Import management reduces the deficit

Islamabad:

The trade deficit shrank 35 percent to $7.4 billion in the first four months of the current fiscal year as the authorities managed imports – the only viable tool at Pakistan’s disposal amid a significant shortfall against projected external financing requirements.

The Pakistan Bureau of Statistics (PBS), the national data collection agency, reported on Monday that the gap between imports and exports narrowed to $7.4 billion, a 35 percent decline in the July-October period of the current fiscal year. This amount was $4 billion less than the comparable period last fiscal year.

That reduction has eased pressure on foreign reserves, which had fallen below $7.5 billion last month despite an International Monetary Fund (IMF) program.

The low availability of external financing is the government’s weakest point in the Pakistan-IMF talks on the $710 million loan tranche. Those talks are set to begin on Thursday. The caretaker finance minister held an internal review meeting on Wednesday to assess performance against IMF conditions.

Given the lack of available funding, the government has no choice but to continue managing international trade, even though the import situation improved somewhat in October, just before the IMF talks.

In the first four months, Pakistan imported goods worth $17 billion, down $3.9 billion, or nearly a fifth, from the same period last year. These imports represent only 29% of the annual forecast of $58.7 billion.

Every dollar saved through reduced imports substantially reduces the pressure on inventories, which remain at a critical level, equivalent to only 1.5 months of import coverage. To access World Bank trade finance, the country needs at least two and a half months of import coverage.

However, lack of adequate raw materials affects industrial production as Pakistan relies heavily on imported raw materials to manufacture goods. The World Bank noted that importers still face challenges in importing non-essential goods.

The PBS reported a marginal increase in exports in the July-October period, totaling just $9.6 billion. Exports rose $63 million in four months, largely due to growth in October. These four months’ exports represent 32% of the annual target of $30 billion.

On a monthly basis, the trade deficit widened by 38.2%. Exports rose 9% to $2.7 billion last month, but imports rose more than 20% to $4.8 billion. The trade deficit on a monthly basis reached 2.1 billion dollars.

Over the past year, the rupee has depreciated by almost 60% against the US dollar, theoretically giving exporters a competitive advantage. However, some of these benefits have been offset by the high cost of doing business and inconsistency in economic policies. Furthermore, exporters’ failure to innovate and scale up value addition has caused them to lose international markets to their competitors.

After keeping it under control for about two months, the government once again allowed the depreciation of the rupee, which began before the talks with the IMF. The rupee closed at around Rs 283 to a dollar on Wednesday.

Pakistan’s gross external financing needs were initially estimated at over $26 billion at the start of the current fiscal year, but the figure has been revised down to below $24 billion due to reduced imports and the restructuring of 31 Chinese loans issued by the Export-Import Bank of China. However, available funding still falls short of $20 billion, according to sources.

The government faces difficulties in issuing Eurobonds and raising debt from commercial loans from abroad.

In October, exports reached $2.7 billion, an increase of $323 million, or nearly 13.5%, compared to the same month last year. On a year-over-year basis, imports also rose nearly 5% to $4.8 billion. The trade deficit narrowed 4.5 percent to $2.1 billion in October, down $98 million from the same month last year.

Published in The Express Tribune, November 2^n.d2023.

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