Trade and commerce – balance of payments
CHAPTER 14
TRADE AND COMMERCE – BALANCE OF PAYMENTS
T
he position of the balance of payments shows the external strength of a country. To achieve and maintain this strength, efforts are made to improve the core external account indicators through taking stocks of the past and crafting forward-looking policies that improve the receipt (exports and remittances), curtail the payments through better management (imports and debt).
The Annual Plan envisages an invigorated external sector. The idea is to give boost to exports. A significant decline in the international commodity prices acted as a guiding post for the balance of payments position, and this situation called for positive influence on market expectations, narrowing of the trade gap as the balance on trade remains the major contributor to current account deficit. The drop in commodity prices internationally is also meant to save foreign exchange, and carry reduction in the domestic prices. However, exports were hit hard due to this downturn than the reduction in import bill; nevertheless there was a pronounced effect of the decline in oil prices on the external account, which can mobilise savings for the economic growth. Pakistan receives more remittances even when there is a slowdown in other economies where Pakistanis’ are working. The Diaspora is one of the resources to count on for improvement of the external sector. Brain drain is now an obsolete term since there has been a paradigm shift and change in thinking resulting in replacement of the term with ‘circulation of expertise in a globalised world’. Pakistan is thus a beneficiary of the remittances sent as a result of its workforce contributing elsewhere. The outlook seems favourable as energy issues are likely to be resolved in the coming years, steps are being undertaken, like the import of LNG, to ensure uninterrupted supply of energy to the export-oriented industries, and solid actions on the security front are being taken, which will enhance exports and create business-friendly environment for attracting the FDI. A large amount of investment is expected for the China-Pakistan Economic Corridor projects, which will generate more economic activity.
Performance review 2014-15
The Annual Plan 2014-15 was outlined keeping in view improvement in energy supply, business friendly environment and better law and order situation;therefore, higher targets were set. However, due to certain unprecedented internal and external factors, the targets are unlikely to be met except remittances. The export target was set at $26.9 billion for 2014-15 as compared to $25.1 billion recorded during 2013-14, while the import target was set at $44.2 billion for 2014-15 as against $41.7 billion recorded during 2013-14, depicting an increase of about six per cent. The trade deficit was targeted at $17.2 billion as compared to $16.6 billion in 2013-14. The current account deficit was targeted to be $2.8 billion (-1.1per centof the GDP) in 2014-15, against $3.1 billion (-1.3 per cent of GDP) actually recorded in 2013-14 (Annexure-1). External account, during July-April 2014-15, remained in deficit to the tune of $2.1 billion as compared to a deficit of $1.9 billion recorded during the same period of the previous year.
The most notable development, during July-April 2014-15, was 16.1 per cent growth in remittances, which reached to a level of $15 billion as compared to about $12.9 billion recorded during the corresponding period of the last year.
There are opportunities of the Foreign Direct Investment (FDI) in almost all sectors of the economy and the energy sector, especially upgradation of the power transmission network; hence the Power Policy has opened this sector for the FDI.The total liquid foreign exchange reserves of the SBP stood at $17.7 billion by end-April 2015 as against $12.2 billion by end-April of the last year. This is equal to financing 21.3 weeks of the next year of imports, showing comfortable level of the reserve adequacy ratio.
Exchange rate
Pakistan’s experience with the exchange rate policy has not been encouraging from the perspective of ensuring export competitiveness. The country maintains an overvalued exchange rate, which encouraged imports rather than exports. An overvalued exchange rate impacts the size of a country’s trade-able sector. Large influx of the capital flows is likely to cause a real exchange rate appreciation. In case of Pakistan, large inflows of remittances and foreign assistance, due to the War on Terror since 2001, have been responsible for overvaluation of the exchange rate.
The average monthly exchange rate against US dollar during April 2015 stood at Rs101.70 against Rs97.49 in the same period of the previous year. This implies a depreciation of 4.32 percent. During March 2015, the average monthly exchange rate against US dollar stood at Rs101.76.
Balance of trade
In 2013-14, the trade deficit increased from the previous year due to slow growth in exports (1.1 per cent) compared to imports (3.8 per cent). However, the trade deficit remained almost at the same level in July-April 2014-15 as against the corresponding period of the last year [Annexure-1].Trade deficit in the Annual Plan 2014-15 was targeted at $17.2 billion. Keeping in view the current trend of exports and imports, it is expected that trade deficit will be less than the target.
Exports: Exports (goods) stood at $20.2 billion during July-April 2014-15 against $20.8 billion in the corresponding period of the previous year, showing a decline of 3.2 percent.Exports (fob) for the full year of 2014-15 are estimated to be around $24.2 billion against the Annual Plan target of about $27 billion [Annexure-1]. Decline in commodity prices, particularly cotton and rice, were the major contributing factor towards low exports.
Exports of goods are witnessing a downturn due to these reasons.Two of the major regions of Pakistan’s exports, namely China and the European Union, are experiencing economic slowdown. Pakistan’s exports to the European Union increased while exports to China declined. The GSP Plus status seems to be working despite the slowdown in the European economy. However, China’s economic slowdown is showing its signs in the form of decrease in Pakistan’s exports. Textile exports are largely flat, mainly due to high cost of doing business, but Pakistani exports could have been much higher had the export mix been more skewed towards value-added products. Exports of raw cotton and cotton yarn are down. However, towels and knitwear exports are all up, suggesting that the value chain are more immune to energy-related issues than those who produce more basic commoditised products. As far as output is concerned, shortage of working capital is faced by exporters. It is hoped that the recent reduction in the policy rate will help in export financing.
The services sector has emerged as one of the drivers of economic growth. Pakistan has opened up its market to the foreignservice providers, particularly in the banking, insurance, telecommunications and retail sectors. Pakistan’s share in the global trade in services is low, while its share in the GDP posted a substantial increase. Services exports have shown growth of 201.09 per cent in February 2015, when compared to the preceding month, which is the highest monthly growth recorded in this fiscal year so far. However, this is not a regular feature because this was mainly due to receipts of the Coalition Support Fund (CSF). Services exports, during the first ten months (July-April of 2014-15) witnessed an increase of 19.5 percent to $5,023 million from $4,203 million during July-April 2013-14.
Imports: Imports during July-April 2014-15 decreased by 1.5 per cent over the corresponding period of the previous year. It is estimated that imports (fob) for 2014-15 will be about $40.8 billion compared to the Annual Plan target of $44.2 billion (Annexure-1).The decrease in import bill is mainly due to the sharp drop in oil prices. Most of the imports are for production purposes; thus contributing towards economic activity. Petroleum imports during July-April 2014-15 stood at $9.8 billion as against 12.2 billion recorded during the corresponding period last year showing a decrease of 19.4 per cent whereas machinery imports showed an increase of 16.9 per cent during July-April 2014-15 where its value stood at $6.1 billion as compared to $5.2 billion recorded during the same period last year. Meanwhile food, transport, agricultural & chemical group and metals group all posted a higher import bill during July-April 2014-15 as compared to the same period last year. The decrease in oil import bill, coupled with increase in workers’ remittances has caused the current account deficit to decrease during 2014-15.
Terms of Trade: According to the data released by PBS 81.31 per cent of exports for which both quantity and prices are available shows 2.02 per cent increase in price effect and no change in quantity effect resulting in total effect of 2.02. On the other hand 53.42 per cent of total imports for which both quantity and prices are available indicate 17.06 per cent increase in quantity effect and 14.81 per cent decrease in price effect with total effect of 2.25. It can be interpreted as the amount of import goods an economy can purchase per unit of exports. It is calculated by dividing total effect in export value by total effects in import value. This means that 0.9 units of exports can fetch one unit of imports showing improved terms of trade leading to replenish more resources into our economy for generating economic activities.
Workers’ remittances: These remittances have always remained major contributor in reducing the current account deficit. Remittances reached around $15.0billion during July-April 2014-15 from $12.9 billion in the corresponding period of last year (Annexure-1) thereby registering an increase of 16.1 per cent. Monthly average remittances during this period stood at $1.5 billion as compared to$1.3 billion during the same period of previous year. Keeping this trend in view, remittances are expected to surpass the annual plan target of $16.7 billion. Workers’ remittances have increased due to reduction in the cost of sending remittances, tight anti money laundering policy, skilled manpower and Pakistan Remittance Initiative (PRI). The bulk of increase in workers’ remittances came from UAE during July-April 2014-15 with a positive change of 34.1 per cent when compared with the same period last year. Likewise, all the major countries from which remittances are received showed a positive trend except the EU, which showed a decline of 15.9 per cent in remittances. Increasing trend of worker’s remittance is reflected in Figure 1.
Current account balance: The current account deficit was targeted at $2.8 billion (-1.1 per cent of the GDP) in the Annual Plan 2014-15 against a deficit of $3.1 billion (-1.3 per cent of the GDP) recorded in 2013-14 (Annexure-1). This was largely based on the assumption of higher growth in exports as well as better inflows in the services accounts. With estimated trade deficit at $16.6 billion and remittances of $18 billion during 2014-15, the current account 2014-15 is estimated to be in deficit by $1.6 billion against a deficit of $3.1 billion recorded during 2013-14. (Annexure-1) The estimated decrease in current account deficit is mainly due to decrease in trade deficit, robust growth in remittances and receipt of Coalition Support Fund (CSF) which resulted in the improvement in services balance.
Capital and financial account: Gross aid disbursements during July-April 2014-15 have increased to $2.6 billion as compared to $2.3 billion recorded last year. Disbursement for the full year is estimated to be $3.2 billion (Annexure-1)
Overall balance: The overall balance is in surplus by $2.1 billion in July-April 2014-15 compared to a surplus of $1.9 billion recorded in the comparable period of 2013-14. (Annexure-1) This indicates that current account deficit is not inherently bad if it is financed by non-debt creating inflows.
Comparison of sectoral performance with global and regional competitors
Comparison of six global and regional countries in terms of current account as percentage of the GDP and in dollar terms and volume of exports and imports change carried out with IMF data. Table 1 shows the comparison.
In the realm of Exports of goods Pakistan has shown moderate progress among regional countries. Examining data of last four years we see that Bangladesh has shown immense growth in this area and has surpassed Pakistan in the change in volume of exports. Bangladesh is showing more exports growth than even India. India has witnessed robust positive change since 2013 and is projected to maintain this trend. Sri Lanka has recouped well from negative growth in 2012 to double digit growth in 2014 but the growth rate is projected to be halved in 2015.China has shown persistent growth in exports of goods and is likely to maintain this trend.
In terms of volume of imports of goods, it is seen that Bangladesh has witnessed greater change in the volume of imports than Pakistan this may be due to the greater exports volume that it had to sustain. Imports of capital goods and raw materials can be a yardstick for assessing the exports pick up in a country. Change in volume of imports in India is however less than that of Bangladesh and even negative growth was seen in 2013.Afghanistan has also shown negative growth in imports in 2013 and 2014. Change in volume of exports in China has been somewhat consistent.
Table 1: Comparison of sectoral performance with global and regional competitors
Pakistan / 2012 / 2013 / 2014 / 2015Current account (US Dollars billions) / -4.7 / -2.5
Current account (as % of GDP) / -2.1 / -1.1 / -1.2 / -1.3
Vol of Imports (goods) % change / 3.3 / 4.2 / 5 / 4.4
Vol of Exports (goods)% change / 1.4 / 5.8 / 1.3 / 8
Bangladesh
Current account (US Dollars billions) / 1 / 2 / 0.3 / -1.2
Current account (as % of GDP) / 0.7 / 1.2 / 0.1 / -0.6
Vol of Imports (goods) % change / 6.8 / 6 / 13.4 / 15.4
Vol of Exports (goods)% change / 9 / 12.5 / 9 / 10.8
India
Current account (US Dollars billions) / -88.2 / -32.4 / -42.5 / -50.2
Current account (as % of GDP) / -4.7 / -1.7 / -2.1 / -2.2
Vol of Imports (goods) % change / 2.1 / -4.6 / 8.5 / 9
Vol of Exports (goods)% change / 2.2 / 5.1 / 7.9 / 8.2
Afghanistan
Current account (US Dollars billions) / 0.8 / 0.9 / 1 / 0.02
Current account (as % of GDP) / 3.9 / 4.3 / 4.8 / 0.1
Vol of Imports (goods) % change / 12.7 / -0.3 / -2.2 / 2.6
Vol of Exports (goods)% change / 0.7 / 8 / -4.1 / -16.7
Sri Lanka
Current account (US Dollars billions) / -4 / -2.6 / -2.3 / -2.6
Current account (as % of GDP) / -6.7 / -3.9 / -3.3 / -3.3
Vol of Imports (goods) % change / -19 / -0.1 / 20.6 / 12
Vol of Exports (goods)% change / -8.3 / 7.6 / 14.2 / 7.7
China
Current account (US Dollars billions) / 215.4 / 182.8 / 185.3 / 220.6
Current account (as % of GDP) / 2.6 / 1.9 / 1.8 / 1.9
Vol of Imports (goods) % change / 7.2 / 9.3 / 7 / 6.5
Vol of Exports (goods)% change / 6.8 / 9.6 / 6.5 / 6.8
Source:IMF
Outlook for 2015-16
The outlook remains optimistic for 2015-16 due to the upcoming developments in the energy sector as well as trade partnerships with regional countries. Moreover improved global economic situation will augment growth in the external sector. However, risks persist due to shortfall in expected growth in emerging economies, Europe, or the GCC which could slow exports.
Trade account: On account of favourable situation in the internal and external front, exports in 2015-16 are projected to grow by 5.5 per cent to $25.5 billion from $24.2 billion estimated for 2014-15. Imports during 2015-16 are projected to increase 6.0 per cent to $43.3billion from $40.8 billion estimated for 2014-15. Hence, the trade account is projected to be in deficit by $17.7 billion in 2015-16 from $16.6 billion estimated for 2014-15 (Annexure-1). The increase in trade deficit will be on account of more imports particularly for China-Pakistan Economic Corridor.
Current account balance: The current account is targeted to be in deficit by $2.9 billion in 2015-16 (-1.0 per cent of the GDP) as against a deficit of $1.6 billion (-0.6 per cent of the GDP) estimated for 2014-15 (Annexure-1). The outlook for current account will be worse off primarily because of higher imports for growing economy. However, the current account deficit will not be worrisome due to inflow of investment.
Capital and financial account: Gross aid disbursements, during 2014-15, are expected to remain at the level of $3.8 billion against $3.2 billion estimated for 2013-14.
Overall balance Upward trend in the trade deficit is forecasted.Allowing for other capital inflows, the overall balance is likely to be in surplus by $4.5 billion in 2015-16 compared to an estimated deficit of $2.5 billion in 2014-15. Details are given in Annexure-1.
Initiatives for 2015-16
Taking a medium-term perspective, the strategy envisioned is to create non-debt creating inflows. Reserves can be built by gradual reduction in the trade deficit by boosting exports, enhancement of investor-friendly environment and revival of non-debtcreating foreign private inflows.
The government is following a two-pronged strategy of the Vision 2025 and 11th Five year Plan. The Vision calls to invoke export-oriented policy led by the private sector, and 11th Five year plan gives a policy framework based on consistency and continuity for sustainable balance of payments situation.
Central to achieving the objective of export competitiveness is the role of the private sector. Planning for the private sector requires a medium and long-term horizon in order to ensure sustainable long-term returns. To encourage the private sector to be export-oriented, the government has built a supportive policy framework, and two pillars of which are consistency and continuity. The government has also adopted a participatory approach to ensure active private sector involvement.
The Vision outlines a clear path for a better trade scenario, especially to flourish exports. Exports are victim of protectionist tendencies, and protectionism incentivises production for the domestic market rather than the global markets. A paradigm shift to provide incentives to industries to move their production from low value to high value products is part of reforms in the Vision. This will improve export competitiveness and enable higher share in the global and regional markets besides diversification of products and markets. Improvement in supply chains and integrating them into the world market offer huge potential for the Pakistani exporters. Regional trade enhancing initiatives can add substantially to Pakistan’s export-to-GDP ratio.
Textiles form the bulk of exports. The Textile Policy 2014-19was announced after approval from the ECC. The trade for the next five years is worth Rs64.15 billion. The finance division will provide Rs40.6 billion, whereas the rest Rs23.5 billion will be financed through the Planning Commission and Textile Development Fund. Through the Textile Policy, effort has been made to address the issues of all the sub-sectors of value-chain by laying down a perspective plan for their sustainable growth for the next five years