Impact Of Imports On Economy

Impact of Imports of Economy of Pakistan

Dated: 18-November-2008 Topic: Impact of Imports of Economy of Pakistan Submitted to: Mr. Abdul Salam Course: Economic Indicators of the Business Group Names: Abdul Hameed (BM-25011)

Institute of Business and Technology (BIZTEK)

Introduction

 Imports play vital role in enhancing exports, these imports could be in the form of raw materials or machineries; both are used in the manufacturing sector.  It is expected that imports of consumer goods have direct contemporaneous association with exports, while imports of capital goods affect exports with two period lags because machinery imported by the producers first setup and then start production, therefore, it starts impacting exports  Long-term economic growth of a developing country depends on the imports of capital goods and machinery that accelerates economic productivity.  In order to maintain the trade surplus, total imports should be less then total exports.  But Pakistan is victim of trade deficit since long time. The trade deficit in the fiscal year 2006-07 is $ 9.9 billion against the deficit of $ 8.4 billion during 200506. The invisibles balance is anticipated to register a surplus of $ 2.8 billion. On this basis, the current account deficit is likely to be around $ 7.1 billion (5.0 percent of GDP) for the year 2006 -07.

Source: Annual Report SBP-2006-07

•

Introduction Cont’ Increase in exports results the increase in nominal GDP,

therefore the demand in imports also increases.

• Pakistan’s economy is highly dependent upon the imports like industrial inputs, machinery, fuel and essential food items. • The final sector in the circular flow of income model is the overseas sector which transforms the model from a closed economy to an open economy. The main leakage from this sector are imports (M), which represent spending by residents into the rest of the world.

Objective of study • The purpose of this study is to find out, why Pakistan faces trade deficit since long. • Either Pakistan imports more capital goods or consumer goods. • Construct some solutions to overcome the problems of trade deficit. • For this purpose imports of goods and services have been estimated using annual data from 1970 to 2007.

Historical background Pakistan has always been victim of trade deficit.

See Table

Historical background Cont’ Imports Trends Imports Trends

40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000

Years

07 20

05 20

03 20

20 01

99 19

19 97

95 19

93 19

91 19

89 19

87 19

85

0 19

Imports (in Million $)

45,000

Historical background Cont’ Import to Exports Trend Exports & Imports Trends

Exports & Imports (in Million $)

45,000 40,000 35,000 30,000 25,000

Imports

20,000

Exports

15,000 10,000 5,000

Years

Show table

20 07

20 05

20 03

20 01

19 99

19 97

19 95

19 93

19 91

19 89

19 87

19 85

0

Imports (Capital & Consumer goods) • The growth in the country's trade deficit slowed to 17.8 percent during FY07 as compared to 87.0 percent in FY06. Consequently the trade deficit widened to a record US$ 9.9 billion in FY07, against US$ 8.4 billion for the previous year. • The main contribution to the sluggish import growth of 8.1 percent in FY07 was from the deceleration in the growth of petroleum and machinery imports. In addition, imports under food, transportation and metal group declined. However, the slowdown in import growth was offset by the lower export performance, as exports grew by only 3.2 percent in FY07 compared with the FY06 growth of 14.3 percent.26

Break-up of imports • Food Group Against an extraordinary growth of 46.5 percent during FY06, the food group imports declined by 6.8 percent during FY07. (39.7)

• Machinery Import During FY07, the machinery import growth fell to 8.1 percent from 40.6 percent growth (32.5)

• Petroleum Group During FY07, the petroleum group imports increased by a nominal amount of US$ $ 0.66 billion as compared to extraordinary increase of US$ 2.6 billion during FY06 (see table). As a result, growth in petroleum group import decelerated to 10.0 percent during FY07 as compared to 66.9 percent growth in the same period of last year. (10)

Break-up of imports Cont’ • Metal Group The metal group imports declined by 5.2 percent during FY07 as against extraordinary growth of 52.1 percent in last year.

• Other Imports The other imports increased by 13.3 percent during FY07 on the top of 19.0 percent growth during last year. The main items which contributed in this strong import growth included musical instruments & parts, professional scientific & control equipments, coal, coke & briquettes, oil seeds & oleaginous fruits, organic chemicals, feeding stuff for animals and manufactures of metal necessities. See table

Break-up of imports Cont’ 30 25 20 15 10 5 0 Percentage

Food Group Machinery Petroleum Metal Chemical Other

Review of literature • Badar(2006) using the time series data from 1973-2005, estimated import intensity for export production in Pakistan. The results of the study indicates a long run relation between exports and imports of intermediate and capital goods. The study also concludes that country’s exports are more sensitive to imports of raw-material rather than capital imports. • Akhtar and Malik (2000) estimated bilateral price and income impacts on Pakistan’s trading performance with its four major trading partners [USA, UK, Germany and Japan]. Using quarterly data for the period 1982-1Q to 1996-4Q applied three stage least square technique.

Empirical results • The results, however, draw that the import of raw materials and capital goods have an important role in boosting the overall export level of the country; whereas, the country’s exports are more sensitive to import of raw material rather than capital imports.

Conclusion  This study indicates that in medium to long-run, it is the structure of imports, particularly capital and raw materials, which should be monitored closely.  Since this will help the policy-makers to focus on importing more of those items which are directly used into export production, thereby increasing the export capacity of the country and reducing the excess pressure on trade imbalances.

Suggestion & Recommendation

• To overcome the trade deficit, there is a need to analyze the different policy options to control trade imbalances. In this context, restricting imports through tariff measures might not be desirable given the country’s obligation under WTO commitments. Thus, any slowdown in trade imbalance could only be achieved through appropriate exchange rate and interest rate policies. • However, what is equally important for the policy-makers is not to significantly weaken the ongoing growth momentum.

Pakistan Reserves

WTO is an organization • Established: 1 January 1995 Membership: 146 countries (as of July 2003), • 3/4th membership comprises • Developing countries (self elected) • Functions: • Administering WTO trade agreements • Forum for trade negotiations • Handling trade disputes • Monitoring national trade policies • Technical assistance and training for developing countries • Cooperation with other international organizations

WTO principles •

The WTO trading system would be

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without discrimination – (MFN and National treatment to all);

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freer – with barriers coming down through negotiation;

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predictable – bound tariffs

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more competitive – by discouraging “unfair” practices such as export subsidies and dumping products at below cost to gain market share;

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more beneficial for less developed countries – by giving them more time to adjust, greater flexibility, and special privileges

Trade Liberalization According to Khan and Zahler (1985), “trade liberalization may promote growth from the supply side but, if the balance of payments worsens, growth may be adversely affected from the demand side because the payments deficits resulting from liberalization are usually unsustainable and not easily rectified by relative price (real exchange rate) changes”.

Impact of WTO in Pakistan • Trade liberalization effected positively the following sector • Agriculture (cotton, Citrus fruits and etc) • Textile Industry • Telecommunication

Trade Labialization

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