Pakistan’s persistent trade deficit has been a major impediment to economic development. The deficit stood at $48.35 Billion in the 2022 fiscal year but has declined to $27.55 Billion this year. Presently, Pakistan exports goods and services worth $35.21 Billion while imports are estimated to be $60.13 Billion. Exports include textiles valued at $16.3 billion, food items worth $4.7 billion, chemicals & pharmaceuticals at $1.4 billion, leather products at $627 million and sports goods at $461 million. The principal imports are crude oil & petroleum products priced at $17.5 billion, agricultural and fertiliser inputs quoted at $8.25 billion, food items primarily cooking oils costing $7.96 billion, and machinery estimated at $4.4 Billion. A portion of the trade deficit is structural, such as petroleum for automobiles and machinery not produced domestically, but the imbalance may be mitigated via myriad strategies to substitute imports and increase exports.
To remedy the persistent trade discrepancy, let’s start by addressing the main factors contributing to the problem. The first issue is the small export base of the country. Pakistan only exports a limited range of products and is heavily reliant on sectors such as textiles and agriculture, thereby limiting the country’s ability to increase exports. Pakistan needs to diversify its export base by identifying new sectors and products that have the potential to generate higher income. This will require state support for Pakistani firms entering new markets as well as investment in Research and Development. For instance, the global sports equipment market is estimated at $160 Billion. Pakistani manufacturers could explore new opportunities in sports such as American Football, Rugby, Netball, Lacrosse, Australian Football, Baseball and Golf. If Sialkot’s manufacturers can produce Cricket Bats and meet 70% of the world’s Football demand, they can also explore opportunities in other sports.
Political turmoil and protests in the country exacerbate problems, hinder investment and prevent successive governments from formulating a coherent trade policy.
Low productivity complicates matters for Pakistani firms competing in international markets. This is a consequence of poor infrastructure, a scientifically inept workforce with inadequate STEM skills and limited access to finance and technology. Addressing these would necessitate a coherent government strategy since higher productivity levels will decrease production costs and increase exports. Pakistan needs to invest in infrastructure to improve the efficiency of its export and import processes. This includes investment in transportation, communication, energy, and water supply networks. Improving infrastructure will reduce the cost of production and transport, making Pakistani goods more competitive in international markets. Practical examples include hydropower projects to generate electricity at 3.5 to 5 cents / kWh. This would be followed up with investments in the Railways for cheaper transport of goods e.g. upgrading the ML – 1 and ML – 2 lines. Financial institutions need to be encouraged to pursue a policy of greater financial inclusion, which will benefit small and medium enterprises that often struggle will access to capital. Special economic zones (SEZs) need to be prioritised to encourage export-oriented industrialisation. Providing firms operating in SEZs with quality infrastructure, utilities and support services will attract foreign investors by creating a favourable environment for firms to manufacture exportable goods.
In the education sector, provincial governments should prioritise STEM subjects. The IT and Technology sector could have become a success story but successive governments ignored subjects such as Computer Science, Artificial Intelligence, Data Science, Biotech and bio-engineering. Therefore, it should not come as a surprise that the country is not prepared for a future where Artificial Intelligence, Web 3, Virtual Reality, advancements in Biotech and the 4th Industrial Revolution determine the trajectories of nations. There is no substitute for an educated and competitive work force, and this necessitates concentrating on STEM subjects.
Moving on, Pakistan is heavily dependent on imports, particularly for energy and capital goods. The country has a limited capacity to produce prerequisites domestically, implying it must import them. An example is the $120 billion spent on Petroleum imports over the past decade. A calculated policy of import substitution would reduce imports. The Federal government needs to identify sectors and products that have the potential to be sourced domestically and provide support to firms entering these markets. This will require investment in infrastructure, education and training, and access to finance and technology. Establishing a $10 billion Petroleum Refinery at Hub to meet refining demands, or even exceed capacity, would save the country $2 billion annually, or $20 billion over a decade.
Pakistan would only have to import Crude Oil and subsequently refine it for domestic use. Demand for Petroleum products could be met locally and tertiary petroleum products could be exported, as China and India are currently doing. The ensuing savings would be enough to finance the construction of the Yulbo, Pattan and Tungus Dams for a cumulative generational capacity of 7,400 MW. Likewise, Pakistan has fertile land that could be used for the cultivation of Olives, soybeans and Palm, and subsequently, the production of edible oils. This would decrease the $7.57 billion spent annually on the import of 4.5 million tons of edible oil.
The devaluation of the Pakistani rupee has also contributed to the trade deficit by making imports more expensive and reducing the country’s purchasing power, which in turn has a further negative impact on domestic demand and GDP growth. Pakistan needs to strengthen its currency to reduce the cost of imports and increase domestic purchasing power. This will require sound macroeconomic policies, including fiscal and monetary policies, that promote economic stability and growth. Expenditure on future projects will have to be determined by economic feasibility, development priorities and efficient outcomes, not based on gaining votes from economically uninformed constituents. For example, the $1.55 Billion spent on the Orange Metro Line in Lahore would have been better spent on the 700 MW Azad Pattan Dam, which would have generated cheap energy at 4.5 cents / kWh. The economic growth resulting from cheap electricity would have been enough to finance multiple metro line projects.
Political turmoil and protests in the country exacerbate problems, hinder investment and prevent successive governments from formulating a coherent trade policy. Any mayhem in the country, whether by political parties or religious organisations, will scare off foreign investors, including Chinese manufacturers attracted by the China – Pakistan Economic Corridor. Political stability is a prerequisite if Pakistan desires to attract foreign investment to finance its trade deficit. On the governance side, the state struggles with a cumbersome bureaucracy and red tape. Prospects of legal disputes and a hectic dispute resolution framework further disincentivise investment. Pakistan needs to create an attractive investment climate, including a stable political and economic environment, favourable policies and regulations, and establish special courts for investors. Improving the rule of law, reducing corruption, enforcing contracts and enhancing transparency are of vital importance. A strong governance framework will create an environment that is conducive to investment and economic growth. Foreign investment can help Pakistan develop new export sectors and products, improve productivity levels, and reduce its dependence on imports.
Lastly, Pakistan needs to reduce trade barriers to increase exports. The country needs to improve its trade facilitation measures, including customs procedures and regulations, to reduce the cost and time of exporting. The Federal government should negotiate trade agreements with friendly countries to improve market access for Pakistani exports in Saudi Arabia, UAE, Qatar and Oman. Pakistan should take advantage of its strategic location, which makes it a gateway to the Central Asian Republics, China, India and the Middle East. Promoting regional trade, and developing transport links and trade agreements with these countries could increase trade flows and increase exports.
Pakistan’s persistent trade deficit is a major challenge to the country’s economic development. Despite the plethora of problems and myriad challenges the country faces, all of these issues can be systematically addressed and rectified. Future governments need to diversify the export base, improve productivity levels, promote import substitution, reduce trade barriers, strengthen the currency, attract foreign investment, develop special economic zones, improve infrastructure, improve governance, and promote regional trade. These strategies will require significant investment and policy reform, but they are essential for Pakistan to achieve sustainable economic growth and development.
The writer is a freelance columnist.