The International Monetary Fund (IMF) has reached a staff-level agreement to complete the seventh and eighth reviews of Pakistan’s Extended Financing Facility (EFF).

With IMF Executive Board approval, $1,177 million will be made available to Pakistan with a total disbursement of $4.2 billion. This will provide much-needed economic certainty and therefore reduce the volatility of the Pakistani rupee’s exchange rate against the US dollar.

Policy priorities include tough measures to reduce government borrowing requirements, introduce power sector reforms that reduce circular debt, proactive monetary policy to bring inflation rates down to more sustainable levels, and strengthen and improve the quality
of governance.

These measures will require significant efforts on the part of the government to honor commitments and maintain the
program on track.

While the IMF program is likely to provide much-needed relief from the exchange rate volatility and uncertainty seen in recent months, efforts must be made to ensure that Pakistan is able to escape to the vicious circle of contacting the IMF every
a few years.

One of the main factors that leads to this vicious circle is the lack of productivity. While countries like Vietnam and Bangladesh have made significant progress in their productivity levels over the past two decades, Pakistan has
behind.

Subsequently, the lack of exports, low levels of trade openness and the inability of local producers to compete in regional and global markets reduced the ability to generate much-needed dollars, forcing the government to rely on loans granted by multilateral lenders and Governments.

According to statistics provided by the International Trade Center’s Trademap.org, global exports grew by more than 20% in 2021. Pakistan’s exports were reported at $31.8 billion in FY22, the highest ever recorded. It has increased by 25.5% from the value of the last fiscal year, as reported by the Pakistan Bureau of Statistics (PBS).

Exports in June 2022 were approximately $2.9 billion, about 5.8% higher than June 2021 exports and 9.9% higher than May 2022 exports.

There was also an increase in imports as they were reported at $80 billion in FY22, 41.9% higher than the value reported in FY21. June 2022 were $7.7 billion, 21.6% higher than the June 2021 value and 13.9% higher than the May 2022 value.

The import ban that came into effect at the start of FY23 may explain the sudden surge at the end of FY22. However, this negates the very purpose of the import ban as it was a measure introduced to limit the outflow of dollars at the height of the economic crisis.

The disruptions resulting from the import ban have created high economic costs. The trade deficit was reported at $48.3 billion in FY22, 55.3% higher than the value reported in FY21.

One of the main factors for the increase in the trade deficit was the strong growth in imports of products belonging to the oil group. According to the latest data available from PBS at the time of writing, the oil group’s imports doubled year-over-year in dollar terms in the first 11 months of FY22.

None of the other groups observed such a high increase. Imports of petroleum products increased by 126.2% year-on-year, while the quantity increased by 26%.

The fact that the rise in international commodity prices has not been accompanied by an increase in fuel prices at the petrol pump has worsened the trade deficit. Pakistan needs a better strategy, which involves trade reforms that can strengthen export-import linkages.

The Economic Advisory Group (EAG) recently launched its book entitled “Trade Connectivity”. The book highlights the benefits of greater trade openness for Pakistan as it will help increase economic growth, improve national welfare and improve consumer welfare through lower prices and availability of a wider variety of products on the domestic market.

One of the main challenges, as noted in the book, is the lack of participation in global value chains (GVCs).

The total GVC participation for Pakistan is about $6 billion, which is significantly lower than that of Thailand, Vietnam and India. The latter countries reported at least $90 billion in GVC participation in 2017.

Participation in GVCs, which involves goods crossing borders multiple times, occurs either through backward linkages or forward linkages. The former involves the conversion of imported inputs into local exports, while the latter involves the conversion of locally produced goods into exports in the importing country.

While Southeast Asian countries have developed backward linkages, Pakistan and India have focused on developing forward linkages by exporting intermediate goods.

Lower import duties in ASEAN countries have played an important role in promoting participation in GVCs. Several countries are signing free trade agreements (FTAs) with their major
Commercial Partners.

Although FTAs ​​can benefit exports, they can be important for sourcing inputs from major suppliers. For example, the book highlights how heavily Vietnam depends on imports from countries with which it has negotiated an FTA.

In addition, Vietnam has also adopted several non-tariff measures (NTMs) to improve its producers’ linkages to major markets.

NTMs involve predetermined specifications in the production of goods and can help improve the quality of goods produced as well as ensure that imports of poor quality or dangerous goods are prohibited. Therefore, Vietnamese products are likely to conform to certain standards and specifications. Unfortunately, the Pakistani government has failed to adopt NTMs and this delay likely excludes its most advanced producers and
developed markets.

The author is Assistant Professor of Economics and Research Fellow at CBER, Institute of Business Administration, Karachi

Published in The Express Tribune, July 18^e2022.

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