Data released by the State Bank of Pakistan (SBP) shows that the current account deficit, a major challenge for the Pakistan Tehrik-i-Insaaf government after Imran Khan took oath as the country’s Prime Minister on 20 August 2018, has shrunk by 73 percent in July 2019 against the comparable figure of a year before. The two major contributors to this decline are: (i) implementation of the ‘prior’ condition of adopting a market-based exchange rate on 16 May 2019 – a mere three days after a staff-level agreement was reached with the International Monetary Fund (IMF) on 12 May 2019; and (ii) decline in capital (machinery) imports due mainly to infrastructure projects completion under the China Pakistan Economic Corridor (CPEC). The question is which of these two factors contributed more to a shrinking of trade deficit?
The rupee depreciation vis-a-vis the dollar has no doubt made imports less attractive. Between 2014 and 2017, machinery imports rose dramatically as a consequence of CPEC projects and thenceforth began to taper off. Estimates indicate that 60 percent decline in imports is due to the cessation of imports of power generation machinery as the first phase of CPEC projects were completed. In other words, the rupee depreciation has not been a major factor in declining machinery imports. Petroleum imports are a major import item for Pakistan but with the increase in the international price of oil and products and due to currency depreciation, Pakistan’s import bill under this head rose by about a billion dollars and this in spite of the decision to ban furnace oil imports followed by a doubling of gas imports. Edible oil imports declined as their international prices declined while transport group witnessed a decline in imports due to depreciation. In other words, the rupee fall did impact on the decline in imports but the decline in machinery imports is attributable to the completion of CPEC projects. Imports declined from 5.5 billion dollars in July last year to 4.1 billion dollars this year.
Economic theory dictates that depreciation of a currency makes its exports more competitive internationally; however, unfortunately this linkage has yet to be conclusively seen in the case of Pakistan. Exports rose from 2 billion dollars in July last year to 2.2 billion dollars this year – a rise of 10 percent but with the base so low the raise in percentage terms overstates the gain. The reasons are four-fold: (i) Pakistan’s industry relies quite heavily on imported raw materials as well as capital machinery whose cost rose as the rupee depreciated; (ii) other input costs including higher electricity tariffs further raised input costs undermining the positive impact of a rupee depreciation; (iii) liquidity constraints due to the government’s inability to clear all refunds; and (iv) the rise in discount rate, another IMF prior condition, made credit to the private sector more expensive.
In this context, it is relevant to note that the productive sectors complain that the incentives agreed with their representatives remain on paper and have not been actually released.
Remittances rose in July 2019 but only marginally. In July 2017, remittances were 1.55 billion dollars and in July 2018 remittances rose by a whopping 27.39 percent. As elections were held on 28 July 2018 this implied domestic politics played little if any role in their rise. In July 2019, the month just past remittances rose to 2.03 billion dollars – a raise of 2.9 percent in comparison to the year before.
To conclude, depreciation of the rupee has played some, though minor role, in comparison to the role played by the completion of the CPEC power sector projects in reducing imports while exports have not responded to a lower rupee value vis-a-vis other currencies as would have been expected given other major challenges facing exporters. One would hope that this data is looked into carefully by the relevant ministries and mitigating measures put in place to ensure a raise in exports, the most desirable source of foreign exchange earnings.
