New Paradigm

The recently completed review of the Extended Fund Facility (EFF) for Pakistan allows the government to withdraw about US $1 billion for budgetary support. This brings the total under the current programme to US$ 3 billion. According to the press release by the IMF on 2nd February 2022, the IMF programme aims to not only support economic recovery from the COVID-19 pandemic related shock but also ensure that the government undertakes policies that would result in better macroeconomic and debt sustainability. The press release also recommends structural reforms to promote jobs and achieve long-run economic growth that improves welfare of all Pakistanis. The press release praises the continued commitment to a market determined exchange rate and a more prudent macroeconomic policy mix that can reduce the probability of a balance of payment crisis and reduce external pressures that are often the reason for the economic volatility in Pakistan.

The press release emphasizes the challenges as Pakistan remains vulnerable to the pandemic related shocks, changes in international financial markets, volatility in geopolitical tensions and most importantly, the lack of implementation of structural reforms. The press release highlights the importance of a focus on strengthening economic productivity and improving the environment to attract investment and private sector development. The implementation of reforms will be necessary to ensure higher and more sustainable economic growth. With improvements in the ability to participate in international trading activities likely to be linked to economic productivity, it is essential to analyze the current trend in trade patterns.

The exports in the first seven months of FY22 was $17.7 billion, 24% higher than the value reported in the same period previous fiscal year, according to the data published by Pakistan Bureau of Statistics (PBS). Imports were reported at $46.5 billion, 58.8% higher than the value in the same period previous fiscal year. The trade deficit was at $28.8 billion, 92% higher than the value reported in the previous fiscal year. At the time of writing, the State Bank of Pakistan (SBP) published the data on trade till December 2021. However, this is about $4.4 billion less than that reported by the PBS in December 2021. The value for exports in the first six months are roughly the same across the two reporting agencies, there is a difference of more than $4 billion in the imports reported by two agencies. PBS reports the movement of goods across borders, while SBP reports payments for imports in FOB terms.

The trade numbers continue to point towards the challenges on the external front. However, similar to the findings of the IMF, the cause for the rising challenges on the external front are likely due to domestic inefficiencies in the economy that result from poor allocation of resources and the over-dependence on imports to produce goods that are sold in the domestic market rather than converted into exportable output. The lack of competition and innovative activities must be corrected.

Approximately of the imports in the first half of FY22 was in petroleum products. This increased 113.4% in dollar value year-on-year over the same time period previous fiscal year. The quantity of finished petroleum products increased by 29%, suggesting that the major increase was driven by rising prices of petroleum goods. However, the quantity of petroleum crude decreased by a meagre 0.7%, while its value increased by 82%. Imports of machinery group has increased by 39.5%, with imports of textile machinery being a main factor as it increased by 88.2%. Imports of mobile phones have increased by 16.2%, while other apparatus has increased by 53.6%. Imports of transport group has doubled year-on-year, with imports of both CBUs and CKDs increasing. In the food group, imports of palm oil increased by 65%, again driven by price as its import quantity dropped. In the textile group, imports of raw cotton were up in terms of dollar value and quantity, while imports of synthetic fibre increased in dollar value but decreased in quantity terms.

Given that Pakistan relies on imported synthetic fibre to improve its mix of artificial and man-made fibre in production of textile goods, a decrease in the quantity of imports of synthetic should raise alarm bells as it may inhibit diversification within the industry. Further, it is important to note that the exports of knitwear have increased by 35.2%, but the quantity has decreased by 0.7%. The gain could likely be from the higher prices offered to textile exporters relative to the previous year. However, the fall in quantity must raise concern as it will eventually impact the sustainability in export growth, particularly as knitwear contributes to more than of textile exports from Pakistan.

A more prudent macroeconomic policy mix can reduce the probability of a balance of payment crisis and reduce external pressures.

In September 2021, the SBP had indicated in its monetary statement that the economic vulnerability was now less exposed to pandemic related crisis and that macroeconomic policies should shift towards sustaining growth rather than supporting its recovery. Keeping in view the shift in economic policies, the government must focus on sustaining export growth levels and improve the competitiveness as exporters face pressure from regional competitors who themselves have recovered from the pandemic induced shocks in the previous two years.

Therefore, this will imply ensuring that Pakistani exporters are able to obtain the most effective mix of inputs by accessing different markets and ensuring that the destination markets continue to purchase Pakistani products. This requires not only better trade facilitation but also enhancing the capabilities of the exporters. It is imperative to redefine the export growth strategy in order to boost it much beyond the current levels.