Define a viable commercial strategy in the national interest
Recent world events, which include not only the Russian-Ukrainian conflict but also the withdrawal of US troops from Afghanistan and the Covid-19 pandemic, have led to several discussions on the level of diversification of Pakistan’s export products as well than in its export markets. Pakistan’s exports have shown an upward trajectory over the past two years, with substantial growth in exports from the textile and IT sectors.
Although the former has traditionally been an export-oriented sector, which generates a significant share of Pakistan’s total export earnings, the recent growth spurt in the IT sector reveals its true potential. Furthermore, imports have also increased along with exports and that too at a relatively faster rate. This leads to a booming negative trade balance.
The foreign exchange reserves held by the State Bank of Pakistan, which had peaked at $20 billion in August 2021, stood at $14.96 billion on March 18, 2022. Although this amount is more than 7, $2 billion declared in 2018-19, when the economy was facing a balance of payments crisis, the management of foreign exchange reserves remains as important as ever. During the previous crisis, the government adopted policies aimed at inhibiting demand in order to reduce imports.
However, with global commodity prices likely to fluctuate due to political uncertainties and domestic politics adding to the uncertainties, it is increasingly important to focus on improving the capacity and productivity of exporters rather than to reduce imports through measures that reduce demand and slow down economic growth. Goods exports were up 26% year-on-year in the first eight months of FY22, while goods imports were up 55%. With exports exceeding $20 billion in the first eight months, they are expected to reach around $30 billion by the end of the current fiscal year. More importantly, services exports, at $4 billion, were up 18.8% year-on-year in the first seven months of FY22.
This is crucial given that services exports have hovered around $5.5 billion in recent years and remained stagnant in terms of growth rate. Importantly, growth is driven by the telecommunications, computer services and information technology sector, which includes not only highly skilled workers, but also freelancers and young entrepreneurs. On the other hand, the rise in imports of essential goods such as oil and related commodities is driven by their prices, with the dollar value of imports increasing by more than 100% year-on-year for petroleum products and LNG in the current fiscal year. Transport group imports also showed similar levels of growth, with CKD/SKD units contributing the most to import growth in value terms.
In addition, various types of machinery and equipment have also recorded significant growth rates. Essentially, imports of non-essential goods are unlikely to be a major driver of import growth, which is mainly driven by rising prices of essential commodities and growing demand for intermediate and capital goods used for produce domestic goods as well as export products. The government needs to ensure productivity improvement that leads to more efficient combination of production rather than focusing on import reduction as a stopgap measure.
Main export markets
Pakistan’s exports are mainly destined for the United States and the European Union. According to statistics taken from the International Trade Center’s Trademap.org, exports to the United States were $4.1 billion in 2020, the second highest since 2006, when they were $4. .3 billion.
Exports to the 27 EU countries are estimated at $6.2 billion and exports to the UK at $1.7 billion. Over 50% of Pakistan’s exports go to the US, EU and UK. Exports to the EU increased by $3.3 billion in 2009, a growth of around 90% in 11 years. Pakistan exported $5.7 billion worth of clothing in 2020, including more than $5 billion worth of goods destined for the United States, EU-27 and the United Kingdom.
Looking at exports from the textile industry, $9.6 billion out of $13.1 billion worth of goods were exported to the aforementioned destinations. Although China and Bangladesh are among the top 10 destinations for Pakistan’s textile product exports, they mainly import either cotton yarn or woven fabrics, unlike advanced countries which import finished consumer goods. Essentially, Pakistan relies heavily on Western markets for its exports of value-added consumer goods. Even exports of intermediate goods and raw materials are likely to be driven by the presence of value chains involving buyers in the developed world.
The recent conflict between Russia and Ukraine is likely to have consequences for world trade, especially since the two countries are major suppliers of several agricultural and mining products. Russia is the third largest exporter of mineral fuels and grains in the world and the largest exporter of fertilizers. Ukraine is the second largest grain exporter and the third largest exporter of animal and vegetable fats and oils. UNCTAD recently published “The Impact on Trade and Development of the War in Ukraine”, highlighting the rise in prices of agricultural products and freight costs due to the conflict. Freight costs are expected to increase by 5-8%, with developing countries likely to bear the brunt of the increase. Spot indices for agriculture, commodities and grains all reacted strongly to the conflict.
In addition, about a quarter of Turkey’s agrifood products and 22% of China’s agrifood products are imported from the Russian Federation and Ukraine. For Pakistan, it is 4.5%, with the majority coming from the Russian Federation. The government must facilitate Pakistan’s exports and ensure that its policies translate into sustainable export growth.
This should include, but not be limited to, negotiations on free trade agreements between different regions and geopolitical blocs, more effective trade missions to important overseas markets to promote Pakistani goods and services and encourage domestic firms to participate in global value chains. A viable trade strategy is in the national interest.
THE WRITER IS THE ASSISTANT PROFESSOR OF ECONOMICS AND RESEARCH AT CBER, INSTITUTE OF BUSINESS ADMINISTRATION, KARACHI