Pakistan Economy: Trade Deficit Narrows by 41%
Pakistan Economy Update: Trade Deficit Shrinks by 41% Amid Import Curbs. In an encouraging development, Pakistan’s trade deficit has significantly reduced by 41% to $25.8 billion during the first 11 months of the fiscal year. However, this decline in the trade gap did not translate into improved exports, which experienced a drop despite a 40% currency devaluation.
The Pakistan Bureau of Statistics (PBS) reported on Friday that the gap between imports and exports narrowed down by $17.6 billion or 41% from July to May in the current fiscal year. Imports decreased by $21 billion or 29.2% compared to the same period last year, amounting to $51.2 billion.
Import Projections Revised Downward
To address the country’s low foreign exchange reserves, the State Bank of Pakistan (SBP) issued guidelines instructing banks to prioritize imports and open Letters of Credit (LCs) accordingly. These import restrictions have postponed a potential default but have also negatively impacted the economy. Despite the government’s claim of 0.3% economic growth during the fiscal year, independent experts and PBS data strongly dispute this. Initial projections estimated overall imports at around $65.6 billion, but revised estimates suggest a decrease to approximately $55 billion for the current fiscal year.
Pakistan Economy in Turmoil: Import Restrictions, Inflation, and Stalled IMF Program
While import restrictions have alleviated pressure on foreign exchange reserves, which currently stand at $4 billion, they have also led to a rise in inflation, reaching 38%, the highest since Pakistan’s inception. The stalled International Monetary Fund (IMF) program remains a significant failure of the Pakistan Muslim League-Nawaz (PML-N) led coalition government. Ninth review talks with the lender concluded on February 9, and the Ministry of Finance has been claiming that a staff-level agreement will be reached “very soon.”
Exports Contract by 12.1%, Annual Target Not Met
According to the PBS, exports contracted by 12.1% from July to May, totaling $25.4 billion. The annual export target was set at $38 billion, but only 67% of the goal was achieved in the first 11 months. Revised estimates indicate that exports may amount to less than $28 billion. The decline in exports can be attributed to various factors, including devastating floods, removal of energy tariffs, low private sector borrowing, and a challenging global economic environment, as outlined in a working paper presented by the Planning Commission.
The inability to boost exports has hindered the government’s efforts to narrow the gap in its external financing needs. This trend is worrisome as exports continue to decline despite significant currency devaluation over the past year.
May Exports Decrease by 17%
In May, exports amounted to $2.2 billion, a decrease of nearly 17% or $433 million compared to the same month last year. This raises concerns about the effectiveness of the government’s strategy to boost exports, which has primarily involved subsidizing wealthy exporters who pay minimal income tax while benefiting from subsidized inputs. Although the Finance Ministry estimates that exporters earned an additional Rs1.5 trillion over the past three years due to currency devaluation, exporters argue that they do not benefit from subsidies and suffer losses incurred by other electricity consumers.
On a year-on-year basis, imports dropped by almost 37% to $4.3 billion in May after a temporary phase that saw imports dip below $3 billion in April.
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