Records highest ever monthly trade deficit
Pakistan recorded its highest ever trade deficit of $4.2 billion in August, an increase of 144% over the previous year, data from Pakistan Bureau of Statistics showed.
A trade deficit means we are paying more on goods and services we are buying from the world than what we are earning by selling our products and services to them.
Pakistan’s exports in August were up 41% to $2.2 billion compared to the same month of 2020, but this was barely enough to keep the trade balance in the positive range. This is because we are spending almost three dollars in imports for every dollar earned from exports as reflected in the latest data. Our imports during August were $6.5 billion, up 95% versus August 2020.
In the first two months of fiscal year 2022, which started on July 1, the trade deficit increased 120% to $7.5 billion or 2.6% of the GDP.
“We cannot afford to keep imports this high,” said Raza Jafri, who is Head of Equities at Intermarket Securities, a brokerage based out of Karachi. There may be an element of one-time developments like companies availing the central bank’s discounted financing scheme in the last fiscal year last year and drawing it now for machinery imports, he said. The analyst said the central bank’s reserves provide an import cover of three and a half months but it is important that we take corrective measures now.
“The rupee slip is one thing. The other would be to restart the IMF program soon,” Jafri said, adding the country should start thinking of a small interest rate increase if the rupee depreciation alone is not able to bring the trade deficit to manageable levels.
The balance of trade or the difference between our imports and exports is a significant part of our current account. A large trade deficit tends to expand the current account deficit. An important gauge to measure an economy’s health, current account is Pakistan’s dollar account that records its transactions with the rest of the world.
Reducing the current account deficit was the PTI government’s biggest challenge since it came to power in August 2018. Within its first six months, the government saw the dollar reserves fall to $6 billion, barely enough to pay for two months of imports. With fewer dollars to import and pay back foreign loans, we nearly defaulted in 2019. Depleting dollar reserves eventually devalues local currency.
To tackle this challenge, PM Khan’s government signed a $6 billion bailout with the International Monetary Fund in July 2019. Going to the IMF helped us avert a default but came with painful economic reforms. The government had to choke the (import-led) economic growth.
We went to the IMF because we import more and export less. By contrast, countries that have export-oriented local industries are better off. On one side, they earn dollars and shore up their foreign exchange reserves to a comfortable level, while on the other they create enough jobs to keep the unemployment rate under control. In the long term, such countries tend to be economically prosperous than the likes of Pakistan that are unable to increase exports.