February 12, 2018
All efforts of the incumbent Pakistan Muslim League-Nawaz (PML-N) government to control the yawning trade deficit have failed to deliver. The PML-N regime tried to slap tariff and non-tariff barriers to achieve the desired results, however the method failed due to some apparent factors.
The first and foremost factor was finalisation of China-Pakistan Economic Corridor (CPEC) as it was done in haste and without proper homework.
There is need to do some soul searching at this stage when the pace of CPEC is expected to slowdown in the wake of the ongoing political transitions happening in both Pakistan and China.
The change of government will happen in China, although, the ruling Communist Party will continue to rule over the country. In Pakistan, there will be three governments assuming rein of powers including the existing PML-N, the upcoming caretaker setup, and finally the government coming into power after winning the next general elections.
It is the wish of the PML-N led regime to inaugurate ML-1 (Mainline one) from Peshawar to Karachi as expressed by Minister for Interior Ahsan Iqbal, but so far Chinese are non-committal in finalising this deal up to May 2018.
Although, there is no iota of doubt that CPEC can be termed a fate changer for Pakistan, its sequencing was done in the wrong manner. The policy makers miserably remained unable to visualise the challenges arising out in the shape of trade and current account deficits at least for the short and medium-term periods. Secondly, they failed to come up with solutions to cope with these challenges.
The result of these failures is visible for all and sundry now, as the trade deficit has widened to $21.546 billion just in the first seven months (July-January) period of the current fiscal year against $17.351 billion in the same period of the last fiscal year 2016-17. The surge is a whopping 24.18 percent in the trade deficit.
In January 2018 alone, the trade deficit touched its peak and climbed to $3.636 billion, the highest registered in a month in Pakistan’s history. The trade deficit was projected to go close to $40 billion for the current fiscal year when compared against $32.4 billion in the last financial year.
What went wrong in sequencing the economic corridor?
When the PML-N finalised the CPEC with its Chinese counterparts after coming to power in 2013, following the general elections, Pakistan’s growth was at its lowest ebb. It was hovering in the range of 2.5 percent to three percent on average annually. However, with the help of the International Monetary Fund (IMF) programme, the government restored macroeconomic stability. Using the IMF programme, it was able to attain certain stability and set the direction for achieving higher growth trajectory, in the range of five to six percent.
Under the CPEC, Pakistan requested China to help overcome the energy shortages by investing in installation of power plants and removing infrastructure bottlenecks through early harvest programme.
This request had some repercussions, which the policy makers should have known beforehand. Investment in these two sectors – power and infrastructure – was bound to cause surge in imports, especially in shape of machinery and raw materials. It was a blunder on part of the Pakistani negotiators who made no efforts to convince the Chinese to relocate their industries in the existing economic zones. They should have urged the Chinese side to simultaneously shift some of the industries to the existing zones in Hattar and Karachi, as well as some parts of Punjab. This could have helped boost exports without wasting too much time.
Moreover, the government should have taken the declining exports as a red flag and should have declared an emergency to achieve a major jump in exports. It is an unforgivable blunder on part of the PML-N government that exports, instead of increasing in the last four years have declined.
Another mistake made by the Pakistani policy makers was not convincing the Chinese to revise investment arrangements, whereby relocating their industries required for manufacturing power plants or at least solar plants to these economic zones at the first stage.
Keeping the exchange rate unchanged also was an issue. Who was responsible for doing that? Why was the government unable to resolve the refunds issue of exporters, which caused the liquidity crunch? And now, who is responsible for not sequencing the CPEC correctly?
All responsible must be held accountable by the government, because it was not the job of China to visualise the structural weaknesses of Pakistan’s economy.
The fallout of wrong policies would certainly impact the CPEC too however, and as a result the overall relations of both the countries too.
To avert the looming and clear cut crisis on the economic front, Pakistan’s top political and military leadership would have to jointly request China for providing balance of payment support to bridge the yawning trade and current account deficits. Or else, Islamabad would be left with no other option but to knock the door of the IMF again. It would be the last resort to avert the crisis.
The political and military leadership have to keep in mind that it was none other than China that advised Islamabad to go back to the IMF in 2013, when the country had plunged into macroeconomic crisis. Therefore, chances of a different outcome this time around may be expecting too much from China.
There is no harm in exploring different options at this stage though. Many independent economists are already expressing their apprehensions that the IMF may take a different view this time around in view of the tweet of US President Donald Trump at the very outset of this calendar year 2018.
Among major other factors, Pakistan’s trade imbalance has further worsened because of rising petroleum and furnace oil prices in the international market, rampant surge in imports of liquefied natural gas (LNG) and continuous hike in imports of machinery and raw material to fuel the growth trajectory of Pakistan.
Pakistan’s Federal Secretary for Commerce Younas Dagha, who recently led the country’s delegation for holding the 9th round of talks with China for revising the free trade agreement (FTA), said the trade deficit had risen because of surge in fuel imports and some other factors. He reminded that the exports also jumped up by achieving 11 percent growth compared to the last year.
Dagha said Pakistan and China were able to evolve consensus for revising the whole of FTA which was expected to be signed next month after getting the approval of the federal cabinet.
Time has come to send an SOS to China for helping Islamabad overcome the lingering crisis, forging consensus among all political parties on the charter of the economy for the next 10 to 15 years. Half-hearted steps would not resolve our problems on permanent basis.
This time window dressing will not solve our problems as we have always done in the past. Consensus on structural reforms is a much needed requirement of this hour to find long-term solutions.
Prime Minister Shahid Khaqan Abbasi should make efforts and take desired steps to correct the economy immediately, because the downslide is going to accelerate in months and quarters to come.
Keeping the economy on the backburner anymore will further aggravate the pace of the looming crisis and there will be no other loser but Pakistan and its poor people.
The writer is a staff member