When numbers speak there is little to argue

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By Khurram Husain

Moved by the numbers

UPON receiving the news that the country’s trade deficit has shrunk in December, Prime Minister Imran Khan is reported to have sighed with relief and said “Thank God! We are moving in the right direction!”

Behind this moment lies a fairly large story, though whether or not it is “moving in the right direction” is a matter of debate. Let’s start with the facts. Pakistan’s trade deficit — the difference between imports and exports — has a troubled relationship with the rest of our economy. On first appearance it seems to rise and fall with overall economic growth.

In 2003, for example, when the country was on the cusp of emerging from a near crippling collapse of growth, the trade deficit came in at $361 million. I’m using only the deficit in goods and services here. The economy had hit rock bottom in 2001, when it registered a growth rate of less than 2 per cent. Those who were in the workforce in those days will remember the near-suffocating levels of contraction under way in the economy, and the extreme pessimism that was descending upon society.

The next year, the GDP growth rate picked up, spurred by 9/11-related inflows, and by 2004 it burst past 7pc, continuing up to a historic peak in 2005 before falling till it hit a trough again below 2pc by 2008. This magnificent parabola best describes the Musharraf regime and the fakeness of it all as a short-lived burst of energy that worked its way through the veins of the economy before it all came crashing down again to where it had started.

The fall in the trade numbers is once again coming in the midst of an epic contraction of the economy.

Through all this, the trade deficit also travelled the same parabolic arc, even if slightly out of phase with the overall growth rate. In 2003, as the economy was pulling itself out of the doldrums, the trade deficit sat at $361m, a paltry number, and evidence that Pakistanis had very little money with which to buy anything from the outside world. At least, some of the oil imports were coming under a Saudi oil facility, so that also further depressed the deficit.

But in the years to come, it rose sharply to hit a peak of $21.4 billion by 2008. As it rose, questions swirled about its sustainability, and Musharraf’s wizards wasted no opportunity to tell us that the trade deficit does not matter, that inflows in the financial account were sufficient to tide us through, that the deficit was on account of imports of machinery that once installed would spur exports which would balance the whole picture.

Of course, none of that really happened. In all my years of having been an economic journalist, one thing I can confirm is that in Pakistan it never really works out as we are being told it will. The economy rode into a glorious crash landing in 2008 when the growth rate fell back down to below 2pc, while we saw record high inflation and financial markets in a meltdown the likes of which we have never seen before.

The trade deficit fell sharply from 2008 until it hit a new trough of $12.5bn in 2011. Growth rates of GDP also lingered between 2pc and 3pc until 2011, and those with a memory will again recall how dismal it was to be in the workforce in those years.

After 2011, the economy again clawed its way out of the dismal zone of 2pc to 3pc growth and embarked on another short-lived adventure. From 2011 till 2017 it once again grew its way back to near 6pc GDP growth, the feel-good level. And once again the trade deficit followed suit.

No sooner had growth returned, the deficit rose by nearly 50pc to hit $19bn in 2012, and then in a merciless arc blew past $20bn in 2015, and beyond $22bn in 2016, surpassing the record of 2008.

As the curtain fell on fiscal year 2018 last June, the trade deficit settled in at $37bn, a jaw dropper of a record. Through all this, the government once again told us the same story: these are machinery imports that will give a boost to exports and things will level out, that these are ‘healthy imports’ and should not be a source of worry because the economy will grow its way out of the barrier that the trade deficit implies.

Of course, it didn’t work out the way they said it would. So when the PTI government came into power, those who know had their eyes on the trade numbers (as well as the fiscal numbers, but that’s another column). The deficit continued climbing until the December data came out when it showed a sharp fall of 18pc. Good reasons to sigh with relief, and the finance ministry claimed credit, saying that the “government’s policy measures have resulted in a shrinking of trade deficit”. That may sound like a drab boast, but once you see the history you realise why they are so moved by the numbers.

But here’s the kick: the fall in the trade numbers is once again coming in the midst of an epic contraction of the economy. The growth rate peaked last fiscal year, breaching 6pc for the first time in a decade. This year’s target was set at 6.2pc, but it has steadily been downgraded to 4.2pc, and now we are hearing reports that the government is working off 3.7pc as the real number.

This is a spectacular crash, and you can feel its effects all around you: lay-offs and cost-cutting across most industries. So the government’s policies are not as responsible as one might think, nor can it be said that “we are moving in the right direction”. If history is any guide, then we could be headed for the dismal zone of 2pc or below GDP growth by next year. A rising trade deficit kills our growth story every time, but that doesn’t necessarily mean that a collapsing deficit by itself is to be celebrated.

The writer is a member of staff.