Lately, visiting the State Bank of Pakistan website for updating myself on economic data is becoming nightmarish; having been sceptical for a long time about the benefits of free trade, it seems my worst fears seem to be materialising. I have always maintained that GDP as an economic indicator is a farce, which apparently means that all the related benchmarks such as tax to GDP and debt to GDP are also a load of bull and that the trade balance is the single most important indicator for determining the health of a nation. And on this count, Pakistan is faring horribly.
Pakistan’s cumulative trade deficit on goods and services since 2008 is more than a whopping US$ 170 billion, and it continues to increase every year, primarily, because our exports first stagnated and now seemed to be collapsing. The reason we avoided going over the financial cliff was not because of any words of wisdom included in IMF program; our heroes were the hard-working Pakistanis abroad who kept sending their hard-earned wages to their loved ones back home. Worryingly, due to the mess created in the Middle East, our overseas brethren are being forced to return for which the government is perhaps ill prepared, resulting in a slowdown and expected steep fall in workers’ remittance. An argument, which in my opinion is used deliberately to cloud this debate on the trade deficit, that petroleum products constitute more than 70 percent of our import bill is absolute hogwash. Even when oil was trading at over US$ 100 a barrel, our fuel bill was under 35 percent of total imports. On the other hand, if oil prices had not collapsed internationally, the entire IMF program would have been able to achieve absolutely nothing.
But we still don’t seem to be learning our lessons; ignore GDP and focus on international trade. The only way to pay for imported goods is by exporting goods, albeit in three different time dimensions; there is no other way. What do I mean by different time dimensions? Well, when we sell State Owned Enterprises, we are in effect exporting goods produced in the past; and rest assured, you privatise because you are forced to because of your careless past spending binge, all other theories and reasons given for privatisation are a cover up. I plan to take up this assertion in a later article. On the other hand, when you borrow to pay your import bill, you are exporting goods to be produced in the future. I agree that all this investment in infrastructure is great for the economy, but at the end of the day,infrastructure is only an enabler. If we don’t produce exportable goods and services, CPEC might never become a game changer.
According to the SBP, our deficit because of trading goods and services for the six-month period July 2016 to December 2016, is a record-breaking US$ 12.5 billion. And just to reaffirm what was asserted above, the dollars to partially finance this largesse came from workers’ remittance of US$ 9.5 billion remitted during this very period, which nonetheless in absolute terms have declined when compared with last year. Ironic that our workers are funding the elite’s imports of cars, phones, branded products and food items consumed at global chains, and oh yes let’s not forget luxury travel in foreign airlines. On the other hand, imports of petroleum products were less than US$ 5 billion out of a total import bill of US$ 25.6 billion; under 25 percent.
If necessity had been the yardstick, we might have avoided this level of alarmingly problematic deficits; but nope, we weren’t watching or probably were gullibly sucked so deep into the globalisation dogma that we have been fully blinded. Article-XII of General Agreement on Trade and Tariffs 1994 states, “Notwithstanding the provisions of paragraph 1 of Article XI, any contracting party, in order to safeguard its external financial position and its balance of payments, may restrict the quantity or value of merchandise permitted to be imported, subject to the provisions of the following paragraphs of this Article”. Without getting into details, undeniably the principle that balance of payment needs to be safeguarded is recognised by WTO; hence the argument that Pakistan cannot control imports is again an uninformed statement. In our case, we have been fighting a war for the rest of the world, which alone should have been sufficient excuse to curtail imports and raise tariffs.
Another argument generally floated in a debate of free trade is that if we set up barriers, others will follow suitin retaliation and our exports will collapse. Well, our exports are already in free fall, so how bad can things get? And in any case, for every dollar we export, we pay roughly two dollars in imports, so why trade for the sake of trading and lose money in the process?
An interesting observation, if you analyse the last six months of trade, is that amongst all our trade relationships, we have surpluses, almost exclusively, barring Afghanistan and Bangladesh, with the Western Bloc countries. And amongst the Western countries, by far the largest surplus of US$ 0.8 billion was with America. The harsh reality is that we cannot afford discontinuation of trade with the West for any reason; a new administration in America bent upon reviewing trade pacts and bringing jobs back home is a game changer in the opposite sense.
And guess which country did we have the largest trade deficit with during the last six months; our best of friends China, approximately US$ 2.7 billion. Before everyone starts jumping about arguing that this is because of CPEC, our trade deficit with them for the fiscal year 2014, before CPEC, was more than US$ 3 billion. And this is the documented trade only, if informal cross-border trade, smuggling, is brought into the equation, according to estimates the deficit perhaps doubles. Some best friends! Why can’t they import more from us rather than dumping Chinese products in Pakistan?
We also run massive deficits with UAE and Saudi Arabia, but that is because of our oil imports, and in any case, the deficit is balancedby the fact that most of our overseas workers are employed in these two countries, and hence a sizeable chunk of remittances originate from that place. Foreign workers are principally export of Human Resources and hence technically form part of the trade balance, but this is not an argument to shift jobs out of Pakistan by marginalising domestic industry. Anytime you import goods, you are exporting skilled jobs outside Pakistan, while our diaspora primarily comprises unskilled workforce. Additionally, overseas employment is temporary, while industry shutting down back home is a permanent disaster.
The final fallacy in support of free trade is consumer choice, which is ridiculous. You do not borrow to pay for gas at home or rent a luxury car when you can only afford to travel by public transport. Why does it make sense at a national level? More on why consumers should have limited choices in a developing nation in another write-up; for now, let’s conclude with something to think about: why are we trading anyway?
The writer is a chartered accountant based in Islamabad. He can be reached at [email protected] and on twitter @leaccountants