Handling trade deficit is tricky.

Byline: Mohiuddin Aazim

Pakistan's merchandise trade deficit in January swelled to $2.67 billion, showing a whopping 24.4 per cent increase over January 2020.

According to the Pakistan Bureau of Statistics (PBS), the cumulative trade deficit in the first seven months of this fiscal year totalled $15bn - or 8.7pc higher than the deficit in the year-ago period. Fortunately, home remittances in these seven months grew 24.1pc year-on-year to about $16.48bn, according to the State Bank of Pakistan (SBP). That was more than enough to make up for the forex lost in the enlarged trade deficit.

Merchandise export earnings of Pakistan that constitute less than 50pc of imports are increasing slowly. And, import expenses that are double the volume of export earnings are growing fast. The trade deficit is expanding in dangerous proportions.

Traditionally, Pakistan has managed its trade deficit with remittances from overseas Pakistanis. It is still doing that. Luckily, inflows of remittances remain strong. But their future outlook is uncertain for many reasons, including the declining export of our workforce.

Big and sustainable gains in exports are impossible to attain without achieving economies of scale in export industries

Pakistan clearly needs a national policy to boost volumes of export earnings and keep the import bill in check. But that is not possible in the short term. The poor performance of merchandise exports is due to deep structural issues. And, imports cannot be contained much amidst a moderate economic recovery under a politically troubled government.

Structural issues of the export sector are so complicated that they cannot be addressed in the remaining two and a half years of the PTI government. Unless all political forces join hands - and the powerful establishment also supports them sincerely - no long-term policy for addressing structural issues like the need for redefining export development strategies can work. A long-term nationalistic approach is also required to develop a new import management strategy. The purpose of that strategy should be to gradually deepen the relationship with growth in imports to sustainable growth in the economy.

The ongoing overreliance on remittances will only complicate external-sector problems. These remittances are a source of non-debt-creating forex inflows separate from merchandise exports. Ideally, Pakistan should use these inflows to finance growth of human capital for future domestic use in an...

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