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Trade conundrum: who is at fault?

The July 2023 trade data indicates an improvement in the trade deficit – from negative 1.863 billion dollars to negative 1.607 billion dollars, a positive trend that was touted by former Finance Minister Ishaq Dar as a major achievement of his ten-and-a-half-month tenure. The question is whether he is right or not?

The decline in the trade deficit is premised entirely on a decline in imports – from 4.219 billion dollars in June to 3.664 billion dollars in July – a decline of 13 percent achieved entire due to administrative controls that were defined by the International Monetary Fund (IMF) in the seventh/eighth review documents uploaded late August 2022 of the now suspended Extended Fund Facility (EFF) programme (with approximately 2.6 billion dollars undisbursed): “authorities imposed a requirement to seek payment authorization from State Bank of Pakistan before initiating transactions for importing certain goods, with approval granted in a discretionary manner, thereby violating the PC on the non-imposition of exchange restrictions. The authorities have partially repealed the import ban in August 2022 (leaving in place the ban on cars, mobile phones, and household appliances), and are committed to eliminating the requirement for import payment authorization at end-August 2022, depending on market conditions. Meanwhile, in early August 2022 CMRs were reduced on terms of payment above 90 days and CMRs introduced in April are set to lapse in December 2022. Finally, Pakistan also continues to maintain an exchange restriction resulting from the limitation on advance payments for imports against letters of credit (LCs) and advance payments up to the certain amount per invoice (without LCs) for the import of eligible items (imposed in 2018). The authorities noted concern about disorderly conditions in the FX market, should restrictions be removed while complementary macroeconomic policies have not yet fully kicked in.”

Disturbingly, the economic team leaders at the time – Finance Minister Miftah Ismail and Murtaza Syed Acting Governor SBP – both qualified economists with relevant international experience unlike their successors, failed to identify the involvement of domestic banks in creating the disorderly market conditions. It was the then Prime Minister Shehbaz Sharif who ordered an inquiry into the matter on 1 August 2022. Jameel Ahmed, appointed Governor SBP on 26 August 2022, acknowledged on 4 October 2022 during his attendance in the meeting of the national assembly finance committee that the inquiry findings revealed that eight banks were involved though he named only seven. During a press conference on 23 January 2023 Jameel Ahmed stated that the inquiry was complete and discussions were ongoing on what type of punitive action would be taken against those banks found guilty – fiscal or regulatory measures? While the claim is that the tax on banks constitutes a fiscal measure yet the tax is on all banks – offending as well as non-offending.

Be that as it may, Dar simply followed the import restrictive administrative measures of his immediate predecessors for which they got a waiver from the Fund till the end of the EFF.

Exports however present a dismal picture and this is in spite of the 6 October 2022 decision by Ishaq Dar to disburse a hefty 110 billion-rupee unbudgeted electricity subsidy to exporters at a time when fiscal space was extremely narrow (opposed by the IMF and cited as one reason for failure to reach a staff level agreement on the ninth EFF review). Exports declined by 12.7 percent July-June 2022-23 against the comparable period of the year before – a trend that continued into July 2023 with total exports of 2068 million dollars against exports of 2250 million dollars in July 2022- a decline of 8 percent.

Major export items that registered a negative trend in June 2023 compared to July 2022 as per the Pakistan Bureau of Statistics are as follows: Knitwear negative 8.82 percent in June 2023 (compared to positive 7.4 percent in July 2022), ready-made garments negative 15.7 percent (against plus 15.5 percent in July last year), bed wear negative 11.5 percent (agai9nst positive 9.35 percent last year), cotton cloth negative 15 percent (against negative 0.83 percent last year), and rice basmati negative 37.6 percent (against positive 10.67 percent in July 2022).

It is relevant to note that while the June 2023 exchange rate average was 286.58 as per the PBS the July 2023 rate was 281.7 – a decline of 1.69 percent. However, the rupee remains under more stress today and one reason is that while foreign exchange reserves were strengthened by around 5 billion dollar injections from friendly countries subsequent to the 29 June 2023 staff level agreement on Stand-By Arrangement (SBA) however these inflows raised the country’s external indebtedness.

Apart from falling exports a desired form of foreign exchange inflows for Pakistan has been remittances through official channels. These declined by 13.6 percent in dollar terms in 2022-23 compared to 2021-22 – a trend that continued into July 2023 with 2026.8 million-dollar remittance inflows as per SBP against 2510.9 million dollars in July 2022 – a decline of 19 percent. This is entirely due to the inane policy of Dar to control the rupee-dollar parity without the reserves to intervene in the market that reinvigorated the illegal hundi/hawala mode of remitting money that had been crippled as a consequence of the Covid19 lockdown.

Export data, one would hope, would be carefully analysed by: (i) our policy makers as it indicates that extending subsidies to exporters (tariffs/fiscal/monetary) – budgeted and even worse for the economy unbudgeted – does not automatically raise exports; and (ii) international multilateral/bilateral donors that a depreciating currency does not always raise exports as is evident in June-July 2022 data in comparison to the year before.

To conclude, the claim by Dar that controlling the trade deficit was an achievement is as erroneous as his claims of other achievements during all his stints as the country’s finance minister. The party must surely realize that Dar has emerged as their Usman Buzdar and his resurrection as the finance minister may cause angst even amongst the party’s diehard supporters leave alone the stakeholders.

Anjum Ibrahim, "Trade conundrum: who is at fault?," Business recorder. 2023-08-28.
Keywords: Economics , Monetary fund , State Bank , Economics growth , Economy , Ishaq Dar , Usman Buzdar , Miftah Ismail , Shehbaz Sharif , Pakistan , SBP , IMF , EFF , SBA

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