INP-WealthPk
Pakistan Needs Import Substitution to Overcome Trade Deficit
May 11, 2022
By Jawad Ahmed
ISLAMABAD, May 11 (INP-WealthPK): The current account deficit (CAD) has become one of the primary obstacles to the economy's smooth take-off due to stagnated exports and rapidly increasing imports.
Import substitution must be a vital component of our economic policy in order to narrow the trade gap and lower the current account deficit, said Dr Saud Ahmed Khan, Assistant Professor at Pakistan Institute of Development Economics (PIDE), Islamabad.
The ever-widening imbalance between imports and exports is exerting pressure on Pakistan's external sector. Being an import-oriented society, as well as rising global oil and food prices, put strain on the country’s current account.
Talking to WealthPK, Saud Khan said that Pakistan, despite being an agricultural country, imports huge quantities of food from foreign countries. Food and agricultural items such as wheat, milk, cheese, and palm oil account for a sizable portion of the import bill.
If food imports continue to climb, the country's current account deficit would balloon, putting more strain on foreign exchange reserves. Saud Khan suggested that the government should support its industrial and agricultural sectors, particularly those having a competitive edge in the local market. He pointed out that Pakistan exports raw or low-value-added goods, which earn little revenue for the government. He said exports from agricultural and small and medium-sized industries have been neglected due to a lack of funding, exorbitant taxes, poor infrastructure, and high input prices.
“The ever-increasing gap between imports and exports can be narrowed by suitable investment and the application of rapidly evolving technologies,” he added.
According to the State Bank of Pakistan (SBP) figures, the trade deficit reached $30.097 billion in the first nine months (July-March) of the current fiscal year (FY22). This gap was recorded $19.349 billion during the corresponding period of the previous fiscal year.
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Source: State Bank of Pakistan/WealthPK research[/caption]
During FY21, the government was able to reduce the CAD to $2.82 billion, but it exceeded $13 billion during the first nine months of FY22, showing no signs of recovery. The continued influx of remittances provides some relief to the government in terms of mitigating the burden of the ever-expanding current account imbalance. According to the SBP, remittance inflows continued to rise at an unprecedented rate in March FY22, hitting $2.81 billion. This is the highest monthly amount for worker remittances for the current fiscal year.
The inflows of worker remittances have remained over $2 billion for the 22nd consecutive month, although other sources, such as foreign direct investment, have performed below expectations in the current fiscal year.
However, these inflows are insufficient to rectify the rapidly worsening imbalance. The continuous rise in crude oil and commodity prices, as well as supply disruptions in the international market, are likely to raise the trade imbalance by the end of the current fiscal year. This problem can be addressed by introducing concrete policies to boost exports and reduce imports.
The previous government sought to raise import levies on luxury products, but rising crude-oil and food commodities import prices put it to a halt. Following reduction in the total import bill in February 2022, key commodity imports begin to grow once again. In March, almost all commodity imports bills climbed. Food imports went up by 18.4% in March, whereas machinery equipment imports increased by 14.2%, transportation goods imports grew by 37%, and petroleum group imports surged by 24.4% as compared to January FY22.
Meanwhile, exports of goods and services were recorded $28.85 billion in the first nine months of the current fiscal year compared to $23.12 billion in the corresponding period of the previous fiscal year.
On the other hand, imports of goods and services surged to $62.131 billion from $44.409 billion during July-March FY22 as compared to the corresponding period of FY21.
Overall, the balance of trade goods and services stood at $33.3 billion – a 56% decline, in July-March FY22. A comprehensive strategy is required for export promotion and import reduction to improve the position of trade balance.
