Reasons behind external account woes identified

Pakistan Business Council (PBC) has said that premature deindustrialization has led to reduction in the contribution of exports in GDP and reduction in Pakistan’s share in global exports. The PBC, while analyzing Pakistan’s economic, trade and manufacturing data which is a part of Making in Pakistan (MiP) initiative, stated that developing countries like Pakistan need to have manufacturing contribution of at least 28 to 30 percent of GDP before its share in the economy starts to decline. In Pakistan’s case, the highest contribution of manufacturing in GDP was 14.8 percent in 2008, since then it has been in a constant decline, clocking at 12.1 percent in 2018. Competitor countries however, are seeing an increase in global exports leading to an improvement in per capita income and a general improvement in the lives of their citizens.

According to the PBC, the economy in the last five fiscal years, witnessed a period of relatively high economic growth, averaging 5.21 percent while the nominal GDP surpassed $ 300 billion benchmark in FY 17, peaking at $ 313 billion in FY 18. However, most of the growth generated was on the back of the services sector as during the last ten years, the sectoral share in GDP for the agriculture and industrial sectors have shrunk while the services sector’s contribution has increased, creating a situation which promoted the premature deindustrialization of the country. The level of inflation in Pakistan dropped from a high of 13.7 percent in FY 11 to just 3.9 percent in FY 18, predominately on the back of falling food inflation which was at 1.8 percent in FY 18 down from 18 per cent FY 11.

However, Pakistan’s external account position has worsened in the last five years. Exports have been on a decline since FY 15 onwards while imports have been registering a YoY increase causing the balance of trade deficit to increase to an unsustainable level of $ 37.6 billion in FY 18. Pakistan’s exports are highly concentrated where around 60 percent of the country’s exports are textile. As textile exports stagnated, overall exports also faced a decline. On the other hand, imports have continued to increase. In the last fiscal year, Pakistan had the highest import level in its history at $ 60.87 billion. The trade in services shared a similar trend with exports being far out-weighed by imports. However, the deficit in trade in services is far lower than that of goods. The country has had a trade deficit in recent history, however a significant part of the deficit was covered by ever-increasing workers’ remittances. From FY 18 onwards, however, inflow of remittances stagnated, hence, the balance of payments have recorded increasing deficit.

The country has been running a budget deficit since at least FY 03. However, the scale of the budget deficit has increased over the years. From a deficit of just Rs 18 billion in FY 03, it increased to Rs 2.26 trillion in FY 2018, implying that the growth in Pakistan’s fiscal expenditures have far outpaced growth in revenues. Tax revenues in Pakistan are more dependent on indirect collections as opposed to direct tax collections. While there has been an increase in tax revenues, it has not been sufficient to match the increase in expenditures. On the expenditure side, more than three-fourth of it is spent on account expenditures while one-fourth in accounted for by development expenditures and net lending to the provinces. As of FY 18, expenditures stood at Rs 7.49 trillion while total revenue was Rs 5.23 trillion.

The share of manufacturing sector in the country has been declining from FY 18 onwards, from a high of 14.8 percent in FY 08, it dropped to 12.1 percent in FY 18. This implies that the relative significance of the sector in the economy has reduced. This trend can be accredited to a number of reasons with the main reason appearing to be the cost structure for industry which is not competitive with regional competitor countries having a similar economic and industrial structure.

The costs of electricity, gas and labour in Pakistan are as much as 2.6 times higher than those in competitor countries. Other than that, the level of investment in the economy is on the decline with a rate of just 16.42 per cent in FY 18. Due to high consumption in the economy, savings are low which in turn limit the level of investments. Other than that, the tax rates are high in Pakistan and the influx of cheap imports has also led to disincentivizing domestic manufacturing, forcing a paradigm shift in the economy away from manufacturing.

Talking about the impact of deindustrialization on the economy, PBC says that due to premature deindustrialization, the economy both on the domestic as well as on the external front, has been negatively impacted. The country’s exports have stagnated while exports of competitor countries such as for Sri Lanka, Vietnam, Bangladesh and India have increased by as much as 11 times. Moreover, the share of exports in GDP has declined, as well as Pakistan’s contribution in the world exports.

Industry in the country has also felt the impact of deindustrialization with increasing reliance on imports and an ever-increasing share of imported products in domestic consumption. For industries like that of footwear, the volume of exports has reduced over the past decade while the volume and value of imports into the country has increased by more than 2.5 times in the same time period.

Published in Business Recorder

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