During the last fiscal year, which ended on June 30, Pakistan’s exports (fob value) rose to $31.1 billion, while imports reached $53.2 billion, resulting in a trade deficit of $22.1 billion, according to the latest balance of payments statement.
Although this deficit is smaller compared to the $24.8 billion deficit recorded the previous year, Pakistan’s fragile external finance situation demands a further reduction this year to minimize the overall external financing gap, which is projected to stay close to $20 billion. Achieving this is only possible with a significant increase in export earnings.
There is no room to reduce imports further for two reasons: The targeted economic growth rate of 3.5% for this fiscal year cannot be reached if imports are further cut, and the International Monetary Fund (IMF) opposes such measures under the new three-year $7 billion Extended Fund Facility. The IMF has, in fact, urged Pakistani authorities to develop an export strategy focused on product diversification and value addition.
In the last two fiscal years, goods imports remained low ($53.1 billion in FY24 and $52.7 billion in FY23, much lower than $71.5 billion in FY22) primarily due to strict tariff and non-tariff measures to contain the import bill.
During these two years, the IMF encouraged Pakistan to relax import restrictions but remained lenient considering the forex crisis in the country.
Reducing imports to contain the current account deficit is no longer feasible; improving exports with a focus on product diversification is essential.
The forex crisis was so severe that the State Bank of Pakistan’s (SBP) forex reserves fell from $9.8 billion in FY22 to $4.4 billion in FY23, rising gradually to about $9.4 billion at the end of FY24, thanks to China, the United Arab Emirates (UAE), and Saudi Arabia rolling over billions of dollars they had placed with SBP.
The IMF also supported Pakistan with a short-term $1.3 billion loan. Currently, SBP’s forex reserves stand at $9.03 billion (as of July 19), equivalent to two months of goods imports.
Given the low level of forex reserves and the need to boost exports in the last fiscal year, it is clear that product diversification, more value addition, deeper penetration into existing export markets, and active exploration of new markets are necessary.
While the to-do list is straightforward, its implementation is challenging, especially amid local political chaos, mounting economic challenges, and pressing geopolitical issues. Adding to these challenges is the ongoing unprecedented energy crisis, making it even more difficult to boost merchandise exports this fiscal year and perhaps the next two years.
In the first eleven months of the last fiscal year, large-scale manufacturing output grew by just 1%, according to the Pakistan Bureau of Statistics, mainly due to significant hikes in energy prices, political uncertainty, and high-interest rates. Towards the end of the last fiscal year, the SBP eased interest rates from 22% to 20.5%.
However, the high prices of fuel oil, gas, and electricity continue to rise as the government collects more revenue from fuel oil and tries to contain the energy sector’s circular debts, worth trillions of rupees.
The circular debts accumulated over three decades due to corruption, inefficiency, and mismanagement by successive governments, and the energy price increases to contain their growth in the past two years have pushed people and businesses to their limits. This has led to growing protests over higher electricity bills.
In this business-unfriendly environment, compounded by political uncertainty and ongoing conflicts between PTI and the current regime, expecting export-oriented industries to take a long-term view and invest significantly in product diversification and value addition is unrealistic.
Moreover, as business lobbies and chambers of commerce warn of closures due to unaffordable production costs, and Karachi-based businesses express concern about rising crime rates impacting investments, expecting a turnaround in exports seems unlikely.
As for deeper penetration into existing export markets — Afghanistan, China, Bangladesh, the United States (US), Europe, and the Gulf Cooperation Council (GCC) — our strained relations with Afghanistan and the current turmoil in Bangladesh’s domestic politics pose significant challenges. Equally challenging are relations with the US and Europe due to Pakistan’s unpredictable relationship with the West.
Additionally, consistently meeting the high standards of US and European buyers while remaining competitive in pricing has become very difficult for most Pakistani exporters, whose energy bills, workers’ wages, and financial costs of production are all rising. Lowering the interest rate alone won’t significantly impact this.
Conversely, exports to China, which have been steadily growing, may continue to increase with the launch of the second phase of the China Pakistan Economic Corridor, as trading costs with our neighbor are much lower than with distant Western or North African countries.
Exports to the GCC region may also grow due to the friendly relations Pakistan has with Saudi Arabia and the UAE, and the presence of millions of overseas Pakistanis in these two countries.
