The most prominent challenge of Pakistan’s prevailing economic quagmire is trade imbalance. It has not only pushed Pakistan into an unsustainable trade deficit, but has also created serious imbroglios in the domains of currency market, ever ballooning foreign payments and alarmingly diminished debt-servicing ability.
Pakistan is a country that has been facing persistent trade imbalances for decades now. The country’s exports have been declining as a share of GDP, while imports have been growing way faster than the exports, leading to large trade deficits, thus further accentuating external vulnerabilities. According to the World Bank, Pakistan’s current account deficit widened aggressively to 3.6 percent of GDP in FY2021, way up from 0.6 percent in FY2020. The principle reason for this deterioration was an upward surge in imports, largely driven by strong domestic demand and rising global commodity prices, especially for oil, food and metals.
At the governmental level, some specific trade policies that have significantly contributed to Pakistan’s economic decline include:
Inadequate government response to domestic inflation:
According to a study by the National Bureau of Economic Research, the decline in employment in Pakistan was due to inadequate government response to domestic inflation. Steps were taken to increase the nominal EERs, which led to the elimination of certain important measures that could have helped the economy flourish. Lack of technological sophistication in Exports:
Pakistan’s export basket lacks technological sophistication and concentrates on textiles alone, with limited and insignificant share of other exportable commodities. This tunneled approach and lack of desired diversification in exports has made Pakistan’s economy vulnerable to external shocks /dynamics.
Strict environmental policies and high costs of goods and services:
According to a study published in the Journal of Economic Structures, strict environmental policiesand high costs of goods and services reduce trade flows between Pakistan and its partners, making homegrown commodities incompatible globally due to exorbitant cost of production.
Overvalued/ Exaggerated Exchange Rate:
Pakistan’s overvalued exchange rate has made its exports less competitive in the global market, further deteriorating the trade imbalance.
The impact analysis of these factors leads us to the conclusion that one of the primary causes of current account deficit in Pakistan is the lopsided trade imbalance between exports and imports. The country has been experiencing this painfully consistent trade deficit since 2003, with high imports and relatively lower exports. The trade openness policy, which led to a high ratio in favour of imports, has worsened the economy of Pakistan. This means that the country’s heavy reliance on imported goods is unhealthy and cannot be sustained perpetually, as it will keep accentuating the trade deficit, further sinking the ship deeper into a quagmire.
Pakistan’s trade deficit has been largely influenced by high imports of energy, which forms the largest chunk in the overall imbalance. In recent years, China has emerged as Pakistan’s largest trading partner and energy imports from China have played a significant role in the trade deficit.
The exaggeratedly high level of exchange rate in Pakistan has had a negative impact on the balance of trade as well. A higher exchange rate can make imports look relatively cheaper, leading to increased imports, hence a larger trade deficit.
All these factors have made overall negative impact on Pakistan’s economy. Below are some key indicators:
Depleted foreign exchange reserves.
Balance of payments constraints on economic growth.
Backlog of imports and reduced export volumes leading to a standstill in the economy.
High ratio of imports due to trade openness policy, further worsening economy.
One of the key factors that further compounds the Pakistan’s trade imbalances is the insufficient export diversification, far below the desired optimum level. Pakistan’s exports are heavily concentrated in few sectors; mainly textiles and clothing, which account for more than 60 percent of total exports. Moreover, we lack requisite value addition. Pakistan’s exports are mostly low value-added products that face intense competition from other countries in the region and beyond. Pakistan also faces the challenge of availability of an extremely
narrow export market, with more than half of its exports going to only 10 countries.
Pakistan has reached a stage where the export diversification has become absolutely inevitable, sooner than later, to enhance its export competitiveness, reduce its exposure to external shocks / dynamics and achieve a sustainable growth. Export diversification can also help Pakistan tap into new markets and products, increase its value addition and productivity, and create more jobs and income opportunities for its people. However, achieving optimum export diversification is not an easy task. It requires addressing several structural challenges that hinder Pakistan’s export potential, creating a business-friendly environment for domestic investment as well as FDI
SOME OF THESE CHALLENGES: INCLUDE: High effective rates of protection that discourage exports and encourage imports:
Pakistan has one of the highest tariff structures in the world, with an average effective rate of protection of 28 percent. This creates a bias against exports and favors import-substituting industries that are often inefficient and uncompetitive. A gradual reduction of tariffs through a long-term rationalization strategy can help level the playing field for the exporters and encourage them to enter new sectors and markets.
Limited availability of long-term financing for firms to expand export capacity:
Pakistan’s financial sector is dominated by short-term lending, which is not suitable for exporters who need long-term financing to invest in new technologies, machinery, and skills. The Long-Term Financing Facility (LTFF), which provides subsidized loans to exporters for capacity expansion, has been underutilized due to various constraints such as high collateral requirements, limited outreach and weak monitoring. Reallocating export financing away from working capital and into capacity expansion through the LTFF can help boost Pakistan’s export supply.
Inadequate provision of market intelligence services for exporters:
Pakistan lacks effective institutions that can provide market intelligence services to exporters, such as identifying new markets and products, conducting market research and analysis, facilitating trade fares and missions, and providing quality certification and standards. These services are crucial for exporters to access new opportunities and overcome non-tariff barriers in foreign markets. Consolidating market intelligence services by supporting new exporters and evaluating the impact of current interventions can increase their effectiveness and efficiency.
Low productivity of pakistani firms:
Pakistan’s firms suffer from low productivity due to various factors such as poor infrastructure, unreliable energy supply, cumbersome regulations, weak governance, low innovation and low human capital. These factors reduce the competitiveness of Pakistani firms and limit their ability to upgrade their products and processes. Designing and implementing a long-term strategy to improve the productivity of firms that fosters competition, innovation and export potential can help Pakistan achieve export diversification.
In conclusion, Pakistan’s trade imbalances pose a serious threat to its economic stability and growth. To address this challenge, Pakistan needs to diversify its exports by overcoming the structural constraints that hamper its export competitiveness. This will require steadfast policy formulation/ implementation and coordination among various stakeholders, including the government, the private sector, and development partners.
