The optimism displayed by the Federal Finance Minister Ishaq Dar on his handling of the economy, based on not only the controversial data released by those entities that are under his administrative control but also by some foreign journals and think tanks that are easily challenged, requires an urgent revisit as disturbing data (that cannot be manipulated) was released recently by the Pakistan Bureau of Statistics (PBS) – a historically high current account deficit of 30 billion dollars during July-May 2017.
The following table shows total exports, imports and trade imbalance since 2007-08 which raises questions about why imports rose so dramatically in the current year compared to 2015-16 and why has the slide in exports not been arrested in spite of the 180 billion rupee export package announced by the Prime Minister in January this year.
What accounts for the 20 percent rise in imports in the first eleven months of the current year compared to the previous full year? In the previous four years the import growth was manageable – between 2012-13 (including the first eight months and a couple of weeks of the PPP-led coalition government, caretakers for around three months and with the PML-N in power for the last three weeks of June) and 2014 the rise in imports was 3.7 percent, between 2013-14 and 2014-15 imports increased by 1 percent and between 2015 and 2016 imports declined by 2 percent. So, why the sudden rise this year?
The quantity of fuel imports rose dramatically in the current year attributable to higher furnace oil as well as LNG imports for electricity generation to meet the energy shortfall. However, the objective to narrow the demand supply electricity gap remained unmet and the shortfall reached the highest level ever in the country’s history in May 2017 at 7000MW. Energy experts maintain that the government’s over arching focus on enhancing generation from specific inputs is flawed on three counts: (i) location of coal-fired plants in Punjab away from the port and indigenous coal supplies would raise transport costs, generate serious health problems for all those who come into contact with coal, and lead to marked environment degradation; (ii) the Economic Survey 2016-17 notes that although installed capacity increased to 25,100MW from 22,900MW…there was a decline in generation due to a decline in the share of hydel in electricity generation attributed to “weather conditions and less flow of water in rivers.” In this context it is relevant to note that the emphasis on mega dams as the cheapest source of energy is not without some downside given that severe weather conditions, due to the El Nino factor, have come to be an almost annual feature and may negatively impact in future; and additionally it is relevant to heed the warning of a former US Ambassador to India who wrote a confidential note to the State Department that the next conflict between the two nuclear neighbours, India and Pakistan, may be on water, as revealed in Wikileaks – a concern that has certainly been strengthened during Modi’s premiership. However while India has so far limited itself to maximising its share of our Western rivers as stipulated in the Indus Water Treaty yet periodic statements from across the border on water related matters does not lend any comfort level to Pakistan; and (iii) with a transmission system unable to transport more than 16,500MW, the Sharif administration has claimed an increase of 1500MW since it took over power four years ago, the increase in generation is unlikely to be delivered to consumers.
Machinery imports have increased, or so claims the Federal Finance Minister Ishaq Dar arguing that this would translate into enhancing capacity leading to a higher output. This view was endorsed in the State Bank of Pakistan’s (SBP) second quarterly report: “the surge in imports is mainly concentrated in the growth-inducing capital goods: the import of machinery, fuel and metal groups accounted for more than half of the total imports during H1-FY17. When the economy is taking off, it is natural to expect some widening in the current account deficit. Nevertheless, it needs to be contained within sustainable levels.” One may assume that machinery is imported mainly by large-scale manufacturing (LSM) sector and not the small-scale manufacturing sector more reliant on domestic machinery and labour due to financial constraints – a sector whose growth incidentally is easier to manipulate as its data is compiled by provinces and onsent to federal government which then consolidates it). Later in the same report, the SBP maintains that “most of the industries that have shown steady growth over the past few years (eg, cement, autos, steel and pharmaceutical), have already achieved high levels of capacity utilisation – further growth would therefore require capacity expansions.” The highest machinery imports were for power sector; however, given the issues surrounding the sector as indicated above this may not provide a comfort level to the public.
Textile machinery imports increased by 35 percent during July-February 2017 compared to the previous year and yet exports of this sector are continuously declining thus the assumption is that the machinery imported is either for replacement as opposed to capacity enhancement – a decision taken by the exporters this year as an overvalued rupee makes imports attractive. Exports on the other hand have been consistently declining since 2014-15. In May 2017, there was a further decline relative to April – to 1627 million dollars from 1805 million dollars in April. The Commerce Ministry claimed that the decline was due to the 10-day transporters strike in Karachi, however, exporters dismissed this claim arguing that after ten days all export items were lifted and hence the port protest did not have any impact on total exports for the month.
Is there a single factor that accounts for a rise in imports and a decline in exports? An overvalued rupee makes exports uncompetitive in the international market and imports attractive. Exporters also insist that (i) routine delays in refunds create liquidity issues for them prompting them to borrow from the market which in turn raises their costs of production even further; (ii) the high costs of doing business in Pakistan with electricity, transport charges higher here than in other regional countries; and (iii) law and order problems.
Remittances are also declining as Gulf countries are in the grip of a recession. So how is the government meeting its current account deficit? The SBP report claims that “the external inflows in the country have been sufficient to finance the current account deficit so far. More importantly, the current level of SBP’s foreign exchange reserves can comfortably finance more than five months of imports.” Sadly, the SBP did not deem it politic to state that the reserves it holds are largely debt enhancing and therefore did not highlight the unsustainability of this policy though it did state, as quoted above, that imports need to be contained within sustainable levels.
To conclude, it is unfortunate that no one who draws a salary from our tax rupees is willing to challenge the Federal Finance Minister’s view of the performance of the economy – a view from specially prepared rose coloured glasses. This is unfortunate and would make the job of his successor extremely difficult, even if Dar succeeds himself – a distinct possibility in the event of a PML-N electoral victory.
================================================== Year Exports Imports Trade balance ================================================== 2007-08 20427 35397 -14970 2008-09 19121 31747 -12626 2012-13 24802 40157 -15355 2013-14 25078 41668 -16590 2014-15 24089 41280 -17191 2015-16 21972 40450 -18478 2016-17 July-May 18541 48539 -29998 ==================================================