Although there is a new government in place, the economic problem is still present.

KARACHI: The economy is stuck in a vicious cycle, with a balance of payments crisis every few years.

Despite the fact that the administration has changed, the economic issues have not changed. The economic issues are exacerbated by currency exchange rate volatility, a growing current account deficit, and fiscal challenges at a time when political tensions are high.

According to the State Bank of Pakistan (SBP), the current account deficit for the first eight months of FY22 exceeded $12 billion. In the first eight months of the preceding fiscal year, the current account was in surplus.

While revenues of goods and services exports and remittances climbed by around $8 billion, payments on imports of goods and services increased by about $8 billion.

On April 1, 2022, the SBP’s foreign currency reserves fell to $11.3 billion from $16.2 billion on March 4, 2022. The foreign reserves position is expected to improve once the country receives the next loan tranche from the IMF, now that the new government is in place.

Furthermore, the recent raise in the policy rate of 250 basis points may help improve dollar inflows and further stabilise the central bank’s foreign exchange reserves. According to the Pakistan Bureau of Statistics (PBS), commodity exports climbed by 26% in the first eight months of FY22 compared to the same period the previous fiscal year, while imports increased by 55.1 percent.

The textile industry, which accounts for over 60% of Pakistan’s total exports, increased by 26.1 percent year over year. Knitwear exports climbed by 33.9 percent, or $830 million, while readymade garment exports increased by 25.1 percent, or $500 million.

In terms of commodity imports, petroleum group imports nearly doubled year over year to $12.9 billion in the first eight months of FY22.

Despite the fact that the quantity of petroleum products climbed by 22% and the quantity of petroleum crude increased by just 1%, the dollar value of the former jumped by 116.7 percent while the latter increased by 79.9%.

Furthermore, LNG imports grew by 105 percent in cash value. The increase in petroleum-related imports accounts for one-third of the year-on-year increase in total imports.

Another significant factor is the increase in pharmaceutical product imports, which increased by 400 percent, or $3 billion. The rest of the commodities had a total value change of less than $4 billion year over year.

As a result, imposing import restrictions is unlikely to lower the current account deficit because the majority of products purchased are almost certainly vital.

Although world prices are expected to determine the value of petroleum imports, a lack of efficiency and inefficiencies in the conversion of input into output are contributing causes to the substantial imbalance between exports and imports.

Pakistan’s exports as a percentage of GDP were at 10% in 2020, according to the World Bank’s World Development Indicators, making it one of the lowest in the world.

This is especially concerning given Pakistan’s ongoing balance of payments problem, which necessitates dollar inflows from exports in order to boost foreign exchange reserves.

Imports were relatively low as a percentage of GDP in 2020, at 17.5 percent. At 8.7%, the weighted average tariff rate on all products is not only greater than the South Asian norm, but also more than three times higher than the East Asian and Pacific average.

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East Asia’s and the developed world’s manufacturing powerhouses are replacing tariffs with technical non-tariff measures aimed at guaranteeing that their imports fulfil specified requirements. This method is vital in improving consumer welfare as well as discouraging the importation of substandard goods.

The diminishing size of the manufacturing sector in relation to the country’s GDP is one of the main difficulties for government policymakers looking to boost economic activity.

Although some experts believe that the economy is turning toward the services and construction industries, this move is unlikely to result in productivity gains.

Competitors

It’s also worth noting that the region’s less developed competitors, like as Bangladesh, Vietnam, and Cambodia, have all seen manufacturing value added as a percentage of GDP rise in recent years.

Between 2010 and 2019, the GDP per capita of the three aforementioned countries increased by more than 4%, whereas Pakistan’s GDP per capita increased by only 3.7 percent.

Exports as a percentage of GDP are higher in Bangladesh, Vietnam, and Cambodia than in Pakistan, with Vietnam having had a fantastic ten-year run.

Exports from Pakistan, on the other hand, have remained static, owing to a lack of productivity and an inability to transform input into exportable output that is competitive in global and regional markets.

Pakistan is one of the world’s most protected markets, with authorities favouring inward-looking policies that favour import substitution over export-oriented measures that would boost Pakistani products’ worldwide competitiveness.

The government, for example, has subsidised low-value-added assembly activities that are unlikely to result in large value-added exports.

On the other hand, by opening up trade and encouraging foreign investment in productive areas, Vietnam has become a significant contributor to global value chains. Vietnam has substituted tariff measures with technical non-tariff measures, as previously stated.

Pakistan’s economy must be more integrated into global and regional markets, according to the new government. First and foremost, it should strengthen trade ties with India.

Textile raw materials and intermediate items imported from India can help enhance domestic manufacturing and exports. Imports of lower-cost agricultural products can also help to reduce inflationary pressures.

While pressing for expanded commerce with Central Asian economies, the administration must pursue free trade agreements with Asean member countries and Turkey.

Last but not least, improved trade relations with the United States and Europe are essential for further export development. To address the situation in the long run, a more proactive trade approach is required.

The author is an Assistant Professor of Economics and Research Fellow at the Karachi-based CBER Institute of Business Administration.