Export slide: causes and implications – I

Multiple changes have been observed at the political and economic stages of Pakistan during the last four years. This period can be considered a surprising regime in the history of political economy of Pakistan as several economic and political incidents are witnessed in national and international scenarios. Several steps in policy transformation have been initiated. The policy dialogues and debates on China Pakistan Economic Corridor (CPEC), revision in the FTA with China, outlining a free trade area among ECO member countries, FTA with Thailand, completion of some energy related projects, Panama-gate scandal, political disturbances in Islamabad, operations Zarb-e-Azb and Raddul Fasad against terrorists’ activities, tension along the line of control, critical role of Pakistan in changing of political alliances in Gulf region, acceleration in the operation against criminal elements in Urban Sindh, and quite visible steps to enhance tax collection by broadening tax base are the obvious phenomena which have been observed. At international fronts Pakistan has entered in a new era: it is the post Britain exit era; it is time of republican in USA led by Donald Trump who issued disputed statements against free trade and economic liberalization; it is the time of openness in financial markets; it is the time of change in Afghan policy; it is the time of post sanctions Iran; and the time when Russia is establishing its close economic and political relations with Pakistan.

Some macroeconomic indicators have shown U-turns in the economic progress of Pakistan. First, a hyper growth in the value of US dollar in term of Pak rupee was converted into the appreciation of Pak rupee, then stability was observed in the currency market. A declining trend of inflation and its arrival at 4 percent in term of Consumer Price Index (CPI) and the controlled decline in the basic (policy) interest rate have also been witnessed in the economy of Pakistan. The fiscal year ended on 30th June 2016 indicates a recovery in GDP growth rate. The growth in GDP (in real term) was recorded at 4.24 percent. The share of services sector in the economy has soared to over 50 percent, which indicates its significant participation in the aggregate growth of GDP. The declining share of agriculture and fast growth in the contribution of services sector in GDP is not a bad indicator in absolute term. It is a common indicator in all growing economies. The shares of services sector in the US and the European Union are more than 55 percent. The share of services sector in some advanced countries (like the UK) was recorded at 70 percent.

Though a steady increase in stock market index reflects a growth in the investment activities in Pakistan, however, it does not portray complete picture. The deterioration in investment activities in the country can be assessed through the declining trend of FDI. Once the FDI in Pakistan had reached 7 billion dollars; now after a consecutive decline during the last 10 years, it has shrunk less than one billion dollar. It is obvious that law and order situation, political uncertainties, high interest rate and a chronic energy crisis were the major hindrances in the investment activities. Though government policies to develop public infrastructure, civil works, construction of the China Pakistan Economic Corridor and inducing investment from China and other countries indicate a good business environment in the near future, however, there are several question marks due to political turmoil in South Asia and the Middle East, including growing terrorism and tension at western and eastern borders of Pakistan.

The adverse side of macroeconomic indicators is the uncontrollable growing trade deficit. This growing trend in trade deficit can be observed for the last two decades. The value of exports at the end of fiscal year (30th Jun 2016) was around 20 billion dollars while imports were recorded at 45 billion dollars, resulting in a US$ 25 billion trade deficit. Thanks to workers’ remittances which helped the economy to reduce the current account deficit and to maintain its foreign exchange reserves. Imagine the drastic picture of foreign debts and IMF conditionalities in the absence of workers’ remittances. Though, Pakistan has achieved the status of GSP plus from European Union, the benefits of GSP Plus status have not been materialized as it was indicated by the aggregate value of exports.

Though Pakistan’s trade deficit was increasing since early 1990s, this increase was mainly because of the quantum jump in imports of oil, machinery and edible products. However, during the last three years, Pakistan’s exports were showing a declining trend which is a grim indicator for the economy. The official trade statistics indicate the deteriorating trends in external trade and continuous failure of trade policy and this negative factor has wiped out the benefits of GSP plus granted by the European Union.

Exports, foreign exchange reserves, inflation, value of local currency in international market, investment and poverty are closely interrelated variables. The decline in exports is not simply a matter of declining in foreign exchange reserves; it also affects the production and industrial activities in the country. Consequently, it affects investment, employment and poverty in adverse direction. Exports, Foreign Direct Investment and Workers’ Remittances are three major sources of the inflow of foreign exchange in Pakistan. Despite declining exports, Pakistan has succeeded to manage its economy by setting off the losses of foreign exchange through workers’ remittances during the last three years. However, in the present situation and political scenario in the Middle East a declining trend in the workers’ remittances can be predicted. Now, a further decline in exports, accompanied by negligible growth in Foreign Direct Investment (FDI) and stagnant workers’ remittances will cause an adverse impact on the foreign exchange reserves. In case of a decline in foreign exchange reserves Pakistan will have to face the problems at two different sides:

(1) To manage the minimum requirement of foreign exchange reserves it has to approach again the IMF and has to accept the conditions which may restrict the government priorities and development planning;

(2) Declining foreign exchange reserves will pressurise the value of Pakistani rupee in terms of foreign currencies. Depreciation in the value of Pak rupee will increase the prices of imported products including industrial raw materials, petroleum, medicines, chemicals, machinery and edible oil. Consequently an increase in CPI (general rate of inflation) will create further economic miseries in the lives of common peoples. This situation would promote or exacerbate poverty.