Growing Trade Imbalance Leads Pakistan to Seek China Concessions

  • Steps must be taken to address eroding trade margins: minister
  • Existing textile industry needs modernization, not protection

Pakistan is pushing for a review of its decade-old free trade accord with Beijing before it moves toward further expansion and liberalization, amid a burgeoning trade and current account deficit.

While South Asia’s second largest economy recording growth of over five percent -- its highest in about a decade -- the country’s trade showed a whopping $25.4 billion deficit during first 11 months of this year through May, according to central bank data.

Pakistan’s trade imbalance with China is equally worrisome, and growing. China-Pakistan bilateral trade in the first 10 months of the current financial year ending on June 30 was recorded at more than $9 billion and like previous years, is heavily weighted in favor of China. Pakistan’s July-April imports from China stand at $7.82 billion while exports are at just $1.4 billion.

The country’s current account deficit more than tripled to $8.9 billion in the 11 months through May, while foreign exchange reserves reduced 15 percent to $15.9 billion after peaking at $18.9 billion in October, according to the State Bank of Pakistan.

Seeking Concessions

Islamabad is seeking changes in the existing free trade pact with its largest trading partner -- it wants same trade concessions Beijing has offered other trading partners in recent years, according to Pakistan’s commerce minister Khurram Dastgir Khan. These include better access to the Chinese market and placing zero duty on some products, he said.

Khurram Dastgir Khan

Photographer: Asad Zaidi/Bloomberg

"Our margin of preference has been eroded by the subsequent accords China has done," Khan said in an interview on May 19. "First address this imbalance, then of course we can begin to negotiate further expansion and liberalization."

China’s Ministry of Foreign Affairs did not respond to faxed questions on its trade with Pakistan.

China Investment

Prime Minister Nawaz Sharif has brought relative stability to the economy, accelerating growth after averting a balance of payment crisis in 2013 with help of the International Monetary Fund’s $6.6 billion loan program. Meanwhile, China is financing projects worth more than $50 billion in Pakistan’s infrastructure and energy sectors under its ‘One Belt, On Road’ initiative.

Read more: China’s Big Political Gambit Hinges on a Remote Arabian Sea Port

Pakistan’s huge trade imbalance will put stress on resources to pay its increasing debt and ultimately lead to again a balance of payment crisis, Mohammed Sohail, chief executive Topline Securities said.

”If we continue to rely on Chinese imports, our overall exports won’t increase, then the balance of payment will be negative, interest rates will be high, there”’ be currency devaluation and the government will be relying on foreign debt.”

Pakistan is expected to finalize its trade accords with Turkey and Thailand by end of 2017.

Currency Adjustment

Khan said a stable Pakistan currency was also putting the country’s exports under pressure. He’s trying to persuade finance minister Ishaq Dar to adjust its value after the devaluation of currencies by regional players including China, India, Turkey and Thailand gave them an edge over Pakistan.

”It requires some adjustments,” Khan said. ”The only argument for adjustment is that comparatively our competitors have devalued their currencies, so yes, it’s a strain.”

IMF last year pointed out that Pakistan’s rupee -- which operates under a managed float regime -- was overvalued by as much as 20 percent and was negatively impacting its exports.

Yet the finance minister thinks otherwise, saying the forex market is independent and the currency is not overvalued. The rupee has remained stable at an average of 104.7 per dollar in the past year, barely moving out of a range of 1 rupee plus or minus.

”Currency devaluation is a myth," he said on May 25 at a pre-budget media conference. "Those who say it’s 20 percent overvalued they’re living in a strange world. There may be a 4 percent to 5 percent difference with the currencies Pakistan is dealing with."

While concluding executive board talks in June, the IMF also sought "greater exchange rate flexibility" to help reduce the external imbalance and bolster the external buffer. It anticipates the current account deficit at 3 percent of the country’s gross domestic product in current fiscal year ending on June 30.

Analysts give more importance to the government resolving other "critical issues" including taxes on raw material imports, wages, energy tariffs and on-time payment of tax refunds worth billion of rupees to exporters.

”Currency is not an issue at the moment,” said Khurram Schehzad, Karachi-based chief commercial officer at JS Global Capital Limited.

Textile Modernization

Khan urged Pakistan’s textile industry, which makes up 61 percent of country’s total exports, to modernize to compete with "newly emerged serious" players including India, Bangladesh and Vietnam.

”If you aren’t competing directly and constantly, you don’t replace your machinery, you don’t modernize you won’t become more productive,” he said. ”Protection for existing sectors would be counter-productive.”

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