Pakistan’s economy registered a growth of 6% in the fiscal year 2021-22 (FY22) compared to a target of 5%. This growth was higher than previous fiscal year’s growth of 5.7%. An early opening up of the economy from the lockdowns of pandemic during 2020-21 allowed the industrial sector to continue its growth streak at 7.2% in FY22 followed by agriculture and services sectors recording 6.2% and 4.4% respectively.
While the above mentioned is good news, however as per data by Pakistan Bureau of Statistics (PBS), the trade deficit has widened by 57.8 percent during the first eleven months (July-May) of FY22. The deficit has reached $43.3 billion compared to $27.4 billion during the same period of 2020-21, which is considered the highest ever trade deficit for the period under consideration. While this was largely due to global rise in fuel, food, and metal prices, it of course was bad news for the fast-depleting forex reserves and the dwindling value of Pakistani rupee.
One encouraging aspect of economic growth in FY22 was the increase in country’s exports by 27.8 percent as it reached $28.8 billion in the 11 months of FY22 as compared to $22.6 billion during the same period of FY21. While most of Pakistan’s exports were destined to far away lands, the country missed the opportunity to export larger volumes in the neighborhood.
Many independent economists have cited the success of Pakistan’s revised free trade agreement (FTA) with a much larger economy – China. This is bearing fruit with rebound seen in exports of some items to China including rice and seafood. Sadly, Pakistan is missing out on trade gains of a similar or greater magnitude in a USD 3.1 trillion economy – India. Today India has become the third-largest unicorn center with 100 unicorns with a valuation of US$ 333 billion. India’s import demand is on the rise and the most economical source will be from the region.
The trading with India is unfortunately seen in Islamabad through the lens of conventional security paradigm. Former Prime Minister Imran Khan thought that normalizing trade relations with India would be tantamount to betraying the people of occupied Kashmir. Perhaps, he could have helped the minorities in the region better if Pakistan’s own economic security was not in the hands of friends in the Middle East, China, and Turkey.
Private sector in Pakistan remains a proponent of trade with India. Since 2012, our research teams have interviewed over 5000 Pakistani firms from various sectors. Just like the gains seen in the case of China and Pakistan’s trade, firms believe that bilateral trade benefits both countries, however with proper safeguards benefits the economically smaller country more in terms of providing access to cheaper imports, technologies, and ideas, besides also providing a larger market for value added and even low-value exports.
We have also interviewed consumer associations across Pakistan. They have long advocated that every time trade with India was curtailed or stopped all together, food price inflation was a natural outcome. The brunt was faced proportionately more by the poorest of the poor in Pakistan. This was seen most in the case of Pakistani Punjab given the linkages with agriculture and food suppliers from India’s western states. Seasonal food shortages in Pakistan were met by importing from India. This argument is valid to some extent. As Pakistan faces record breaking inflation and further price increases to the tune of over 12% expected in FY23, India’s growth in consumer price index remained in single digits ranging between 7 to 8%. Besides higher levels of agricultural output, India generally also remains in a better position to insulate from commodity super cycle currently experienced in most economies.
The business community also demands a longer-term vision of exports. They understand that GSP+ and other market access measures provided by EU and US will not last forever. Ultimately, India and Asia remain the global drivers of present day and future demand. Their population profile is much younger than China. Export-oriented and potentially large exporting sectors (including IT and ICT) want to fast integrate in value chains in these economies. We have seen Pakistani industrial and services sector providing value to Indian buyers but through third country ultimately resulting in a loss to the exchequer.
Pakistani firms often cite the hostilities between China and India which haven’t prevented them from trading with each other and investing across the border. This raises an important point – is Pakistan able to scale up trade with countries in the neighborhood with whom we don’t have hostilities? Data speaks for itself. We haven’t been able to keep our market share in Afghanistan’s sufficiently large consumer market. The envisaged gains from Sri Lanka and Pakistan FTA could not materialize. We haven’t followed through with our trade commitments to other ECO and SAARC member countries with whom we haven’t fought any wars. In summary, the country has yet to learn how to do sustained business with the world.
This is important in the context of China – Pakistan Economic Corridor (CPEC). Beijing has often emphasized that Pakistan will not be able to optimally benefit from the large infrastructure endowments and industrial capacities built under CPEC (including Special Economic Zones) unless dividends of CPEC are shared with neighbors and trade and investment value chains across the region are strengthened – precisely the same argument due to which China, Bangladesh, Sri Lanka, and several economies of the far East have strengthened their trade and investment ties with India overtime. These lessons from the neighborhood are important and should be practiced keeping the political differences aside which could continue to take their course.
I do respect the view that Pakistani exports face a virtual closing of border by Indian non-tariff barriers (NTBs). If history is of some guide, such barriers come down on both sides only when there is an intent for pursing trade, business delegations meet regularly, trade desks at the embassies are functional, and traders are not seen with suspension but facilitated by relevant authorities. In fact, it is the private sector on both sides that eventually becomes a powerful advocate for lowering NTBs. Pakistani authorities need to understand that even unilateral action to allow merchandise and services trade with India will lead to improvements in Pakistan’s overall trade balance and increase diversity in industrial exports back to India and beyond.
A failure to understand the above mentioned is leading Pakistan to continuously resort to the International Monetary Fund. Pakistan’s economic growth rate over the past decade and a half remains one of the lowest in the region. The country is one of the least integrated with the world in terms of trade and investment. This dismal economic record is not allowing the country to move and keep people out of poverty.