Trade deficit

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Pakistan’s trade deficit has expectedly widened sharply during May, the ministry of commerce data showed on Wednesday. The gap between what the country sells to the world and what it buys from it ‘ballooned’ last month by 134pc to $3.4bn from $1.5bn a year ago. That the nation’s import bill for the month shot up by a hefty 77.8pc to $5.1bn during the month is attributable to last year’s lower import base when the import bill dropped to $2.9bn on the back of the drastically reduced domestic demand because of the Covid-19 pandemic and consequent economic shutdown to halt the spread of infections. The more than 25pc drop in the monthly exports also contributed significantly to the widening trade gap. The trade deficit has been increasing since December primarily because of faster growth in imports than in exports. Overall, the gap has expanded by 29.5pc to $27.3bn in the 11-month period between July and April from $21.1bn in the same period last fiscal year. Imports rose by 22pc to $49.9bn and exports by 14pc to $22.6bn. But the question is: should we be worried about the rising gap between what we import and what we export?
There’s not much to worry about the rising import bill. This was expected. Two factors have played a major role in the increased import bill this fiscal from last year. First, the import of food, including wheat and sugar, and cotton have pushed imports more than was estimated at the beginning of the financial year. Next year, these imports are expected to moderate on better domestic crop yields. Two, the revival of economic activities and a surge in the demand for Pakistani exports has driven up imports of raw materials as well as machinery for technology replacement and capacity expansion. Moreover, the country’s current account remains in surplus in spite of the widened trade deficit as the surging remittances have largely offset the impact of increased imports. The external sector is unlikely to face any serious financing challenge in the next one to two years if the remittances continue to grow at the same pace. But the long-term balance of payments stability requires the government to boost exports through product and market diversification. Additionally, it must tweak its policies and learn to respect contracts it makes with investors to give confidence to investors for attracting longer-term, non-debt creating foreign direct investment flows to sustainably grow the economy.