faced with mass ignorance, fear mongering by the government and opposition, and misleading politicians, we are rapidly spiraling towards a point where the entire system appears to be at risk. It is a scary scenario when the news channels continue churning out ‘simulations’ about Panamagate and JIT proceedings, while economic news of missed targets and crucial strategic issues about the country’s survival are all but forgotten. It is a sad reflection on us when the sacrifices of heroes such as Capt. Akash Aftab Rabbani (Shaheed) are all but forgotten, while stories of corruption and corrupt leadership take center-stage with the latter being lauded for their achievements.
The fact is that the present government has been embroiled in a ‘Game of Thrones’ and has been unable to resolve the energy crisis; improve the social sector indicators; enhance the industrial production; deflate the circular debt…and the list goes on. What has been achieved is the creation of one institutional crisis after another and a never-ending blame game. Unfortunately, it has been a patchwork of ad-hoc governance policies, which have replaced ‘real’ governance and institution building and this has translated into underperformance and skewed priorities.
A few weeks back the Government presented the Economic Survey 2016-17, which show-cased a long list of missed economic targets that the Government had set for itself for the outgoing fiscal year. Except for a concerned few, it had no impact on the people or the country as most went about their life trying to weave their way through the myriad everyday survival issues. On the weak edifice of the Economic Survey the Government presented the Fiscal Budget for the next fiscal year, with fiscal targets that at best can be described as hard to meet.
One glaring miss in the Economic Survey was the rapidly worsening trade deficit. As per latest data from the Pakistan Bureau of Statistics (PBS), there has been further deterioration as the Trade Deficit has risen by 42 per cent year-over-year to an alarming level of US$30 Billion (US$8.9 Billion above last year and US$9.5 Billion above the US$20.5 Billion annual Ministry of Finance target) in the 11 months of the current fiscal year. This is way beyond all the estimates and well above the government set targets. And this at a time when oil prices are depressed. The hapless government appears to be clueless about how to address the issue of falling exports and rising imports and bridging the US$30 Billion gap.
Exports are in decline despite government’s ‘unsubstantiated’ claims of providing the industry with un-interrupted power supply and a Rs.3 per unit concession in electricity tariff. Under a three-year Strategic Trade Policy, the government set an annual export target of US$35 Billion by 2018 and announced a subsidy package of Rs.180 Billion for textile, clothing, sports, surgical, leather and carpet sectors. The Ministry of Commerce notified five cash support schemes to improve product design, encourage innovation, facilitate branding and certification, upgrade technology for new machinery and plants, provide cash support for plant and machinery for agro-processing and duty drawbacks on local taxes. The export sector continues to underperform despite export subsidy and incentive initiatives, and lags in terms of competitiveness with low skill levels, high input costs and severe energy shortages.
It is generally accepted that exports at a minimum should be 10 per cent of GDP, while in the case of Pakistan exports are at 6 per cent of GDP. Exports were down by 3.1 per cent to US$18.5 Billion in the 11 months, well below the annual target of US$24.8 Billion; while, imports were up 20.6 per cent to US$48.53 Billion. It is anticipated that the current account deficit for the year will be in well excess of US$8.5 Billion. The solution – the government continues to borrow short term from Commercial banks (external and internal) to fund the gap. With slowing foreign remittances, low foreign direct investment, rising repayments and repatriations the government now has limited options to finance the fiscal gaps other than through borrowings. The Government has missed its export targets for four consecutive years, despite having been granted duty-free status for its EU exports.
The trade deficit poses a serious threat to the external balance of payments. This is a vicious circle where to compensate for lower exports and other inflows the government is resorting to increased borrowings, and in turn has to pay higher amounts for debt servicing, leading to further problems. The government has recently removed the commerce secretary, for failing to implement the trade policy and replaced him with a person who was earlier removed from the Ministry of Water and Power for his failure to manage load-shedding issues. As in the past, moving the goal-posts or shuffling personalities cannot be a solution. There is need to make constructive sectoral changes for a meaningful boost to exports. Perhaps that is too much to ask. There can be no short-cuts and as the American Economist, Martin Feldstein, said, “The only way that we can reduce our financial dependence on the inflow of funds from the rest of the world is to reduce our trade deficit”.