There’s bad news. The trade deficit has gotten out of hand. But there’s good news too. The deficit has peaked and it is expected to shrink in the second half of the fiscal year, between January and June 2022.

The Pakistan Bureau of Statistics says imports in July-Nov 2021 surged 69 per cent year-on-year to $32.934 billion. But export earnings totalled $12.344bn, despite about 27pc yearly growth. This produced a huge trade deficit of $20.59bn, about 112pc higher than the July-Nov 2020 deficit of $9.724bn.

This meteoric rise in the deficit is the primary reason for the rupee depreciation. In five months, the rupee lost over 11.5pc value against the greenback. It plunged to 175.72 a dollar at the end of Nov from 157.54 at the end of June. Now, the placement of the $3bn Saudi foreign currency deposit with the State Bank of Pakistan (SBP) has minimised the worries of the central bank regarding the adequacy of its forex reserves. This means speculative dollar buying may remain under check at least for a few months taking extra pressure off the foreign exchange rate.

Global Container Freight Rate Index soared from $3,143 in December 2020 to $10,839 in September 2021 before falling — this should help check the growth in the import bill in the second half of our fiscal year

But is there any hope for improvement in the fundamentals of the external sector, particularly in foreign trade?

The answer is YES. The merchandise trade deficit has almost peaked. We may see a declining trend in the deficit from January 2020, if not from Dec 2021. This is not mere optimism. A careful review of the foreign trade situation points towards this possibility.

One big reason for the increase in the import bill has been a steep rise in global freight rates. Global Container Freight Rate Index that tracks these rates soared from $3,143 in December 2020 to $10,839 in September 2021. The index then started falling. At the end of November, it was $9,353. This declining trend is expected onwards if no eventuality hits the world. This should help check the growth in the import bill in the second half of our fiscal year ie Jan-June 2021. (Most containerised import cargoes are booked a few months before at the prevailing freight rates and the benefit of lower rates comes with a time lag).

Crude oil prices are showing some respite in the rising trend that we saw till the end of November and the trend may continue as the global economy is not growing at the initially estimated pace. Arab Light Crude, for example, fell from about $85 a barrel on November 10 to a little over $75 on December 7. This oil pricing trend, along with the efforts being made to strike the right balance between imports of crude oil and finished oil products, should also help in containing the imports bill in the second half of the fiscal year.

The International Monetary Fund’s estimate for 2021 global economic growth is 5.9pc and 4.9pc for 2021. A full one percentage deceleration in the global growth rate for the next year may lead to some reduction in international fuel oil prices next year. And, that may translate into a lower average oil import price for Pakistan as well. Although the government hopes to hit Pakistan’s economic growth target of 5pc during this fiscal year, a slowdown in the targeted pace of growth would also lead to a lower import bill.

Even if Pakistan is spared from the spread of the latest variant of Covid-19 (Omicron) and thus avoids lockdowns and lowered business activities, ongoing energy woes have already started affecting large-scale industrial output. Besides, the initial pick up in aggregate demand is losing steam.

Together these two factors can reduce the goods’ import bill in the second half of this fiscal year. (The output of large-scale manufacturing grew just 5.15pc in July-Sep this year from a year ago. And, the monthly quantum index of manufacturing continued to slide downwards in seven out of eight months since February 2021 when it had peaked past 175. In September, the index reading was close to 140).

On the other hand, consumer demand for goods has also seen its best during the first half of FY22 (July-Dec 2021) and it cannot be expected to grow any faster in the second half. Fears of Omicron are real, political uncertainty is growing and growth-induced job creation remains limited. All three factors put together are expected to lead to slower consumer spending. And, on top of all this interest rate tightening and the SBP’s advice to banks to pay a certain rate of return on savings may also depress demand in the coming two quarters.

Even if the central bank, that hiked its key policy rate by 150 basis points on November 19, keeps the rate stable in its next policy review due on December 14, it may come up with some mechanism for keeping the interbank market less liquid, (for example, an increase in banks mandatory cash reserves or statutory liquid reserves) and some measures to contain rapid growth in imports (like revised regulations for imports). That, too, would lead to a slower rise in the import bill in the second half of this fiscal year. And, that deceleration can become more pronounced if the government also decides to bring more tariff lines under stricter regulations and higher import duties.

So, a slowdown in merchandise imports bill growth in the second half seems almost a certainty. What is yet to be seen is how much relief it would bring in terms of volumes of foreign exchange and at what cost to the economy and to the manufacturing sector that relies heavily on imported inputs.

Published in Dawn, The Business and Finance Weekly, December 13th, 2021