Pakistan’s Balance of Trade (BoT) has been greatly influenced by the export and import quality of products in the economy, however, both the BoT and the Current Account (CA) have never been as poor as today.
The BoT, which is the difference in the value of imports and exports, has consistently been running on a deficit since 2003, and the main reason for the deficit is the high imports of fuel for energy needs and the reliance on foreign countries for investment. This has drastically affected Pakistan’s Balance of Payments (BoP) and the BoT currently stands at negative Rs. 317,370 million.
The CA records a country’s transactions with the rest of the world, and in the context of Pakistan, we have been buying a lot more from foreign countries than we have been able to sell. The reason behind this is simple: Pakistani goods are far less competitive in the international market and foreign goods are widely consumed in Pakistan, because of which the current account stood at a record low of negative 5798 million USD in July 2018. However, the attempts such as devaluing the rupee against the dollar have shown to reduce this amount to negative 4082 million USD, which, sadly, is still not a lot better.
But for now let’s set aside the CA and BoT aside and look at the exports and imports of Pakistan.
Why are our exports so low?
The simple answer is that Pakistani goods are not very competitive in the international market and Pakistani producers exporting their goods abroad fail to capture the demand of foreign consumers. There are a few very important and genuine reasons for this lack of competitiveness in the international market. One such issue is that Pakistani goods are consistently lacking in quality. The way that production standards and quality have improved around the world are beyond the capabilities and measure of Pakistani producers.
Pakistani exports are also low because of the highly limited goods that are available in the international markets. Goods such as cotton and textiles seem to be the most competitive products for Pakistan but the lack of saturation in the quantity of goods that are exported hinders export growth. The diversification in the goods produced would prove to be beneficial for trade in the long term. One way to promote the creation of new goods in the international market is for the government to begin subsidizing local producers that have a major market share for their products. Pakistan’s markets are also unexploited, which adds to the tentative exports Pakistan could have.
The recent conflict between India and Pakistan saw the removal of the Most Favored Nation (MFN) title away from Pakistan by India, due to which the export tariffs have also increased and the prices for domestic goods exported to India have begun to rise.
In the past, the reason for declining exports has been because of conflicts between the monetary and tariff policy. The constant battle for the appreciation and depreciation of the currency against India and Bangladesh had also proven to be extremely volatile to the Pakistani export condition in the Asian region. Additionally, import tariffs have not favored the Pakistani export condition to a great extent as well.
For some context we can refer to the table below which shows Pakistan’s highest exports.
Why are our imports so high?
As of February of this year, Pakistan has managed to reduce its imports to 579039 million rupees as compared to Rs. 624,644 million in January. One of the main reasons behind the substantial reduction in the imports is because of the depreciation of the rupee against the dollar. The Rupee is currently valued at 139 rupees per dollar, with forecasts tending towards decline in the coming months. As a result of the currency depreciation, imported goods have now become a lot more expensive and so the demand has shifted to more locally produced goods.
According to Trading Economics, global macro models and econometric models, Pakistani imports are expected to be at Rs. 655,000 million by the end of this quarter which is troublesome to say the least.
However, that is the end of the positive news. Imports are consistently going to rise unless and until the Pakistani demand for products can shift to locally produced goods, and the only way to do that is to make sure that the quality of goods being produced is high. As mentioned before, quality assurance is of extreme importance and is that single factor that makes the distinction between goods being consumed and demanded or ignored and thrown away.
Pakistani consumers have a high dependability on imported goods which they use on a daily basis and this may not sound problematic but when you take into perspective the majority of the population being dependent on these goods then the expenditure on imports tends to rise at a monumental rate.
For some context we can refer to the table below which shows Pakistan’s highest imports.
The prevailing trade situation in India
The BoT in India is also something that has suffered greatly as compared to the last fiscal year. As of the previous indication, the BoT recorded a deficit of $ 9.6 billion, with an unprecedented CA deficit of $ 19 billion. However, what is increasingly surprising is that the $ 9.6 billion deficit, is actually a reduction from India’s last fiscal year where the deficit was recorded to be approximately 12.3 billion dollars. This is surprising to say the least as economic analysts and forecasts expected the BoT to go up to $ 14.3 billion.
The reason behind this feat is because India managed to decrease its trade gap by boosting exports and radically reducing its imports. Although the BoT is still better in Pakistan, we have to realize that India is a far larger country with a greater population and therefore a greater consumer of products, and its requirements far outweigh than those within Pakistan.
In line with Trading Economics, exports in India increased by 2.4% to $ 26.7 billion, mainly due to the contributions of the increase in engineering and pharmaceutical goods. India managed to reduce its import capacity by 5.4% to $ 36.3 billion because of a decrease in the reliance of oil (by 8.1%) and electronic goods (by 6.5%).
India’s CA deficit, however, widened greatly. The reason behind this spike in the CA deficit can be attributed to the increase in imported services and the decrease of exported services, coupled with the increase of the primary income gap.
As compared to Pakistan, India’s export market is much more saturated due to which India is able to generate a higher revenue from its exports, while Pakistan’s export market remains unsaturated and lacks the diversity needed for increases in the export revenue. Also, specialization may be a massive reason for the potential loss of export revenue as Pakistan may not have been able to classify the improvement in quality for its textile or cotton products. While Pakistan may have this issue, India has grown past it by specializing its exports of pearls and precious stones. This may have been done to such a great extent that it tends to make up $ 30.4 billion of its entire export revenue.
At the same time, it would also be wrong to admit that Pakistan will always stay on this path. According to economic analysts, Pakistan is set to increase its export capacity in the coming years following the investments from China and Saudi Arabia, which will encourage economic development and growth.
The tables below can provide an insight into the Indian trade.