Trade deficit: by default or by design?

Trade balance deficit is being considered as the biggest challenge for the current government. This is for simple fact that Imports are roughly fifty billion dollars whereas exports are two billion dollars for the previous year. By current trend, this deficit is going to soar by the day. Bailout through entering in program with IMF is considered the only way forward at the moment.

One expert familiar with the trade deficit issues termed this approach as “get more loans to payback the loans”. No matter how serious is the trade deficit and its impact on common person, is it manageable without IMF. What are the short terms and long term solutions are main issues that require an objective analysis.

Imports make the goods expensive, minimize chances of creating jobs or funds for the public welfare projects as foreign exchange reserves get exhausted .Its relevant to mention chunk of imports are of POL, edible oil and product thereof .Then comes machinery, chemicals and commercial imports of non-essential items. Can we curtail POL bills? Answer is both yes and no. In Sri Lanka, wheat and tobacco are not produced. Over the years, this country has grown the habit of getting carbohydrates from potatoes in the absence of wheat whereas the imported cigarettes have been made too expensive to be affordable.

Many such examples are available in East Europe as well. Big challenges are countered through bold step. One step could be to make petrol too expensive so people develop habit of travelling by public transport provided the government makes it easily available. Simultaneously, heavy tariff is levied on all automobiles exceeding 1800 CC. On edibles oil, Pakistan needs to gradually divert to locally manufactured maize and cottonseed oil.

We continue to thrive in protective regimes for capital goods industry and are content with assembling auto and electronic sectors. Such protection needs to be abolished and let them compete in international markets. It may take time but eventually the industry will learn to survive but hard way.

Government tariff regimes on commercial imports have led to mushroom growth of informal sector. The FBR has levied different tariff for industrial and commercial importers on industrial raw material. The net result is that industrial importers sell in local markets after paying 3% less than commercial importers. Strange is such approach when end user is the industry then why different rates, no matter whosoever imports. Secondly, commercial importers are asked for 3% value addition tax at import stage, which is their final tax liability. It is no hidden secret that such imports are under-invoiced but local sales are made at actual price without any check since they are exempt from the audit. Levy of additional duty on non-essential items has hardly reduced quantum of imports but no lesson has been learnt. The fact remains that all branded chains such as Bass, Gucci, Versace etc. are not exporting to Pakistan; even very marginal import of perfumes and cosmetics from France. In fact, these brands are copied in China from where they are imported to Pakistan.

Emails with such businesses suggested that government should not allow import of branded products without proper licenses from their manufacturers. It was also revealed that leftovers, counterfeit or expired stuff are also imported where new stickers are embedded on packing material. Checking this will drastically reduce imports of foot-wear. Make it point not to create another regulatory body but sub-let it to the renowned international 3rd party for checking origin of goods and their quality.

Our exports profile is lop-sided as is primarily of Textiles. We may note that as per WTO data, Pakistani textiles has around 7.5% share in global trade and in textiles around 60% is of garment. Whereas Pakistan in Textiles exports yarn, bed--wares and only 20% hosiery items. Share of garments is marginal. The reason, group leader value added sector explained that garment are made from man-made yarn which is very expensive. Reasons notwithstanding, question arises if such export can helps in bridging the trade deficit?

Over the years, In fact, government have been giving subsidy for R&D and now Duty Draw-back of Local Taxes and Levies (DLTL). In fact textiles operates in zero sector and government offered this facility for upgrading and research. .But this sector hardly spends much on up gradation as well on research. A ground check in this sector revealed they have not employed any professional with a few exceptions. One prominent investor from abroad was in for surprise to learn that a unit exporting billion of rupees has not employed any engineer in the unit.

Pakistan exports orchards and rice. Many foreign experts wondered why basic commodities’ byproducts are nor manufactured. Study of different countries has indicated that sugarcane sector is making ethyl alcohol, citric acid, lactic acid, cattle feed, oxalic acid, baker’s yeast, mono sodium glutamate, torula yeast, lysine, acetone-butanol-alcohol. Similarly papers, boards and chemicals are developed. Many countries have introduced energy conservation measures to save as much as possible, even after using it as captive fuel though pooling up the surplus from a number of factories for supporting a bagasse-based energy industry. Similarly, Wheat byproducts such as Oat and Bran are obtained by an industrial milling process. Instead of exporting raw fruits, its pulp can fetch seven times more value.

Informal sectors operate through cash transactions. On question how to counter cash transactions keeping in view that FBR recent past measures failed to curb it, “ lack of innovative approach as well capacity to deliver are the key reasons” remarked a giant corporate entity. Discussion with various businesses suggested SBP should restrict cash transaction more than Rs10 million only by Tax -filer. This will result in 1) broadening of tax-base, 2) minimizing informal sector and making difficult to mis-declare the value. It was found that massive dead investment is in bearer instrument is on rise. Simultaneously, the State Bank should restrict the sale of such instruments especially prize bond against proper CNIC and its purchase and sale should be through authorized dealer. Similarly only Tax Filer should only be entitled to travel in Economy Plus and other privileges classes in airlines.

There seems to be consensus that exports are in dire need ;for drastic diversification as well paradigm shift from basic textiles and commodities to value added sectors and linking Incentives with, research and consistent up gradation and innovative techniques. A vibrant industry will attract professional entrepreneurship. Resultantly Pakistan may see quantum jump in exports. Such compact strategy can minimize imports, growth in capital goods industry, which has 60% shares in global trade. Only in this way, the bridge between imports and export can be curtailed.

The key to success is time-tested formulae: the will and capacity to do the right things and selecting the right team to get it done.

Author is former member of FBR management.

@Chafqat