Historic deficit overshadows record exports in November

Economically, Pakistan finally had a reason to celebrate in November. Its exports have increased by 27 percent in the first five months of the current fiscal year (July-November). But the celebrations abated when figures showed imports rose 72% over the same period. As a result, the trade deficit swelled to $ 20.74 billion.

In November, the deficit stood at $ 5.10 billion. This is the highest trade deficit recorded in a single month.

The situation has put the government in such a delicate position that the Pakistani prime minister’s trade and investment adviser Abdul Razak Dawood only tweeted November export data on Wednesday.

According to Dawood, exports in November stood at $ 2.9 billion against a target of $ 2.6 billion.

Regarding the import data, he said “it is being analyzed and will be shared shortly”.

Analysis of the data revealed that in the first five months of the current fiscal year, Pakistan exported goods worth $ 12.36 billion, while it imported items from worth $ 33.11 billion.

The trade deficit stood at $ 20.74 billion. It was $ 9.54 billion over the corresponding months of last year.

The year-over-year increase in the quantum of exports was 27%, while that of imports was 71.59%.

Economic impact

The historic trade deficit in November caused the Pakistani stock exchange to bleed, which fell 1,900 points on Thursday.

Analyst Raza Jafri said the panic was partly due to the news of a record trade deficit in November.

Anxious investors have rushed to withdraw their money as they expect the belt to be tightened again.

According to reports, the State Bank of Pakistan (SBP) is expected to announce the next monetary policy on December 14. Analysts are forecasting a further hike in the key interest rate of 1% or 100 basis points in an attempt to control inflation.

Last month, the central bank raised the interest rate 150 basis points to 8.75%. The meeting which was rescheduled for November 26-19 shocked experts who expected a maximum increase of 100 basis points.

Structure of the trade deficit

The trade deficit has grown steadily since the start of this fiscal year in July. The PTI-led government managed to reverse this trend over the past fiscal year, but it has swelled again due to exponential growth in imports.

In fiscal 2018, the deficit reached a record high of $ 37.7 billion. But, the government’s actions brought it down to $ 31.8 billion and $ 23.18 billion in fiscal years 19 and 20 respectively. In FY21, it fell again to $ 30.79 billion.

The growth in imports gave the government some breathing space, as the Federal Revenue Council (FBR) collected an additional 35% of revenue from sales tax, withholding tax and customs duties in November 2021 compared to November 2020.

Measures to curb imports

The government has put in place several measures in recent months to curb imports. The SBP imposed 100% cash margin (CMR) requirements on 114 items in October.

Cash margin is the money that importers must deposit with their banks to initiate an import transaction, such as opening a letter of credit (LC). Increasing the cash margin requirement increases the cost of imports.

In September, the central bank tightened the terms of auto loans, personal loans and credit card loans in order to control demand and lower inflation.

SBP increased the down payment for a car loan to 30 percent from 15 percent. The maximum term for auto financing has been reduced from seven to five years.

This step came after a strong demand for vehicles which put pressure on the current account. Commercial banks issued a record number of auto loans worth Rs 360 billion in August.

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