Call to tackle widening trade deficit before it becomes economic crisis

Islamabad: The latest evidence of a sharp rise in Pakistan's international trade deficit during the first two months of this year, may not immediately provoke an economic crisis for the south Asian country.

But within this trend lie substantial reasons to be concerned over the sustainability of a widely publicised two-year-old economic recovery.

According to the government's federal bureau of statistics, the trade deficit for the first eight months of Pakistan's financial year (July-June), widened to more than $7.4 billion, up from just $3.47 billion for the same period, a year ago.

Some analysts fear the trade deficit for the financial year which ends in June could soar to a record $10-$11 billion which has never been experienced before.

Among the largest expenditures on Pakistan's list of annual imports lies the country's rising bill for oil imports which this year would cost at least $6 billion.

But many analysts believe, the widening deficit is also driven in significant measure by the sharply rising cost of imports required for a growing economy, especially the import of machinery and equipment to meet the demand from the country's industrial sector.

For now, Pakistan remains in the comfortable position of being able to borrow on international markets.

In fact, the government's plans for yet another launch of an international bond later this year continues to be closely watched by many bankers and analysts who are keen to track Pakistan's main economic trends.

Many analysts believe, Pakistan's liquid foreign currency reserves of just over $12 billion are sufficient enough to allow the country to meet its balance of payment obligations including the need to finance its trade deficit.

Of equal significance are the remittances from Pakistan's expatriate workers who every year send up to $4-$5 billion which helps to meet part of the country's global obligations.

As yet, no one is entertaining the thought of an economic crisis hovering around Pakistan in spite of the record rise in the country's trade deficit. But there are two elements which are vital to appreciate the quality of economic performance.

On the one hand, there is indeed some evidence of an economic slowdown setting around Pakistan with some analysts forecasting this year's economic growth to remain in the range of 6 to 6.5 per cent of gross domestic product, down from over 8 per cent last year.

The relative slowdown is widely assumed to have been precipitated at least in part by the effects of high global oil prices which have driven up industrial and business costs in Pakistan.

This trend has coincided with increasing anxieties among the Pakistani public over rising inflation. While the government and the central bank are known to have taken measures for tackling recent inflationary trends, the level of inflation so far conceded by Pakistani authorities remains significantly below what is the scale of popular lament.

The government's failure to back such innovative ideas as the establishment of economical public transport has only prompted an increasing number of middle class Pakistanis to seek a bank loan for buying a car.

And since there is plenty of cash in the banking system, clients who put up a ten per cent collateral for a car purchase find instance takers among bankers. Aren't there some obvious pitfalls driving up the widening trade deficit that need to be tackled before Pakistan's present day challenge starts becoming a crisis?

- The writer is a Pakistan-based journalist.