BCom Notes Part II Economy of Pakistan Foreign Trade of Pakistan

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Foreign Trade

Foreign Trade of Pakistan

Pakistan has recorded laudable export performance during the last several years, with exports growing at an average rate of almost 16 percent per annum over the last four years 2002-03 to 2005-06. Given the importance of export in the economic transformation of any nation, the ability to achieve strong export-led growth has become a recurring theme in policy making in Pakistan. The strong export growth in Pakistan benefited a great deal from the rapid improvement in the international trading environment, which in turn was the direct consequence of the most ambitious and successful round of multilateral trade negotiation in Uruguay under aegis of the General Agreement on Tariffs and Trade (GATT). This trade negotiation succeeded to a great extent in bringing down tariff barriers, particularly in the international trading environment.

Pakistan’s import growth slowed to a normal level in the current fiscal after surging at an average rate of 29 percent per annum during the last four years. Four years of strong economic growth strengthened domestic demand which triggered a consequential pick up in investment. The rise in investment demand led to a massive surge in imports. Though Pakistan continued to maintain its strong growth momentum. import growth has decelerated to its trend level for a variety of reasons including the pursuance of tight monetary policy during the year. The lower growth in imports is likely to improve trade deficit from 9.5 percent of GDP last to 9 percent this year. However current account deficit is expected to be around 5 percent of GDP as against 4.4 percent last year.

Importance of Foreign Trade

Importance of Foreign Trade of Pakistan

1. Export of Raw Material and Semi Finished Goods

Pakistan’s exports consist of raw material and semi-finished goods, which fetch very little price in international market. Most dependence of export is on cotton, cotton textile products and basmati rice, whereas production of these goods depends upon natural factors. If natural circumstances go against the cultivation of cotton and rice then export earnings reduce drastically.

2. Import of Machinery and Industrial Raw Material

Pakistan’s imports consist of machinery, industrial raw material, vehicles, medicines, electronic goods and other value added items. The prices of these items are increasing in international market. Therefore the total import bill is increasing day by day.

3. Import of Agricultural Products

Pakistan is an agricultural country but to our ill fate we import many agricultural food items such as soyabean oil, palm oil, tea, pulses, spices and many times sugar and wheat from other countries thereby increasing our import bill.

4. Increased Use of Petroleum Products

In Pakistan number of motor vehicles and other means of transports are increasing. Similarly due to industrialization, use of machinery is increasing. All these factors are increasing demand of petrol and petroleum products, prices of which are rapidly increasing in the international market, causing increase in the Pakistan’s import bill.

5. Import of Services and Other Invisible Expenditures

Most of the export and import trade of Pakistan is carried on by foreign shipping companies, as our shipping industry is not developed and we do not have many cargo ships. Similarly foreign banks and insurance companies render their services in international trade. Thus lot of foreign exchange is spent on such service charges.

6. Limited Trade Relations

Pakistan has very limited trade relations. Most of the trade is being carried out with UK, USA, Japan, Europeans Union and Middle East.

7. International Trade by Private Sector

Private sector is dominating international trade of the country. Businessmen themselves are finding export markets by sending their representatives for trade negotiations and trade.

8. Unfavorable Balance of Payments

Balance of Trade is usually against Pakistan. Pakistan’s exports earnings from raw cotton, textile goods, rice, leather and surgical products are very less where as expenses on imports of machinery, industrial raw material, petrol and on electronic goods are greater. Pakistan receives less and pays more, which makes its balance of trade unfavorable.

Balance of invisible is always against Pakistan. It is a statement of Pakistan’s use of foreign ships, insurance companies and banks for which Pakistan has to make payments in foreign currency. Pakistani does not have ships, banks and insurance companies abroad, which may perform services and earn foreign exchange. The drain of foreign exchange is too much on this account.

Balance of Payments is always against Pakistan. It is a statement of a country’s trade (visible) and financial transactions (invisible) with the rest of the world. Since both the above balances are against Pakistan, therefore final balance of payments is also against it. This is being balanced by borrowings from World Bank, IMF and friendly countries. Unfavorable balance of payment increases the debt liability of Pakistan.

9. Unfavorable Terms of Trade

Terms of Trade are a price index, which shows a country’s exported goods prices relative to its imported goods prices. It is prepared by taking an index of prices received for export and an index of prices for imports and then export prices are divided by import prices. An improvement in a country’s terms of trade occurs if its export prices rise very slowly whereas import prices rise fast.

Major Exports of Pakistan

1. Raw cotton, Textile products and Cotton yarn.
2. Rice.
3. Leather and leather products.
4. Carpets and rugs, Tents.
5. Synthetic textiles.
6. Surgical instruments.
7. Sports goods.
8. Readymade garments.
9. Vegetable, fruit and fish.
10. Engineering goods.
11. Chemicals and Pharmaceutical products.

Exports of Pakistan

Exports were targeted at $18.6 billion or 12.9 percent higher than last year. Export of food group declined by 3.5 percent. This declined is caused by a 2.6 percent and 14.3 percent decline in exports of rice and fruits. Export of rice declined due to lesser production caused by adverse weather condition which kept the domestic price higher. It was more profitable to sell within the country than to export. Exports of textile manufactures grew by 0.2 percent. Prominent among these are export of knitwear 13.9 percent, readymade garments 6.8 percent, made up articles 8.9 percent, cotton yarn 4.6 percent and towels 2.6 percent. Exports of other textile materials registered a high double digit growth of 17.2 percent. Export of raw cotton, cotton cloth and bed wear on the other hand registered a decline.

Direction of Exports of Pakistan

Although Pakistan trade with a large number of countries its exports are however highly concentrated in few countries including USA, Germany, Japan, UK, Hong Kong, Dubai and Saudi Arabia which account for one-half of its exports. The United States is largest export market for Pakistan, accounting for 28.4 percent of its exports followed by UK and Germany. Japan is fast vanishing as export market for Pakistan as its share in total exports has been on decline for one decade, reaching less than one percent from 5.7 percent a decade ago.

Pakistan needs to diversify its exports not only in terms of commodities but also in terms of markets. Heavy concentration of exports in few commodities and few markets can lead to export instability. Other issues which need to be addressed include low value added and poor quality, obsolete use of machinery and technology, higher wastage of inputs adding to the cost of production, low labor productivity, little spending on research and development, export houses lacking capacity to meet bulk orders, inability to meet requirements of consumers I terms of fashion and design, non-adherence to contracted quality and delivery schedule, lack of marketing techniques etc.

Major Imports of Pakistan

1. Machinery.
2. Petroleum.
3. Chemicals.
4. Vehicles and spare parts.
5. Edible Oil.
6. Wheat.
7. Tea.
8. Fertilizers.
9. Plastic material.
10. Paper Board
11. Iron ore and steel.
12. Pharmaceutical products.

Imports of Pakistan

Pakistan’s imports are also highly concentrated in few items namely, machinery, petroleum and petroleum products, chemicals, transport equipment, edible oil, iron and steel, fertilizer and tea. These imports accounted for 73% of total imports during 2006-07. Among these categories machinery, petroleum/petroleum products and chemicals accounted for 53.4% of total imports.

Direction of Imports of Pakistan

Pakistan’s imports are highly concentrated in few countries. Over 40 percent of them continue to originate from just seven countries namely, the USA, Japan, Kuwait, Saudi Arabia, Germany, UK and Malaysia. Saudi Arabia is emerging as major supplier to Pakistan followed by the USA and Japan. The shares of USA and Japan, with some fluctuations, exhibited a declining trend because of the shift in the import of machinery/capital goods and raw materials to other sources. On the other hand, the share of Pakistan’s imports from Saudi Arabia has been rising due to higher imports of POL products. Malaysia share has shown rising, as well as, falling trends over the years mainly on account of fluctuations in palm oil prices

Improvement in Balance of Payments

Measures for Improvement in Balance of Payments

1. Increase in Exports by Providing Different Incentives

First important step for improving balance of payments of Pakistan is to increase its exports. It is suggested that following steps should be adopted in this regard.

1. Decrease in cost of production, for which interest rate for new industries should be reduced.
2. Cost of transport particularly railway freight should be minimized.
3. Custom duties on the export-oriented industries should be reduced.
4. Cost of transport particularly railway freight should be minimized.
5. Modern techniques of production should be used.
6. Instead of exporting raw material, value added goods should be produced and exported.
7. Those industries should be encouraged and set up which use locally produced raw material.
8. Labor productivity should be enhanced by imparting education, training and providing different types of facilities of life.
9. Goods of different varieties keeping in view the demand and requirement of foreigners should be developed, produced and exported.

2. Decrease in Imports by Setting up Key Industries

Second important requirement for improving balance of payments is to decrease imports. It is suggested that after adopting following steps imports will be decreased.

1. Import substitution industries should be set up.
2. For production of edible oils, seeds should be grown locally.
3. Tea consumption should be discouraged.
4. Production of food grains such as wheat should be increased.
5. Import of luxurious items should be banned or heavily taxed.
6. Basic and key industries should be developed which can produce machinery and spare parts for manufacturing industries.

3. Increase in Invisible Earnings

Thirdly, for improving balance of payments expenses on invisibles are to be decreased and to increase exports. After adopting following steps, invisibles balance can be improved.

1. National shipping company should be strengthened for assisting the international trade. Freight charges of this company will become a source of saving of foreign exchange.
2. Domestic commercial banks and insurance companies should be strengthened and be given task for facilitating Pakistan’s international trade.
3. Expenses on our embassies abroad, which involve foreign exchange should be reduced. VIP culture should put to an end and unnecessary tours and medical expenditure of high government officers and politicians in foreign countries hospital should be disallowed.
4. Foreign countries visits by the general public should be discouraged in order to save the precious foreign exchange of the country.
5. The efficiency of Trade Attaches of Pakistan Embassies should be improved. It is their duty to do their best for developing markets of Pakistani products in the countries they are posted.

4. Search of New Markets

Fourth important requirement for improving the balance of payments is the expansion of trade relations. After adopting the following steps trade relations will be expanded.

1. Govt. officials and business community should participate in trade fairs arranged by foreign countries.
2. Trade Agreements with different countries should be made.
3. Seminars and Trade Exhibition should be arranged within country in which foreign delegates should be invited to participate.
4. Booklets, brochures, pamphlets about Pakistani products and economy of Pakistan should be distributed to foreign business community.
5. Research for marketing should be conducted.

5. Quality and Packaging of International Standard

1. Exportable Goods should be of international standard; their packaging should meet the same standard. Good packaging provides safety and security of the product and is not destroyed during handling and shifting process.

6. Revival and Restoration of Sick Industries

1. Sick industries should be revived. This will increase output of industrial goods, which will result in the decrease of prices. The cheap goods will become a good market for buyers and they will import more from Pakistan, thus the export proceeds of the country will increase.

7. Foreign Joint Ventures

1. Pakistan’s exports can be pushed up after collaboration of foreign investors. The foreign partners have more contacts in foreign markets and in order to increase profitability of industry, foreign partners will market the products in their countries hence Pakistan’s exports will increase.

8. Promotion of Labor Intensive Industries

1. Small and cottage industries are labor-intensive. Products utilizing more cheap labor with have a comparative cost advantage which will help in decrease in cost. Industries such as, leather goods, readymade garments, surgical instruments sports goods should be developed for export purpose.

How Pakistan’s Export can be Increased

1. Diversification of Exports.
2. Trade facilitation.
3. Increased market access.
4. Enhancing export competitiveness by reducing cost of doing business.
5. Capacity building on WTO and trade negotiations.
6. Developing export of services.
7. Improving compliance of quality infrastructure.
8. Techno-legal proposals.

1. Focus on Neglected Regions/Countries

Trade policy aimed at focusing on neglected regions/countries. The Ministry of Foreign Affairs in consultation with the Ministry of Commerce has appointed Honorary Counsels General in important cities of the region to focus on trade matters to boost export. In this regard the Board of EMDF has approved the funds for Pakistan’s Embassies to hire local marketing executives to be funded from Export Market Development Fund. This aspect already stands implemented.

2. Marketing Efforts in USA and European Union

Another important point of the current trade policy was to boost trade with USA and EU. For this purpose, Market Company for EU and Consultants for USA have been hired and this aspect has also been implemented.