First let me explain what is Balance of Trade (BOT) or Trade Deficit and why its important to consider as a key economic indicator for the macro economy of Pakistan. We hear this jargon from multiple sources on media and hence will first explain it for our audience before explaining its evolution in last 8 years starting from Pakistan Muslim League government and moving on to Pakistan Tehreek e Insaf government.
What is Balance of Trade and Why it is important Economic Indicator?
Balance of Trade is the gap between a country exports vs imports or in mathematical terms, it is country exports minus imports for any given time period. Positive value mean that the country is net exporter (trade surplus) and negative value means the country is net importer (trade deficit)
Balance of Trade is the single largest component of a country’s Balance of Payment. Balance of Trade is also used to measure the relative strength of a country’s economy. Country that have high trade deficit borrows money to pay for the gap while countries who have positive Balance of Trade, lends money to deficit countries. However, trade deficit or trade surplus is not the only indicator of countries economic strength or weakness as it must be considered in context of other economic indicators.
Balance of Trade or Trade Deficit – Pre and Post PTI Government
Pakistan Tehreek e Insaf took control of Federal Government of Pakistan back in August 2018. In below graph, we will look at the pre and post August 2018 Balance of Trade of Pakistan. We have kept the graph in USD instead of PKR as it will incorporate the impact of Pak Rupees devaluation into account. Moreover, we have started the graph from June 2012 when PMLN formed government till Jan 2020 to see the full evolution of Trade Deficit between PMLN and PTI governments.
As you can see in the above graph, Balance of Trade of Pakistan in June 2012 was USD 881 million. The exports of Pakistan in June 2012 were USD 2.6 billion and imports of Pakistan were USD 3.5 billion i.e Trade Deficit of USD 881Mn. The trade deficit of Pakistan increased to USD 2.1 billion in July 2014 i.e. more than 110% mainly due to increase in Pakistan imports i.e. USD 4 billion. Exports of Pakistan shrinked in July 2014 to USD 1.9 billion.
However, this was just the beginning of Pakistan Balance of Payment crises resulting from PMLN flawed economic policies.
Pakistan Historic Trade Deficit under PMLN Government in 2017-18
In Budget year 2017-18, Pakistan Balance of Trade reaches record deficit as it was the last year of the Pakistan Muslim League Nawaz (PMLN) government. The trade deficit in the 12 months of FY 2018 stood at USD 37.7 billion with imports standing at record USD 60.9 billion. In July 2018, Pakistan also faced one of the highest monthly trade deficit in its entire 70 years history i.e. USD 5.5 billion. This was the worst nightmare for any country which has limited avenues to support its Balance of Payments.
To support with the Balance of Payment crises, PMLN proceeded to acquire highest amount of loans and that too at relatively very high interest rates.
PTI reduces Pakistan Trade Deficit at record rate in first 18 Months
When Pakistan Tehreek e Insaf took over power in August 2018, it took various steps to reduce the record trade deficit. Pakistan could not afford to survive with such high trade deficit and hence drastic steps were required. The brunt of the government measures was faced by imports as exports are much more time consuming to increase and require long term steps. Imports, on the other hand, are easy to control by increasing import duties and taxes. The result was ban on imported vehicles, increase in prices of imported items i.e. food, fashion, home furniture and fixtures etc. This was not a very popular move as people were accustomed to imported items and sudden increase in their prices or their non availability was felt by a limited but vocal segment of the society. All the businesses associated with their imports, also felt the impact on their incomes.
As of Jan 2020, balance of trade deficit in PTI regime for first half of FY 20 reduced to USD 11.6 billion or 30% from FY 19 i.e. USD 18.3 billion. The International Monetary Fund (IMF) has projected Pakistan trade deficit to reduce to USD 24.3 billion by end of FY 2020. The month of Jan 2020, Trade Deficit was recorded at USD 1.87 billion which is half of the level recorded in July 2018 i.e. USD 3.5 billion. This is no less a feat of any government.
Increase in exports is only way forward for Pakistan
Exports of Pakistan have not shown any solid results in last 8 years. However, increase in exports is the only way to reduce the trade deficit beyond current point. The economic team of PTI understand the importance of export oriented industries and therefore have given them various incentives till date. A more comprehensive set of incentives are in the pipeline as Imran Khan led government is in the process of finalizing Pakistan Strategic Trade Policy Framework (STPF). The framework is expected to look beyond the traditional zero rated exports sectors.
What suggestion do you have regarding the balance of trade deficit PTI? Feel free to leave the comment below.