The Pakistan Bureau of Statistics (PBS) on Wednesday released data which showed that the trade deficit widened to $25.5 billion in the first six months (July-December) of current fiscal year due to a significant surge in imports that outpaced the increase in exports. The deficit was $13.2 billion (or 106%) higher than the comparative period of previous fiscal year, it added. The annual trade deficit target of $28.4 billion has become irrelevant due to higher imports.
Imports during the first half increased two-thirds to nearly $40.6 billion. In absolute terms, the imports grew $16.1 billion, according to the PBS.
The central bank has introduced a cash margin requirement (CMR) for more imported goods besides curtailing consumer financing to ease the import pressure. However, these measures have failed to contain imports that have risen to a new peak.
PBS said that exports of goods remained at $2.7 billion in December, higher by 16% (or $374 million) over the same month of previous year. The trade deficit widened 85% year-on-year to $4.9 billion in December 2021.
The central bank’s foreign currency reserves are constantly on the decline and dipped further to $17.9 billion, as the impact of a $3 billion Saudi Arabian loan is being diluted.
The State Bank of Pakistan on Wednesday further amended foreign exchange regulations requiring exporters to bring export proceeds.
Economic growth in FY22 is now expected toward the upper end of 4-5% CAD rose to $0.8 billion in July and $1.5 billion in August, reflecting both vigorous domestic demand and high global commodity prices
Remittances remained strong, growing by 10.4% during July-August
Exports also performed reasonably well (averaging $2.3 billion per month Rupee depreciated by 4.1% since July Many other currencies depreciated recently
In FY21 primary deficit declining by around ½ percentage points to 1.4% of GDP Improvement largely stemmed from strong growth in tax and petroleum development levy Deficit contained owing to significant deceleration in non-interest expenditures In the first two months of FY22, FBR revenue grew by over 40 percent (y/y) Federal PSDP releases rose to an all-time high for this period, equivalent to nearly 44% of their budgeted amount for the full year.
Any unforeseen slippages in the fiscal stance would further bolster domestic demand, imports and inflation. Historic cuts in policy rate and introduction of SBP Covid-related support packages help private sector Private sector credit grew by more than 11% during FY21
Consumer loans (mainly auto finance and personal loans) followed by working capital loans Inflation fell from 9.7 percent (y/y) in June to 8.4 percent in both July and August Core inflation also fell in both urban and rural areas in August.
Nevertheless, prices remains relatively elevated, with month-on-month increases of 1.3% in July and 0.6% in August. Inflation expectations of both households and businesses have drifted up and wage growth has picked up Inflation outlook largely depends on the path of domestic demand, notably fuel and electricity, as well as global commodity prices.
MPC will continue to carefully monitor developments affecting medium-term prospects for inflation, financial stability and growth and stands ready to respond appropriately.
Remittance inflows during August 2021 were mainly sourced from Saudi Arabia ($694 million), United Arab Emirates ($512m), United Kingdom ($353m) and the United States ($279m).
Currency depreciation in Pakistan has always been “involuntary”. The authorities did not let the currency depreciate when an adjustment was due. The rupee was overvalued for a long time. Historically it has slipped only when the authorities were unable to control the supply of dollars any longer. Public debt has soared as a result; the foreign exchange reserves have been depleted. A strong rupee has also caused the trade and current account deficits to grow.
Under these conditions, the gains form depreciation are hard to come by. The sudden plunges in the value of the rupee cause panic, further compromising the gains. The impact of depreciation on foreign trade and related sectors depends on three broad factors. One, inflation in other countries particularly main trading partners; two, domestic prices; and three, overall macroeconomic conditions and policies, particularly during the depreciation phase.
The first two factors determine the real effective exchange rate (REER) and thereby external competitiveness. A higher external competitiveness leads to higher gains. The size of gains depends on the nature of exports and imports and the capacity to export. The third factor determines the extent to which depreciation will help boost the economic activity (thus enhancing the capacity to export). If any of these factors is missing, the potential gains from depreciation may be compromised.
The decline in trade and current account deficit was mainly supported by contraction in imports. It is because of this that no significant impact of depreciation on employment and poverty was observed. The fault does not lie with depreciation. The adverse impact of the factors highlighted above outpaced the potential gains from the depreciation.
Any assessment of impact of depreciation on exports, imports and employment must consider the overall state of economy and policies. It must account for two counterfactuals. One, what would have been the situation of exports, imports, trade and current account deficits if rupee was held at the 2017 value? Two, what would have been the gains from depreciation if rupee was allowed to adjust before the balance of payment crisis?
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