The recent military escalation between Pakistan and India raises warning
flags that the South Asian region is still very much susceptible to war.
Although recent events may have been triggered by a combination of
domestic politics in India and a reaction to the Pulwama attack, it is
important to note that given the challenges being faced by Pakistan on the
economic front, a war would only have exacerbated them.
Efforts to avert the war at this critical time are commendable. It is essential
that the Pakistan Tehreek-e-Insaf (PTI) government strives for economic
stability in Pakistan. Today, Pakistan faces a balance of payments crisis that
requires financing from the International Monetary Fund (IMF).
The current account deficit coupled with a volatile exchange rate has led to
economic uncertainty. It is crucial that Pakistan steps up efforts to maintain
peace in the region by ensuring greater investments and enhancing trading
relationships.
The current government is making strides to improve business environment
in Pakistan. The Finance Supplementary (Second Amendment) Bill 2019
includes incentives to increase cost competitiveness. The importance of
increasing exports cannot be understated. In a recent address to a business
delegation, the prime minister correctly identified trade and investment as
important pillars of foreign policy. Focusing on establishing export-oriented
industries will not only help tackle the balance of payments crisis but will
also strengthen diplomatic relations with global and regional powers.
A closer look at Pakistan’s recent trade patterns indicates a reduction in the
trade deficit. According to data extracted from the Pakistan Bureau of
Statistics (PBS), the trade deficit was 20% lower in February 2019, relative
to the gap reported for February 2018. The push came from a fall in imports
as they decreased more than 12%.
Exports from July 2018 to February 2019 were 1.85% higher than the
amount in the previous corresponding period while imports were 6.13%
lower. During the same period, the trade deficit decreased 11%.
In essence, the reduction in the trade deficit is mainly driven by a fall in
imports of machinery, transportation equipment and petroleum products.
This is determined by import demand and fluctuation in global prices.
It is imperative that the government instead focus on increasing exports in
order to make the reduction in trade deficit more sustainable.
Impact of trade disputes on Pakistan’s deficit
Uncertainty in global trading relationships, such as between the US and
China, can have an impact on Pakistan’s trade deficit. In a recent
development, the US and China have agreed to ease tensions as it is expected
that Washington may roll back tariffs on a significant proportion,
approximately $200 billion worth, of imports while Beijing may reduce
tariffs on major imports from the US such as automobiles.
However, on the other hand, the Trump administration has ended
preferential treatment for more than $5.6 billion worth of US imports from
India as a result of a lack of equitable access for US goods in the Indian
market. Affected products include food and beverages, textile, leather, metal
and plastic.
According to the Global Trade Alerts, the US introduced a large number of
harmful interventions to limit trade, particularly in the iron and steel sector.
On the other hand, it liberalised imports of wearing apparels, particularly
men’s and boy’s suits.
Pakistan is likely to have benefitted from the trade liberalisation as its
exports of men’s and boy’s suits increased by more than $800 million
between 2015 and 2017. Furthermore, imports of base metals into Pakistan
increased by $1.26 billion, mainly driven by the China-Pakistan Economic
Corridor (CPEC)-related demand.
Major export markets for Pakistan include the US, China and the UK.
According to data extracted from the State Bank of Pakistan (SBP), export
receipts from both the US and China increased more than 5% between July
2018 and January 2019 over the same period of previous fiscal year. Exports
to the three markets constituted more than 31% of total exports from
Pakistan.
FDI drops 23% after completion of many CPEC projects
Exports to the US and the UK mostly comprise finished textile products while
exports to China are heavily focused on cotton yarn. In 2017, cotton yarn
contributed more than 40% of total exports to China from Pakistan,
according to data borrowed from ITC’s Trademap.org.
Export receipts for knitwear increased more than 12.7% between July 2018
and January 2019 relative to the same period of previous fiscal year. On the
other hand, import payments on raw cotton increased more than 52%
between July 2018 and January 2019 relative to the same period of last year.
Imports from the US
In recent years, the textile industry has increased its dependence on
imported raw cotton. Pakistan imported $279 million worth of raw cotton
from the US in 2017, which replaced India as the top origin country. In 2016,
Pakistan imported $86 million worth of cotton from the US.
Pietra Rivoli’s “Travels of a T-shirt in the Global Economy: An Economist
Examines the Markets, Power and Politics of World Trade” documents the
resistance from textile lobbies in the US when Pakistan requested relief in
tariffs on finished textile products and apparel in the mid-2000s. However,
a recent spike in trade with the US should help meet contract requirements
between the US and Pakistani producers necessary for preferential
treatment.
Pakistan to pay China $40b on $26.5b CPEC investments in 20
years
Imports from the US increased in 2017 by more than $800 million, a growth
rate of 42% from the previous year. Apart from raw cotton, Pakistan
imported more than $346 million worth of soybean seeds for sowing from
the US, up from $123 million in 2016. This increase in imports of soybean
seeds should help create new opportunities for Pakistan.
In 2018, the export of soybeans from the US to China was almost a quarter
of the value of soybeans exported in 2017.
Therefore, it is essential that Pakistan leverage CPEC and the GSP Plus status
awarded by the European Union to attract investment, both domestic and
foreign, to improve economic conditions in the country. It is imperative that
investors are provided a competitive business environment, safeguarded
from uncertainties such as war, to increase exports and reduce the trade
deficit.
Source: The Tribune, India Monday, 18 March 2019