Trading strategies to turn over a new leaf

KARACHI:

As Pakistan enters a new political era with the upcoming elections, the new government will need to come out with all guns blazing to tackle the economic challenges ahead.

Pakistan was in the grip of an economic slowdown as political uncertainty reduced business and investor confidence in the country. The recent monetary policy statement, released by the State Bank of Pakistan (SBP), highlighted the slowdown in the fall in inflation as significant adjustments were made to energy prices in recent months.

The fuel price hike in early February continues to pose challenges as domestic energy prices continue to rise.

While the statement noted the improvement in the central bank’s foreign exchange reserves and the current account surplus reported for December, it also suggested that recent tensions in the Red Sea and the Middle East and rising global freight rates could pose challenges for Pakistan.

At a time when high inflation is a major concern, the negative impact on the cost and flow of global trade will add further complexity for policymakers. The central bank continued its tight monetary policy, but also expects its consolidation to help achieve its 5-7% inflation target.

The new government will have a mountain to climb as it tackles economic challenges and reduces inflation to the target set by the central bank. The right mix of trading strategies will become increasingly important.

The balance of payments crisis, often exacerbated by the government’s indecision to approach multilateral and bilateral creditors for financial assistance, worsened economic conditions.

Import restrictions imposed to reduce the trade deficit led to shortages, increased prices and reduced the level of production in the country, especially of goods that depend heavily on imported inputs.

Although the trade deficit narrowed by 43% in 2023 from the figure reported in 22 and by 39% year-on-year in the first seven months of 2024, it did not necessarily ease the economic challenges facing the country. Imports fell by 31% over the same time period, while exports fell by 13%.

Exports had exceeded $31 billion in 22nd year but declined to $28 billion in 23rd year. Workers’ remittances also declined similarly, falling from $31 billion to $27 billion.

The current account deficit narrowed due to a decline in imports, which fell by about $20 billion over the same period.

In addition, the government has been able to obtain recent loans from both China and the United Arab Emirates, providing some respite as the central bank builds up much-needed foreign exchange reserves.

Policymakers should review import-related restrictions to revive growth and reduce the rate of inflation. Policies that enhance the growth and sustainability of trade networks, both regionally and globally, will be vital if the economy is to turn over a new leaf.

Reading: Trade deficit narrows to $13.1 billion

First, it is important to ensure that trade relations are not only restored but also expanded. Improved cross-border relations will enable businesses not only to source their inputs from more efficient sources, regionally and globally, but also to increase consumer welfare through lower prices and increased variety.

Negotiations with the IMF on a future package must include strategies to avoid import restrictions.

Second, it is important for the government to continue measures to improve trade and customs infrastructure. Electronic single window and paperless cross-border trade processes and procedures that reduce cost and time for transactions are essential.

Pakistan’s Single Window is an excellent resource for enhancing trade-related infrastructure capabilities and ensuring maximum business participation in international trade activities.

Digitization processes should also ensure better access to information for smaller businesses that often face barriers due to information asymmetries, locking them out of potential export markets.

Reducing shipping and transportation costs through a more efficient domestic infrastructure, both physical and digital, will become increasingly important if the Middle East crisis prolongs and creates transportation blockades.

Third, it is imperative to ensure that domestic production and processes meet international standards, particularly those set by our main export market destinations.

For example, the EU is likely to impose carbon taxes on certain industries’ exports in the near future, while several major trading partners are imposing higher quality standards, certification requirements, conformity assessments and product quality testing requirements that could potentially create challenges for non- compliant exporters.

The government should also push for the adoption of greener technologies as it not only reduces dependence on imported fossil fuels but also encourages exporters to take advantage of the incentives offered by export destination markets related to the use of green technology in processes and their production processes.

Finally, it is imperative that policy makers realize that the balance of payments crisis is due to the lack of productivity and skills of our producers. The trade deficit is a symptom of inefficiency in the economy and restricting imports can only temporarily resolve the balance of payments crisis.

It is unlikely to cure the disease, which is caused by low levels of productivity and poor skills. Therefore, the government should focus on improving the productivity levels of businesses and providing opportunities to enhance their capabilities.

Essentially, the new government will need to take several measures to improve economic conditions. Commercial strategies must evolve in order to meet the challenges they overcome.

The author is Assistant Professor of Economics and Research Fellow at CBER, Institute of Business Administration, Karachi

Published in The Express Tribune, February 5^u2024.

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