The worrying trend in
A worsening trade gap leads to downward pressure on the rupee because Pakistani importers will require more US dollars to pay for the higher levels of imports, rendering dollars dearer in the local market. In principle the higher demand for foreign currency can be met in one of two ways: one, an inflow of foreign currency into
The first, inflow from abroad, route, while preferable, is unadvisable or problematic, especially keeping in view the rapid deterioration of the trade balance. The inflow of currency can be achieved in several ways: an increase in foreign investment; increased remittances; foreign aid and/or loans; and an increase in exports. Other than resorting to foreign loans – the least desirable option – the other avenues cannot be short term solutions. Foreign investment will not experience a steep increase so long as the country’s political climate and law and order situation remain volatile and infrastructure bottlenecks persist. The flow of foreign remittances is already considered to be near its potential following the post-9/11 crackdown on alternative, non-official channels.
Enhancing exports may be the most economically sound course of action; however,
A depreciation of the rupee may provide a small, short-term boost to the competitiveness of
The second route that
The conclusion then is that the current level of imports is unsustainable. Tightening fiscal and monetary policy can help reduce the demand for imports by reducing aggregate demand. However, as sustained, high growth rates are vital for
The starting point for identifying possible cutbacks in the country’s import bill must be petroleum products, the single largest imported commodity according to the FBS. In July 2006 the import of the petroleum group of commodities rose by 43.73% as compared to July 2005 to Rs. 43.717 billion. With few economists forecasting a significant reduction in oil prices over the next few years,
July 2006 also saw Rs. 2.269 billion spent on the import of foreign assembled cars. In light of the required belt tightening this is an unwarranted expense. However, it should be noted that were such a cutback established a caveat must be better regulation of the local car industry in order to prevent local manufacturers from exploiting consumers.
The FBS also indicates that in July 2006 Rs. 3.746 billion worth of sugar was imported – an increase of 293.49% over July 2005. While the government continues to prevaricate over the sugar crisis and refuses to launch an independent and transparent investigation of the sugar cartel, the real need for such quantities of imported sugar cannot be established. Clean governance may directly help reduce the country’s import bill in this instance.
Beyond these areas the opportunities for targeted import reductions are limited, suggesting grim choices lie in the months ahead. Macroeconomic measures to reduce imports across the board will hurt economic growth, but so will the alternative of financing the import binge. The present government is truly caught between a rock and a hard place, but it is a situation of its own making; the economic cul-de-sac the government finds itself in is a logical and predictable outcome of its economic policies since 1999.