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28 July - 03 Aug, 2012
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ECONOMIC REVIEW
Containing Trade Deficit
Trade and industry is not asking for favors but for a conducive working environment
by SHABBIR H. KAZMI

Containing Trade Deficit
Analysts are of the unanimous view that ballooning trade deficit has become a cause of serious concern and needs to be tackled prudently at the earliest. It may be true that imports are on the rise but the most disappointing point is that little is being done to boost exports. A lame excuse is that external factors are responsible for widening trade deficit but policy planners just don't accept that the economy is suffering because of their imprudent decisions.
Trade deficit for the financial year 2011-12 touched a record level of US$15.3 billion as compared to $10.5 billion a year ago. The primary reason for this huge deficit was import bill swelling to $40 billion and exports worth $24.7 billion proving paltry. Imports increased to $40 billion from $35.8 billion. As against this, exports decreased to $24.7 billion from $25.4 billion.
The hike in import bill can be attributed to quantum rise in oil and fertilizer import. Oil import constituted $14.36 billion or 36% of total imports, mainly because of volume increasing by 23%YoY. Second spoiler was fertilizer import swelling by 126%YoY to $1.07 billion. Third contribution came from increase in imports under metal segment, witnessing growth of nearly 20%YoY to $1.8 billion. Among others food group attained 12% share in total imports.
Textile and food group contributed the most to the overall decline in exports. Textiles and clothing having the largest share in total exports remained almost stagnant at $13 billion, whereas food group exports declined to $3.8 billion. Within textiles, readymade garments exports posted growth of 30%YoY to $1.41 billion. Rice export registered marginal decline of 2%YoY to $2.06 billion during the year.
Manufacturers and exporters of textiles and clothing deserve kudos. It was feared that export of textiles and clothing would go down by $4 billion because of 1) extensive load shedding of electricity and gas, 2) decline in international prices of cotton and 3) developed countries still struggling to overcome economic downturn. Therefore, it may be said that had the manufacturers received uninterrupted supply of energy products, overall export of textiles and clothing would have been much higher.
Since the government is expected to announce 3-year Trade Policy shortly, it is necessary to point out the key areas, which have the potential to boost overall exports. In fact, trade and industry is not seeking incentives but demanding removal of irritants, looming load shedding of electricity and gas being the worst. It may be true that bringing down lending rates in the near future may not be possible, but export refinance rate can be reduced to facilitate the exporters.
Till electricity and gas supplies get better, performance of manufacturing sector is not likely to improve. Therefore, in the short term greater focus on agriculture is required to boost GDP growth rate as well as exports. Efforts to enhance production of cotton and sugarcane can help in boosting export as well as containing imports. The added advantage will be running of textile and sugar mills at optimum capacity utilization, creation of new job opportunities and above all poverty alleviation.
Since nearly 60% of total exports comprise of textiles and clothing, boosting production of cotton can help in stabilizing its price in the local market. Complete ban on export of raw cotton and quantitative restrictions on export of yarn and unprocessed cloth can also boost export of value added products. It must be kept in mind that countries buying raw cotton, yarn and unprocessed cloth ultimately become competitors of Pakistani exporters in the global markets.
Containing Trade DeficitSugar industry is called the driving engine of rural economy but it also has the potential to boost exports and contain imports. At present sugar mills have an aggregate installed capacity to produce 9 million tons sugar annually but average production hovers below 4 million tons. Any increase in sugarcane production will not only improve capacity utilization but more importantly production of molasses (a byproduct) from which ethanol is produced. Blending of ethanol with motor gasoline can help in containing oil import.
Sugar mills are also capable of contributing up to 3,000MW electricity to the national grid. However, this has not become possible because the government is not ready to grant the mills status of IPPs and offer them the bulk power purchase tariff being offered to IPPs. It must be kept in mind that sugar mills will use baggase as fuel as against highly expensive furnace oil being burnt by the IPPs.
The government will also have to stop diverting gas to power plants. Circular debt issue is the outcome of poor recovery of electricity bills by the distribution companies. It is shocking to note that if distribution companies dispatch 100 units, they receive payment for 30 units only, as 40 are pilfered and payment for 30 is never received and goes straight to receivables. Therefore, allocating more gas is meaningless unless distribution companies improve recovery.
One could also say with deep regret that over the years role of Ministry of Textile, Ministry of Commerce and Trade Development Authority of Pakistan has remained highly disappointing. They have the primary mandate of facilitating manufacturers and exporters but often the high ups just don't bother to listen to what trade and industry has to say. A lot of time and energy was wasted in negotiating an incentive package with the European Union but it was never realized that it could not yield anything worth making a difference.
Response of the Government of Pakistan to Iranian offer of barter trade has also been lukewarm. Buying of electricity, gas and crude oil/POL products in exchange for wheat can help in improving supply of energy products in Pakistan. Let one point be remembered that if export of wheat to Iran and Afghanistan is not ensured through official channels it will be ultimately smuggled to these countries. It is on record that Pakistan produced nearly 1.2 million tons surplus sugar during 2011-12 crushing season but delay in granting permission to export to smuggling of nearly half a million tons sugar to neighboring.
Let it also be kept in mind that Pakistan can achieve $30 billion exports during 2012-13 if prudent policies are followed. The immediate demand of the trade and industry is to remove the irritants. They are not asking for any favors but for a conducive working environment.

 
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