Presciently and perhaps a dictum acknowledged by most economic pundits in private gatherings, continuing long-term deficits will eventually and most definitely lead to a financial crisis, at which point the nations creditors will come a knocking for their pound of flesh. And what can a nation offer in such a forced sale scenario, obviously only what the government owns, its land and businesses. So why do western economists publicly, and rather aggressively, propagate market and currency liberalisation as a panacea for developing nations, is indeed mysterious.
Admittedly, ignoring global conspiracy theories implicating the developed nations, only an economist can figure out what another economist theorises, however, when primary theories linked with globalisation bring to pass a global crises of humongous proportions, skepticism thereto is but natural. And for an accountant, with a bit of auditing background, skepticism is a key ingredient of professionalism.
Looking at things from an accountant’s more simplistic mindset, in comparison with economists only since it is almost as difficult to discern accounting standards, an entity which regularly incurs a loss on a year on year basis and successively contracts debts to fund such losses, is not a going concern. So in an accounting analysis, where a nation as a whole is treated as a business unit, then its exports are its revenues, imports its costs and the trade deficit its loss for the year. Mandatorily, and rather interestingly, much like double entry accounting, external trade has to balance at all times, either through taking on foreign debt or through other income such as worker’s remittances or though other proceeds such as selling of assets. Logically then, unless losses are curtailed, the party can continue only till such time that the lenders are willing to dance, which is obviously till the music plays, ie there remain assets which can be offered in a forced sale scenario referred to in global parlance as privatisation. Definitely a frightening scenario!
In Pakistan’s case, the party is fast moving towards a hangover. Consistently imports have exceeded exports for a number of years and while workers’ remittances have weathered the storm substantially, foreign national debt has expanded, no surprises here, significantly. Note that workers’ remittance, the knight in shining armour, is an uncontrollable variable and imagine what can happen if at any point this pool of money dries up.
In essence then, Pakistan will seriously have to revisit its foreign trade and take steps to curtail, if not eliminate, its trade deficit, by hook or by crook. For the critics with an unconsciously consistent negative mindset, yes WTO is a problem, but, notwithstanding how productive WTO is for Pakistan, innovative solutions will have to be imagined, for survival.
THE DEVIL IS IN THE DETAIL The starting point for any brainstorming on trade is necessarily a diagnostic of what exactly is the country trading. While one has generally abhorred getting into facts and figures in these write-ups, in this particular case a bit of research was needed, if only to challenge preconceived notions. All credit to the websites of the Central Bank and the Pakistan Bureau of Statistics for the information hereunder all of which relates to FY 2013. Accordingly any concerns on accuracy and authenticity of the data may kindly be directly forwarded to the aforementioned institutions. Finally, the intent is not to carry out an all-inclusive analysis, more modestly, the intent is to simply point in a particular direction.
Firstly, looking at exports, which have hovered around USD 25 billion during the last three years, what hits immediately is that things are in a limbo. In all three years, textile group exports lingered around USD 13 billion and food group exports fluttered around USD 4 billion, and it is not rocket science to conclude that roughly 55 percent of exports are more or less raw commodities. Indeed the textile industry is expected to object to this assertion, but detailed analyses will most likely evidence that the majority of their exports can hardly be categorised as value-added. If the theory of comparative advantage dictates that Pakistan be forever relegated to producing raw commodities for the world, then perhaps this is another economic theory that the nation’s leadership would be better off ignoring.
More upsetting is the fact that exports of engineering goods declined from USD 423 million FY 2011 to USD 361 million in FY 2013. For a developing country this is indeed a worrying sign, perhaps it is time to revisit the ancient strategy of pursuing export oriented industrialisation.
Moving on to imports, which increased from USD 36 billion in FY 2011 to USD 40 billion in FY 2012 and 2013, what was enlightening was that, contrary to the much touted popular belief, petroleum group imports are not 70 percemt of total imports, they are a more manageable 35 percent and stood at USD 14 billion in FY 2013; which by the way is almost comparable with workers’ remittance in that year. All is, therefore, not lost.
On the other hand, food group imports of about USD 4 billion are alarming for an agricultural nation. While approximately half of this amount was spent on palm oil, a significant portion probably has to do with all the fast food imports that the nation consumes at burger joints. Other anomalies in a country comprising a significant population living below the poverty line is import of mobile phones worth half a billion dollars, motor vehicles for a billion dollars and electrical apparatus of another half a billion dollars. More curiously, textile group imports zigzagged around USD 2.5 billion in the last three years. Consumer choice might be important but not at the risk of living beyond means.
Also note that the above anomalies are evident while reviewing a broader categorisation of imports, a detailed itemised review of food, machinery, transport, textile, Agri. and other chemicals group will most likely identify additional largesse. Puzzlingly, the nation imports iron and steel and related scrap of around USD 2 billion a year, but if Pakistan Steel Mills is running at less than 20 percent capacity, who is processing all that metal? Beyond commodities, the nation paid a whooping USD 1.2 billion for travel services in FY 2013, and all this time the national airline is running in losses; something is surely amiss. The net trading position in telecommunication services is definitely grayish and needs an accountant’s reconciliation. For the record the net deficit in services trade for FY 2013 was USD 1.5 billion.
Without further ado, let’s get to the crux of the argument; if the final outcome of all this trade is a net negative to be financed out of aid and expensive debt, then how does trade liberalisation benefit Pakistan. The slogan of “Trade not aid” might be more prescient once clarity is achieved on exactly what to trade. Definitely the intent is not to trade the nation’s sovereignty, which is the final outcome of a debt trap. No, the suggestion is not to stop trading, except that trading for the sake of trading is ill advisable. At the end of the day, the mercantilist had it right, the bullion must come home!
(The writer is chartered accountant based in Islamabad)Syed Bakhtiyar Kazmi, "Trade – devil is in the detail," Business recorder. 2014-02-19.
Keywords: Economics , Economic issues , Economic policy , Economic development , International economics , Financial crisis , Foreign debt , Economy-Pakistan , Foreign investment , Trade , Pakistan