Report On International Trade

Principles of Macroeconomics

Submitted to: Mr. Zia Abbas Rizvi Project Report on

International Trade Trade deficit- A case of Pakistan

Prepared by Ghulam Mustafa Memon (10107) Ahmed Mujtaba (6775)

1

Abdul Qayoom Shah (10150) Madeha Malik (10714)

Abstract In most countries, International trade represents a significant share of gross domestic product (GDP). While international trade has been present throughout much of history, its economic, social, and political importance has been on the rise in recent centuries. Industrialization, advanced transportation, globalization, multinational corporations, and outsourcing are all having a major impact on the international trade system. Increasing international trade is crucial to the continuance of globalization. International trade is a major source of economic revenue for any nation that is considered a world power. Without international trade, nations would be limited to the goods and services produced within their own borders. In this report we talk about a case of Pakistan imports and exports and a significant change in trade deficit. Pakistan's trade performance recorded a significant improvement during FY09. Country's trade deficit recorded a large 18.5 percent contraction during FY09, breaking from the rising trend witnessed since FY03. This was due to a 12.9 percent fall in imports during FY09 which outpaced the impact of 6.7 percent fall in exports during this period. In the wake of the global recession and a fall in international commodity prices, some slowdown in country's import and export growth was expected during FY09. The impact of these developments, however, was intensified by a broad range of domestic factors -especially the energy crisis that led to a greater than expected fall in both exports and imports during this period. Resultantly, exports and imports both recorded a broad based decline during FY09.

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Review of Literature The global situation: The global financial crises has severely hurt global aggregate demand, decimated liquidity in the international capital markets, and reduced investor confidence. Consequently, world trade, investment and industrial production fell sharply from the last quarter of 2008. These developments adversely impacted social indicators globally, as unemployment is on rise and poverty is likely to increase in developing economies. Indeed, falling demand for emerging economies exports directly translated into slowing GDP growth. This impact was heightened by the uncertainty (and increasing risk aversion) in international credit markets. The countries with substantial macroeconomic imbalances were particularly badly hit, as the access to international capital flows was abruptly curtailed, and their governments were often not in a position to initiate counter-cyclical fiscal or monetary policies. Current Scenario of Pakistan According to the Statistics Division, in September 2009, exports rose 2.62 per cent to $1.52 billion and imports fell 4.31 per cent to $2.42 billion over previous month. A reduced trade deficit is a very encouraging sign for the country which is struggling to safeguard its economy from external shocks as a result of current account deficit, a factor that has disturbed the country’s financial balance sheet for the last couple of years. The FBS data show that trade deficit during September 2009 narrowed by 55.9 per cent over September 2008. In the first quarter (July-September) of fiscal year 2009-10, the trade deficit dropped by 44.74 per cent (or $2.50 billion) to $3.09 billion compared to $5.59 billion in the corresponding period of last year. Imports stood at $7.58 billion during the period under review while exports totaled $4.49 billion. During the same period of last fiscal, imports stood at $10.81 billion and exports $5.21 billion. That depicted a 29.85 per cent decline in imports and 13.86 per cent fall in exports.

During FY09, exports declined by 6.0 percent against commendable increase of 18.2 percent in the previous year. A large part of this fall stemmed from contraction in textile exports amid

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shrinking external demand due to global crises and severe domestic power shortages. However, strong increase in rice and cement exports moderated the overall fall in exports during the period. The increase in the former was principally driven by bumper rice crop while the increase in latter mainly stemmed from strong demand from Middle East and some African countries. More than two-third of the 10.5 percent contraction in imports during FY09, on the other hand, was due to lower petroleum group, telecom group and raw cotton imports. Fall in petroleum group, in turn, was largely (95 percent) caused by fall in oil prices while lower telecom group imports mainly owed to imposition of custom duty on cellular phones and increase in GST on the telecom sector. Likewise, lower raw cotton imports largely reflected better domestic cotton crop and lower domestic demand. In Nov-June FY09, steep fall in import prices, subsiding aggregate demand pressures and significant exchange rate depreciation all contributed to a sustained contraction in imports. This fall in imports, supported by strong growth in remittances, allowed a large contraction in the current account deficit. In fact, the improvement in current account deficit would have been even higher, were it not for a fall in foreign exchange earnings, and had there not been a fall in exports during the period. Fall in exports, in turn, probably owed substantially to the severe power shortages and unstable security situation, which further aggravated the impact of slowing demand in Pakistan‘s major export markets. The above figure depicts the historical perspective which portrays the effect of imports and exports on current account deficit for last 19 years including GDP growth rate and oil prices.

Pakistan has little to gain from the system because of handful of its exportable products, resultant of lack of diversification in export destinations as well as export items offered. Accordingly Pakistan is facing a persistent trade deficit. It has eroded country’s forex reserves and also put pressure on the value of currency. Pakistan, on account of its increasing trade imbalances, is

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unable to invest in hi-tech machinery and equipment to adhere to demanded standards of products under preferential trade agreements already signed and to be signed with industrially rich countries and also countries in South and South East Asia. Besides above high cost and delays from inefficient practices at Customs, ports and transportation agencies prevent the desired/envisaged enhancement in export volume. Challenges for our exports The principle reason for growing disconnect between the evolving global market structure and our export performance is the erosion of the competitiveness of Pakistan’s traditional exports in general and the country’s weakness in diversifying its product and market mix. The challenges faced by Pakistan exports include: -Infrastructure deficit, particularly in energy. -Poor innovation and technological infrastructure. -Low labor productivity. -Low levels of manufacturing value addition. -Little Foreign Direct Investment in manufacturing and exportable sectors. -Anti-export bias in taxation. -Increasing costs of exports as compared to imports. -Lack of product and geographical diversification in exports. - Absence of economies of scale in the production processes, especially in the Small and Medium Enterprise sector which accounts for a vast majority of the enterprises in the country. Our Imports Imports registered a negative growth of 1.5 percent in July-February 2009. The imports stood at $ 23.8 billion as against $ 24.1 billion in the comparable period of last year. The growth in imports reflects impact of substantial fall in oil and food imports in monetary terms and these two items were responsible for 80 percent of additional imports bill last year. Import compression measures coupled with massive fall in international oil prices have started paying dividends and imports witnessed marked slowdown during the last two months.

The monthly import bill on account of petroleum has lost one-third of its value. The additional import bill during the period July-February 2008-09 on account of petroleum and wheat was just above the $1.0 billion. This massive addition is neutralized by massive negative contributions from non-food and non-oil imports. Other positive contributors to additional import bill are power generating machines which have added $435.2 million, agricultural chemicals other than fertilizer ($213.4 million), and electrical machines & appliances ($92 million). The non-food and non-oil imports showed negative growth of 7.8 percent which implies on drastic import compression.

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The unit value of import of crude oil is still depicting 45 percent increase in the period JulyFebruary 2008-09. The unit value of soya been and palm oil are also showing massive increases of 62.9% and 22.8%, respectively in this period. This clearly reflects the time lag involved in translating the benefit of lowering of prices in the international market into the import bill. The consumer durables, transport group and telecom sectors are responding positively to the import compression measures. The current growth in imports is coming from only a narrow range of products and corrective measures are needed accordingly in these items.

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Introduction Pakistan has bilateral and multilateral trade agreements with many nations and international organizations. Pakistan’s exports are highly concentrated by commodity; currently the majority of exports originate in the textiles and apparels sectors. The bulk of Pakistan’s trade is with countries outside of South Asia. For example, textile exports are concentrated in China, Bangladesh and Hong Kong. Leather exports are concentrated in Hong Kong, Italy and Republic of South Korea. Vegetables and fruits are mainly exported to the United Arab Emirates, India, Japan and Sri Lanka. Fish and fish products are exported to China, Japan, UK and USA, while surgical instruments are largely destined for Germany and the USA. This pattern reflects in part Pakistan’s specialization in products that are also exported by its neighbors. Recent analysis by the World Bank indicates the potential for greater trade with India, notably in light manufactured products (for example bicycle components and fans). Fluctuating world demand for its exports, domestic political uncertainty, and the impact of occasional droughts on its agricultural production have all contributed to variability in Pakistan's trade deficit. By looking at trade performance of Pakistan for the year 2008-09, we have witnessed unprecedented economic downturn especially in our major markets of export i.e. USA & EU. Consumption decreased in the developed world and the global trade shrank by 9%. Global recession adversely affected exporting countries and Pakistan is no exception to it. Exports from Pakistan declined to US$ 17.8 billion as compared to previous year’s exports of US$ 19.1 billion. Imports also witnessed a relative decline and fell by 13% as Pakistan’s imports during 2008-09 stood at US $ 34.9 billion as compared to US $ 40.4 billion in 2007-08. During 2008-9, the export of Textiles, which account for around 54% of Pakistan’s total exports, dropped from US$ 10.6 billion to US$ 9.6 billion. The major losers in this regard were Readymade Garments, which dropped by 21.7%, Cotton Yarn, which dropped by 15%, Bed linen, which dropped by 10.2%, Art Silk & Synthetic Textiles, which dropped by 22.1% and Cotton Fabric by 4.0%. The exports of finished leather and leather manufacturers dropped from US$ 1.1 billion to US$ 0.8 billion registering a drop 24.5%. The Rice exports have registered an impressive growth from US$ 1.84 billion to US$ 1.99 with an increase of 8.2%. Engineering goods also registered an increase of 26.1% from US$ 211.3 to US$ 266.4 million. In this regard, the major contributors have been the specialized machinery, transport equipment, electric fans etc. The export of Jewelry also rose from US$ 213.4 million to US$ 288.4 million, registering an increase of 35%.

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The dismal performance of textile exports can be attributed, beside their structural issues, to rising cost of production owing to increase in domestic cotton prices and stifling power shortages. In addition, the deteriorating law and order situation in the country also resulted in reported diversion of export orders to other countries. Poor quality of cotton on account of contaminated cotton issue has also adversely affected the export of spinning industry. Furthermore, textile exports appear to have also suffered from the slowdown in the US economy that has been the largest destination for Pakistani exports during the last few years. In addition, Pakistan also faced tough competition from China, India, Bangladesh and Turkey in the EU market for textile apparel. In the case of bed wear exports; its exports to EU market are rising after the reduction of anti-dumping duty on this category from the previous level of 13.1 percent to 5.8 percent. Taking a long term view of Pakistan’s export performance over the last ten years, Pakistan’s share in the global market, according to WTO data, has declined by more than 1/3 to 0.13% in 2009 from 0.21 % in 1999. During the last few decades, the global trade has undergone a major structural change as far as the product composition and geography of trade is concerned. There has been an explosion of non textile manufactured exports at the global level. Whereas, the share of non-textile manufactured in Pakistan’s exports has gone down from an already low figure of US $ 5.83 billion (25.08%) in 2007-08 to US $ 3.12 billion in 2008-09 (17.32 %). At the same time, our competitor economies, particularly in Asia, have significantly enhanced their share in non-textile manufactured. As far as the Textile and Clothing sectors are concerned, the rate of growth in Clothing is much higher than Textiles in the international market. Whereas, Pakistan, managing to keep its market share in Textiles to an extent, has been slow in benefiting from the expansion in higher value Clothing sector. The world faces an unprecedented energy crisis, record high prices of agricultural commodities, and global competitive markets for manufactured products. We are short of energy, low in agricultural productivity and have a small and uncompetitive manufacturing base that is responsible for stagnant exports – a major cause of the trade deficit.

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Methodology: The following steps were taken to execute the study:  A comprehensive study & research to get the maximum data from various internet sources, our instructor, books and research articles.  It was a group project report. Each member participated by reading articles and different material. We then discussed every article and compiled successfully the final report.  Many research journals and articles were thoroughly reviewed.  Articles published in various newspapers like Daily Dawn, The news, business recorder, jang etc and magazine Pakistan & Gulf Economist were thoroughly reviewed.  Other sources like business plus, articles by economists and research analysts were also used.  Statistical data from official websites like statistical bureau of Pakistan, State Bank of Pakistan, Trading development authority of Pakistan, Export bureau, and others.  This report covers all the facts and figures to show the trade deficit of Pakistan and position year by year.

 The format of this report is according to what our instructor told us in class, all the heading are covered in our report.  Graphs and statistical data are enclosed at the end of the report.

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Conclusion A reduced trade deficit is a very encouraging sign for the country which is struggling to safeguard its economy from external shocks as a result of current account deficit, a factor that has disturbed the country’s financial balance sheet for the last couple of years. The merchandise trade deficit improved by 6.9 percent and declined from $12.5 billion in JulyFebruary FY08 to $ 11.6 billion in July-February FY09. The substantial decrease of 42.0 percent in imports outstripped otherwise significant decline of 17.9 percent in export growth which caused the trade deficit to improve by 6.9 percent. This is the first ever improvement in the last three years or so. The trend has been portrayed in the above graph.

While this trend of decline in import is welcome trend the slower growth in exports is, however, worrisome and cannot be easily dismissed as a byproduct of global recession because most of our exportable commodities are relatively cheaper and, as such, their demand is largely inelastic in the world market. Apparently, Pakistan could have earned more from its exports if the authorities had succeeded in removing some of the major bottlenecks like energy shortages and poor law and order situation, which is affecting the overall economic activity very adversely in the country. In addition, it would have been much more preferable if the recent reduction in trade deficit could have resulted primarily from higher growth in exports rather than the decline in imports. Curbing imports drastically is the only option as a short terms measure. As long-term measures, they suggest an all out well coordinated plan to improve our exports for which they are convinced, there is vast potential. In order to restrict the level of imports the Government has taken some measures. It has imposed additional duties on more than 370 items and State Bank has enhanced LC margin to 100% on import of Luxury items. These measures are not enough in view of the seriousness of the problem; they maintained and suggested a total ban on import of all non-essential items at least for a period of one year. They are of the view that through prudent exploitation of national resources and planning we can boost our exports to cut our trade deficit drastically. There is a vast potential and exports surplus available in textiles, carpet, leather and 10

sports

goods

provided

necessary

incentives

to

these

industries.

Agriculture is another sector with huge unexploited potential. A country that is currently footing $5 billion bill on food imports could in fact reduce it to $1.5 billion, plus export agricultural products of around $5 billion in one year if the government pays proper attention to this sector. The legal system relating to agricultural marketing is in favor of trade and industry that marginalizes the farmers. This is the reason that high commodity rates have not benefited farmers much. Productivity of most of the major crops of Pakistan farmers is much below the global standard. Another neglected sector from export point of view is the services sector, which has big potential. Export of services accounts for about 30% of exports worldwide. However, unfortunately in our country the Ministry of Commerce has no much expertise in this area.

Policy Recommendation The following points are recommended to improve trade deficit of Pakistan: 11

 Pakistan needs more measures to cut on its petroleum imports either through looking into alternative fuel sources or demand management. The import of edibles also needs to be looked into carefully and may be given priority for domestic substitution.  Government need to steps to enable the firms and entrepreneurs to become globally

competitive and export those products which are valued more in the international market. This would involve structural transformation in the form of increased mobility of labor and capital across sectors and change their production processes and ultimately the content of exports.  A total ban on import of all non-essential items at least for a period of one year  Deepen and diversify export markets particularly our major trading partners US and EU

as well as countries with which Pakistan has signed a free trade agreement such as China, Malaysia and Sri Lanka.  Promote trade in services which globally have a more stable demand pattern and are less

prone to detrimental external shocks seen for the case of commodity trading. Acquire and upgrade technology level so that Pakistan can move away from the traditional and low value export products.  Rationalize the tariff policy keeping in view the structure of value addition in various industries.  Promote agro-processed exports  Devise a medium term strategy to boost exports of gems and jewellery.  Provide incentives to facilitate technology acquisition, adoption, replacement with the twin objectives of energy efficiency and environmental protection  Pakistan does not have a comprehensive energy policy; it has made limited progress in

agricultural productivity; its main industry – textiles – is struggling to compete in global markets; its real interest rates remain negative; and the domestic capital markets do not have the depth to mobilize capital to meet its development needs. So Pakistan needs to focus on all these issues.  The government must try to develop a consensus among the provinces on water and hydro power issues. Regardless of the reservations of small provinces, they all must come to an agreement on what our long- term needs are.

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Reference 1

Trade Development Authority of Pakistan http://www.epb.gov.pk/v1/statistics/index.php

2

State Bank of Pakistan http://www.sbp.gov.pk/ecodata/index2.asp#external

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State Bank of Pakistan Annual Report for 2008-2009 3

The Federal Bureau of Statistics http://www.statpak.gov.pk/

4

Newspapers & Magazine

http://www.brecorder.com.pk/ http://www.thenews.com.pk/daily_detail.asp?id=202564 http://www.thenews.com.pk/blog/blog_details.asp?id=234 http://jang.com.pk/thenews/nov2008-weekly/busrev-17-11-2008/index.html http://www.nation.com.pk/pakistan-news-newspaper-daily-english-online/Business/10Mar-2009/Trade-deficit-imports-decrease-in-Feb http://www.pakistaneconomist.com 5

Pakistan’s Economy: The regional comparison. http://thefinancialdaily.com/NewsDetail/81470.aspx

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Pakistan’s Trade Policy, 1999–2008: An Assessment by Mirza Qamar Baig, PIDE.

7

External trade sector is worrisome! http://finance.kalpoint.com

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http://www.opfblog.com/2596/pakistan-economic-survey-paints-a-dismal-picture/

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http://forum.pakistanidefence.com/lofiversion/index.php/t59133.html

10

http://web.worldbank.org

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Report on Trade Related Challenges Facing Exporters in Pakistan by PIDE

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Article: Continuity or change in policy? By Yousuf Nazar http://www.dawnnews.tv/wps/wcm/connect/dawn-content-library/dawn/in-papermagazine/economic-and-business/continuity+or+change+in+policy

13 Article: July trade deficit narrows by 31 per cent By Mubarak Zeb Khan Wednesday, 12 Aug, 2009 Dawn news 14

Article: Trade with neighbours by Mohiuddin Aazim Monday, 17 Aug, 2009 Dawn news

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Article: Trade deficit down 44.74pc in July-Sept By: Imran Ali Kundi | Published: October 11, 2009 Dawn news

16 Report by Merrill Lynch Research Report by Muzammil Aslam, Economist, KASB Securities. 10 July 2008 14

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Appendix Table 1: Import and Exports of Pakistan 25 years

16

17

Table 2

18

Chart 2 Textile sector of Pakistan

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Table 3 - Structure of Exports July-February Particulars

2007-08

A. Food Group B. Textile Group C. Petroleum Group D. Other Manufacturer E. All Other Items Total Non-Textile Share of Textile Share of Non-Textile

2008-09

1,425.1 2,099.3 6,854.0 6,470.4 730.8 589.2 2,232.7 2,444.4 417.9 552.4 11,660.5 12,155.7 4,806.5 5,685.3 58.8 53.2 41.2 46.8

($ Million) Change Absolute % Contribution to Increase/ Increase in (%) Decrease Exports 47.3 674.3 136.2 -5.6 -383.6 -77.5 -19.4 -141.6 -28.6 9.5 211.7 42.7 32.2 134.5 27.2 4.2 495.2 100.0 18.3 -

Table 4 - Structure of Imports July-February Particulars A B C D E F G H I.

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Total Imports Food Group Wheat Unmilled Machinery Group Power Gen. Machine Petroleum Group Textile Group Agri Chemicals Group Fertilizer Consumer Durables Road motor Vehicles Telecom Raw Materials Others Non-Food, Non-Oil

2007-08 24,137.9 2,511.3 369.0 3,497.9 647.9 6,340.2 1604.7 3,653.6 625.5 3,259.2 855.8 1,427.9 2,192.2 1,862.4 15,286.4

2008-09 23,770.5 2,749.6 838.0 3,698.0 1083.1 6,921.2 1037.4 3,528.9 365.7 2,026.5 622.8 716.3 2,096.3 2,165.0 14,099.7

($ Million) Absolute % Cont. of Increase absolute % Change increase -1.5 -367.4 100.0 9.5 238.4 -64.9 127.1 469.0 127.7 5.7 200.1 -54.5 67.2 435.2 -118.5 9.2 581.0 -158.1 -35.4 -567.3 154.4 -3.4 -124.7 33.9 -41.5 -259.8 70.7 -37.8 -1,232.7 335.5 -27.2 -233.0 63.4 -49.8 -711.6 193.7 -4.4 -95.9 26.1 16.2 302.6 -82.4 -7.8 -1186.7 258.1

Non-Oil Imports

17,797.7

16,849.3

-5.3

-948.3

Table 5 PAKISTAN TRADE AND BUDGET DEFICIT 1976-2008 (Rs in millions)

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S.No

Years

Trade Deficit

Budget Deficit

01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31

1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1989 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

9212 11718 14835 19463 23519 24264 33212 33709 39368 51799 11354 29076 34106 45658 42384 32832 58161 81615 52751 69719 102834 139688 63178 75622 90114 87930 73683 62078 188789 368991 726317

13065 13261 14416 18250 16127 16637 19076 27940 27712 39416 44586 48529 63352 62068 62840 89193 89971 107525 92179 105352 137839 156588 204560 179177 196600 164900 202150 177400 162000 216967 325300

323.0

32 33

2007 2008

822494 1304153

502011 683400

Table 6 Export Data – Commodity wise S. NO .

COMMODITY BY COUNTRIES

2005-06 EXPORT

A

TEXTILE & GARMENTS CATEGORY

1

RAW COTTON

2

COTTON YARN

3

YARN OTHER THAN COTTON YARN

4

COTTON CLOTH

5

KNITTED CROACHED FABRICS

6

READY-MADE GARMENTS

7

KNITWEARS

8

EXPORT

2007-08

% SHARE

EXPORT

% SHARE

68,151

0.41

50,226

0.30

70,122

0.37

1,382,874

8.41

1,428,041

8.41

1,300,968

6.83

36,996

0.22

67,193

0.40

46,792

0.25

2,108,183

12.81

2,026,388

11.94

2,010,611

10.55

51,378

0.31

63,568

0.37

71,666

0.38

1,309,990

7.96

1,384,775

8.16

1,452,477

7.62

1,751,494

10.65

1,961,048

11.55

1,872,030

9.83

TEXTILE MADE UPS.

3,043,582

18.50

3,069,651

18.08

2,440,569

12.81

a) BED WARE

2,038,064

12.39

1,995,899

11.76

1,903,501

9.99

b) TOWELS

587,641

3.57

602,547

3.55

613,065

3.22

c) TEXTILE MADE UPS (EXCL.TOWEL&BEDWARE)

417,877

2.54

471,205

2.78

537,068

2.82

38,902

0.24

69,060

0.41

71,050

0.37

200,308

1.22

419,724

2.47

410,308

2.15

9

TENTS AND CANVAS

10

ART SILK AND SYNTHETIC TEXTIL

B

OTHER CORE CATEGORIES

1

RICE

1,157,814

7.04

1,125,819

6.63

1,836,063

9.64

a) RICE BASMATI

479,616

2.92

556,320

3.28

1,068,862

5.61

b) RICE OTHER VARIETIES

678,198

4.12

569,499

3.35

767,201

4.03

1,157,8 14

2

2006-07

% SHARE

LEATHER PRODUCTS

7.0 4

1,125,8 19

6.63

1,836,063

9.64

1,014,948

6.17

911,065

5.37

1,114,760

5.85

a) LEATHER

292,394

1.78

356,884

2.10

415,261

2.18

b) APPAREL & CLOTHING

501,786

3.05

388,115

2.29

528,154

2.77

c) LEATHER GLOVES

151,459

0.92

132,589

0.78

161,168

0.85

69,309

0.42

33,477

0.20

10,177

0.05

1,014,94

6.

5.

1,114,7

d) OTHER LEATHER MANUFACTURES 8

17

911,06 5

37

60

5.85

3

FOOTWEAR

145,220

0.88

1,144,516

6.74

124,135

0.65

4

SPORTS GOODS

343,329

2.09

288,383

1.70

302,723

1.59

5

CARPETS

257,263

1.56

233,334

1.37

216,620

1.14

6

SURGICAL GOODS,MEDICAL

163,078

0.99

190,789

1.12

261,072

1.37

7

PETROLEUM PRODUCTS

825,654

5.02

858,379

5.06

1,259,330

6.61

8

MOLASSES

43,592

0.26

28,085

0.17

54,681

0.29

22

Table 7 Cumulative Imports by Major Countries

23

(Millions)

24

Table 8 Cumulative Exports by Major Countries (Million Rs)

25

Table 9 26

Chart 3

Chart 4 27

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