The government is taking credit for a massive 19 per cent increase in exports in December 2020. It keeps reminding the nation of this achievement through euphoric tweets. But what these self-congratulatory tweets often ignore is this: imports grew even faster — by 24.5pc. And, that increased the monthly trade deficit from $2 billion in December 2019 to $2.6bn in December 2020, according to the Pakistan Bureau of Statistics.

For preparing the balance-of-payments (BOP) statement, the State Bank of Pakistan (SBP) does not rely on PBS data that reflects the total value of foreign trade, including the cost and freight or cost, insurance and freight. It takes into account FOB or free-on-board values of exports and imports. And, when we see export and import values on the FOB basis, we find out that in December 2020 year-on-year growth in imports was a whopping 32.4pc against exports’ growth of only 6.8pc.

It is the same BOP statement from where the government takes out current account data and proudly presents to the nation when it is in surplus. So it would be appropriate to rely on FOB values of exports and imports for analysing the trade account of the first half of this fiscal year. Based on FOB values, merchandise imports in July-Dec rose to $23.2bn from $22.13bn in the year-ago period, showing an increase of 4.8pc. Exports fell to $11.8bn from $12.4bn, reflecting a decline of about the same magnitude i.e. 4.8pc.

We can expect an even sharper rise in the merchandise trade deficit in Jan-June

This hard fact dashes all hopes for the merchandise trade deficit coming under control anytime soon. In July-December, this deficit soared to $11.4bn from $9.7bn in July-Dec 2019. In the ongoing second half of this fiscal year, we can expect an even sharper rise in this deficit. The reason is that the domestic economy is recovering, necessitating larger imports. And a rise in international prices of fuel oil and food commodities amidst global recovery is making imports costlier.

A silver lining lies in the services trade, though, where we see the deficit falling. In July-Dec 2020, the services trade deficit fell to $977 million from $1.7bn in July-Dec 2019. But even this improvement is due almost entirely to a huge decline in services imports rather than any substantial increase in exports. So Pakistan needs to focus on boosting services exports, which have huge untapped potential.

The IT and IT-enabled services, a key subsector of the overall services sector, have $10bn export potential, Minister for Information Technology and Telecommunication Syed Aminul Hauqe recently informed the Senate. He said the government was expecting to earn as much as $5bn through the exports of IT and IT-enabled services by 2022-23. In 2019-20, this subsector’s exports brought in $1.2bn. And, in the six months of this fiscal year, such exports totalled $684m.

It would be naïve to expect that even if IT and IT-enabled exports continue to grow at this pace, they would reach $5bn by 2023. Or even if they reach this level, their net impact on the overall services trade cannot be mitigated due to services imports.

In addition to IT and IT-enabled services, the overall services sector includes subsectors like financial services, charges for the use of intellectual property and other business services, personal, cultural and recreational services and government goods and services. With the economy on the path of recovery, services imports in these areas would also grow, offsetting partly net foreign exchange earnings gains that Pakistan can make via IT and IT-enabled exports.

To turn the current services trade deficit into a surplus and improve the overall balance of payments, the government needs to ensure that IT and IT-enabled services exports actually hit the $5bn target by 2023. This requires setting quarterly targets with the help of the private sector and doing everything needed to hit or surpass those targets.

When merchandise export earnings (calculated on the FOB basis) are not growing and services exports are showing only a modest increase, what else can keep the current account in surplus? Remittances, right?

But there is a limit to increasing remittances. In July-Dec 2020, remittances grew too fast — about 25pc. Any faster increase in remittances cannot be expected without running the risk of finding out at the end of the day that some incremental remittances were Pakistan’s own ill-gotten wealth routed back home via agents and front-men of the owners of this wealth.

Until November 2020, Pakistan’s current account remained in surplus principally due to a meteoric rise in remittances. But in December, even growth in remittances could not help. The country booked a $662m monthly deficit. For July-Dec 2020, however, we saw a current account surplus of $1.1bn against $2bn deficit in July-Dec 2019. The credit for this goes entirely to $2.8bn additional remittances. In July-Dec 2020, remittances from overseas Pakistanis totalled $14.2bn against $11.4bn in July-Dec 2019.

The fact that the current account balance for the first half of this fiscal year remains surplus means so far the country has managed to compensate the overall trade deficit with strong growth in remittances. Whereas the rise in remittances is in itself commendable, the government should now make stronger efforts to enhance overall goods and services exports and not solely rely on remittances for keeping the current account in surplus. It is the current account surplus that continues to ward off a downward pressure on the exchange rate and emboldens the central bank to maintain foreign exchange reserves at the levels where they are. So it is very important for the PTI government to continue to keep the current account in surplus.

In July-Dec 2020, the overall BOP deficit shrank to almost $1.3bn from $4.3bn in July-Dec 2019. But this lowering of the BOP deficit is chiefly due to external borrowing. Even here what is comforting to an optimistic soul is that incremental volumes of long-term and short-term external borrowing fell to $4.5bn from $5.6bn.

Published in Dawn, The Business and Finance Weekly, February 1st, 2021