The ongoing economic crisis in Pakistan has been shaped largely by the huge balance of payments deficit. Today, the country’s imports are worth nearly thrice its exports, leading to a sharp depletion of the country’s foreign reserves. Why have Pakistan’s exports declined in recent years, and how has it contributed to the current economic crisis?
Overview of Exports
Manufactured goods have continued to comprise a major portion of Pakistan’s exports, accounting for about 73 per cent of the total export value in 2016-17. The textile industry, in particular, remains integral to Pakistan’s international trade. Various textiles-related commodities, such as cotton fabrics, cotton yarn and threads, knitwear, and bed-wear are some of the biggest exports of the country. Other important exports include, rice, leather, fish and fish preparations, fruits and vegetables, woolen rugs and carpets, and sports goods.
Pakistan’s exports are concentrated in relatively few countries. USA is currently the biggest export destination for Pakistani goods, accounting for over 16 per cent of the country’s export value in the second half of 2017. It is followed by UK, China, Afghanistan, and Germany as largest buyers of Pakistani products, collectively making up a further 28 per cent of export value. Other important export destinations include Spain, Netherlands, Belgium, Italy, UAE, and Bangladesh.
In recent years, Pakistan has struggled to increase, or even maintain, the level of exports, leading to a highly negative balance of trade. In the fiscal year 2017-18, the country’s total exports were valued at $23.2 billion while the imports were recorded at nearly thrice that value at $60.9 billion, resulting in an unprecedented trade deficit of $37.7 billion, and seriously depleting our foreign exchange reserves. According to one report, 45 Pakistani products have lost competitiveness in the international market since 2013.
A close look at Pakistan’s export figures in recent decades reveals an inconsistent growth pattern. While the general trend for export value has been upward, the country has struggled to maintain consistent growth for any considerable length of time. However, it is in the past seven years or so that the export performance has been particularly disappointing.
The total export value stood at $24.8 billion in 2010-11, but it failed to achieve any meaningful growth in the ensuing years, and declined sharply in 2015-16 to $20.8 billion. While the exports grew to $23.3 billion during 2017-18, this increase was drastically overshadowed by the much larger increase in imports – from $52.9 billion in 2016-17 to $60.9 billion in 2017-18, thus further deteriorating the balance of trade.
Causes of Decline in Exports
The primary reason for the recent decline in exports is the energy crisis that has hit the country over the past decade or so. The serious energy deficiency has caused many factories to shut down, while others have operated at minimum capacity, thus adversely affecting our production levels and the ability to export. It may also be argued that the quality of infrastructure in the country has not kept up with the regional standards, and obsolete technology continues to characterise many industries, which has reduced the competitiveness of our products internationally.
Our monetary policy in recent years has also conflicted with the balance of payments interests as currency appreciation in the past has also reduced our exports’ competitiveness in important international markets. Furthermore, there have been no meaningful efforts to broaden Pakistan’s export base, and heavy reliance on textile products alone continues to characterise our exports industry. The national tariff policy has led to heavy taxes being imposed on imported items that are used as inputs for producing export commodities; this has created a net negative impact on the balance of trade.
The obvious consequence of the decline in exports in recent years is an ever-widening trade deficit which has depleted our foreign exchange reserves, and caused the currency to depreciate emphatically. This has forced Pakistan to borrow heavily from foreign countries and agencies in recent years. The debt level has now reached a 15-year high at 72 per cent of the GDP. According to recent statistics, the currency devaluation has also added Rs1.190 trillion in public debt. Despite recent relief package worth $6 billion pledged by Saudi Arabia, yet another bailout from the International Monetary Fund (IMF) seems inevitable.
Reducing the current account deficit over the next few years is a major economic challenge for the new government. A steady stream of high value exports is, in fact, the key to boosting our foreign currency reserves, and reducing our ever-growing foreign debt. Pakistan has untapped export potential worth $12.8 billion, according to the International Trade Centre, which the country would do well to exploit. The government would have to create an investor-friendly environment conducive to the production of exported commodities, and provide specific incentives to exporters.
Widening our export base should be a top economic priority for the government as the textiles and garments industry accounted for 62 per cent of Pakistan’s exports in 2017. At the same time, focus should be on controlling the country’s skyrocketing imports by implementing a long-term policy of industry promotion, hence, paving the way for steady export-led growth.