The worsening trade deficit

THE news on the external sector of the economy continues to be distressing. According to the latest data released by the Federal Bureau of Statistics (FBS), Pakistan's trade deficit during July-September, 2008, has swelled to a record level of 5.549 billion dollars, registering a huge increase of 52.65 percent from 3.635 billion dollars during the corresponding period last year. The deterioration resulted from a much larger increase in imports than exports. While imports climbed by 34.29 percent from 8.056 billion dollars to 10.818 billion dollars, exports grew by 19.10 percent from 4.42 billion dollars to 5.269 billion dollars during the first quarter of 2008-09. The trend during the latest month was particularly alarming. At 2.027 billion dollars, trade deficit in September, 2008 was higher by 62.13 percent than 1.25 billion dollars in the same period last year. Pakistan's imports during the month stood at 3.80 billion dollars as against the exports of merely 1.77 billion dollars. The ballooning of the trade deficit to an unprecedented level during the first quarter of the current year, needless to say, is highly disturbing and should be a warning signal for the economic managers of the country to do something urgently to correct the course in the external sector. At the present rate, the all time high trade deficit of 20 billion dollars recorded in the previous year would easily be surpassed during 2008-09, posing enormous difficulties for the management of the economy. Already, the foreign exchange reserves of the country are down to a level enough to finance only a few weeks of imports and the rupee is at a record low in the exchange market. With rumours of a default circulating in the market, businessmen and ordinary people are almost panic stricken and investors are losing confidence despite repeated assurances of the State Bank and the Government about the resilience and solvency of the economy.
The government had imposed additional customs duty on more than 370 items and LC margins were raised to 100 percent to curtail the flow of imports in a bid to reduce the trade deficit, but its impact is yet to be seen. Clearly, the government needs to do much more to contain the trade deficit within manageable limits by adopting highly restrictive policies because the country cannot afford to continue with the existing level of imports which are more than double value of its exports. Keeping in view the critical position of the balance of payments, authorities of the country are also making efforts to attract foreign flows from different sources. However, the response so far has not been very encouraging. While the response from Saudi Arabia for an oil credit facility is still awaited, "Friends of Pakistan" and IFIs, except the Asian Development Bank, have made no concrete commitments for disbursements so far. In a desperate move, Pakistan has now requested Iran to provide crude oil on deferred payment to ease the current account position of the country. The only saving grace is a substantial decline in international oil prices that would reduce the import bill and provide some relief to the economy. However, the duration and extent of this relief will depend on the duration and extent of recession in the developed countries. Also, the effect of declining international prices may be partly cancelled by weaker exports due to a global recession. All said and done, the country has to make swift and effective structural adjustments in the external sector and at the same time make frantic efforts to attract financial flows immediately from a variety of sources. This is essential to avert the fast developing balance of payments crisis and insulate the economy from its impact. Hopefully, the government would be able to manage this very difficult situation by utilising all options available.

European action produces results

A NOTHER day on the stock markets and another incredible swing — fortunately this time a surge. It follows action by the Europeans rather than the Americans — not inappropriate since the EU is the world’s biggest economy. Moreover, one of the major factors in the continuing panic last week was European procrastination, with governments unable to act together until forced to by the imminent prospect of global meltdown. As an aside, this demonstrates the importance of European financial coordination: European governments acting on their own not only failed to stem the crisis, they exacerbated it; European governments working together have — even if copying the model unilaterally unveiled by the British whereby billions are injected into the banks in return for equity — boosted investor confidence. That said, instant solutions of the type the markets wanted, with blank checks attached, would not have resolved the crisis — as was seen with the US initiative; it did not stem the alarm. Time was needed to understand the deeper issues and come up with appropriate response. Not that the Europeans actually intended to take their time. That was more an accident. Nonetheless, the plan agreed by the euro-zone leaders has the merit in that it addresses the poisonous legacy of bad debt and unblocks interbank lending, one of the key concerns of the market. It must be hoped that confidence will now return. It has been the commodity most absent in recent days and without it there is no hope of normality. Unfortunately, there is, equally, no guarantee that markets will not plunge again in days to come, despite the trillions of dollars being put into them by the world’s governments and the trillions more promised in guaranteeing investor accounts.
That is because for the moment there is systemic pessimism in the world’s market places. Investors are looking for what can go wrong with politically-led rescue plans, not what can go right — and there is one big thing that can still go wrong: Recession in the industrialized world. In their present mood, investors are quite capable of panicking themselves and the markets into fresh turmoil over fears of recession. There is not a full-blown one as yet but if it comes, it would have devastating effects on the exporter economies of Asia, particularly China. India would suffer too, though probably less so since it is more focused on the expanding domestic market than the Chinese. So too would oil exporters. In the chaos, everyone seems to have forgotten about oil which has nearly halved in value in just three months over fears of a recession cutting demand for energy. On Friday, amid the general panic, the price hit a one-year low. Prior to the financial crisis, that would have been the big news, with forests of print devoted to it.

—Arab News