Morning Briefing for July 12, 2012 – Standard Capital

Karachi, July 12, 2012 (PPI-OT): Why trade deficit swelled to 9.7% of GDP in
FY12 – Economic strategy Standard Capital

Pakistan has missed every economic target for FY12.

According to Standard Capital, the overall performance was marred because as Standard Capital has always contended that real economic sectors are underperforming. Some of the highlights that created trade deficit and its vital components are given hereunder;

1. Trade deficit target of US$ 14.5 billion was breached and actual figure remained US$ 21.3 billion i.e. 9.7% of country’s GDP. Hence it widened by 36%YoY against FY11 deficit of US$15.6 billion. The reasons being shrinking exports given impediments in trade and industry, power outages, law and order etc. Pakistani rupee looses lustre due to that as it went as high as Rs 96 against greenback.

2. As mentioned, much trumpeted exports for FY12 went down by 4.7%YoY to US$23.6 billion as against US$24.8 billion reported last year. Exports are linked with vibrant trade and industry which remained under cloud due to textile ministry’s apathy and lack of investments from genuine investors.

3. Government and IMF approach of demand destruction backfired wherein imports grown i.e. noticeably by 11%YoY i.e. US$44.9 billion during the year as against US$40.4 billion witnessed in FY11. Exports remained stagnant i.e. growth was compromised in almost every set of policies. Government blamed poor law and order and diversion of funds to thwart terrorism as one of the resource constraints.

4. Take a look at imports which swelled given increase in global oil prices. In Pakistan’s case, the prime importing brand, Arab Light 34 Mono, soared by 19%YoY during FY12 resulting ballooning of imports as oil imports (50% of crude and remaining imports of fuel oil and diesel) contains 34% weight in the total import bill. Pakistan’s inability to create oil resources and developing of alternate resources since early 2000 is backfiring to the hilt.

5. There was a profiteering instinct among fertilizer giants and collusion of distributors as well as lack of foresight on handling this issue on the governmental level. Government resorted to imports huge fertilizer amounting US$1.1 billion (great increase of up to 112%YoY) during Jul-May 2012 since fertilizer giants resorted to nearly double prices instead of helping the state to look into issues.

6. Pakistan’s biggest exports i.e. textiles suffered since cotton prices went down wherein spinners and weavers had to sustain losses given lower yarn and unfinished cloth prices. Overall cotton prices went down by 35%YoY during FY12 which also reduced the export value in US Dollar. Textile milliners faced terrific problems such as lack of electricity and gas breakdowns that resulted in diversion of orders to other competitive states.

In the overall analysis, Pakistan’s real economy is suffering since trade and industry is at peril given host of issues highlighted in this report. Some of the other economy elements include level of poor FDI’s and Coalition Support Funds inability to support Pakistan hampering real economy indicators.

Some of the positives remain Pakistan’s affinity with regional giants for trade which should bear fruit in favor of growth in agriculture, industry, transportation, energy and mining. Pakistan can save lot of exchange if it works out the strategy of importing cheaper raw materials, cheap oil, cheap machinery etc instead of relying on heavy dollar denominated imports. Moreover, work on organic based fertilizers could stop fertilizer blackmailing. At present, the only good story is Pakistan’s remittances which is bracing for US$13 billion mainly emanating from workers in GCC states. However, any war like situation, as it is brewing in the middle east, could put a stop on this major flow, hence, policy makers should look for other resources i.e. putting emphasis on supply side economics.