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5/22/12

Causes and Remedies of

Trade Deficit

By: Fahim RiazMTO Batch XII


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Outline

International TradeExports & ImportsTrade Balance(Surplus & Deficit)Major Exports and ImportsAn overview of Pakistans Trade

Balance

Causes of Trade DeficitRemedies of Trade DeficitConclusion


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Introduction

Pakistans negative trade balance is aconstant problem since 50s and its causeslie not in international trade but mainly in

domestic factorsThe problem of a deficit coupled with high

inflation and low economic growth iscausing the balance of payments problems

to be more serious.Foreign reserves are rapidly shrinking day

by day and no worthwhile inflow tocompensate the loss is likely to be

replenished in near future.


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INTERNATIONAL TRADE

INTERNATIONAL TRADE: is exchangeof goods and services acrossinternational borders or territories

Why it is important?Without international trade, nations would

be limited to the goods and servicesproduced within their own borders.


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Export and Imports

An export is any good or commodity,transported from one country( home country )to another country in a legitimate fashion,

typically for use in trade.An import is any good or commodity,

brought into one country from anothercountry in a legal way. Import goods or

services are provided to domestic consumerby foreign producer.


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Balance of Trade andTrade DeficitTrade Balance (or net exports)

The value of a countrys exports less the value of itsimports in a particular period (quarter or year)

Deficit: In economic term relates to more expenditureand less of revenue

A negative balance of trade is known as a tradedeficit or, informally, a trade gap consists ofImports More than Exports.

A positive balance of trade is known as atrade surplus and consists of exporting morethan is imported


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Factors affecting balance

of trade

Prices of goods manufactured athome

Exchange ratesTrade agreements or barriersTax and tariffBusiness cycle at home or abroad.


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Pakistans MajorExports


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Contd.

Major Export


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Composition of Exports


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Pakistans MajorImports


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Composition of Imports


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Trade Pattern

0

2

4

6

8

10

12


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Challenges

IndicatorRanking2007-08

Ranking2008-09

Overall

Competitiveness92 101

Infrastructure 72 85

Labour Market

Efficiency113 121

Financial Market

Sophistication65 71

Technological

Readiness 89 100

Innovation &

Sophistication Factors78 85

(Ranking among 131 countries)


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Causes of Trade Deficit

Worsening Energy CrisisImport oriented industries

Flaws in AgricultureProductivityNarrow export base

Rupee DevaluationIncrease in prices of inputsLess modernization of

machinery


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Worsening Energy CrisisSerious energy shortages, long spells of load-shedding arelooming risks to our production level and economy.

Around 25 percent of textile units have been closed , Out ofaround 1,200 textile units, 300 are closed in Punjab.

The export were down to $17.8 billion as compared to $19.2 BN

Import oriented industries Import depends upon countrys demand and production

capacity. if you are not producing in accordance with your

demand then you will have to import that.Our import aremainly consist of Consumer goods rather then Capitalgoods.

Imports totaled $22.4 bn in July-March. Was $ 32 bn in theFY 09.

Most of the raw materials of textiles and garments, whichconstitute over 50 percent of the total exports, was


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Flaws in Agriculture Productivity Main stay of our exports has been on rice, cotton etc The shortfall in cotton crop compelled textile industry to

spend $1.291 billion US to import 4.6 billion bales. The food bill paid in 2008 amounting to $4 billion Its an indicator of incompetence and lethargic attitude One such case is the export of wheat on a marginal prices

and then importing it back on higher prices.

Narrow export base: Around 50-60% of our exports consists of Cotton related

items. Bad weather or other uncertain circumstances can

adversely effect this 60% of our export. Remaining partconsist of few products like Surgical and sports items.

Out of a total of over 5,000 items being traded in the world,

Pakistan has hardly 1,400 items


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Rupee Devaluation: Devaluation may be a cure for some countries balance of

payments deficits but not for all. It may work better forindustrialized countries rather than developing countriesmain examples is China. The dispute is the low value of yuan

as compared to dollar The constant increase in import bill is putting pressure on

Pakistans forex reserves and fast depleting reserves arecausing depreciation of our currency. Which is increasing ourimport bill.

Increase in prices of inputs High inflation rate in the past many years has seriously

damaged our cost competitiveness. The major investor are shifting their investment to other low

cost areas like China, Bangladesh.

Imposition of VAT is also a major threat that can increase thecost of doing in Pakistan.


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Less modernization of machinery Industries specially SMEs are facing the problem of less

modernization of machinery. The main problem here is thelack of finance available.

This impacts the quality of the goods to be exported. Theother barriers are taxes and other fee levied by thegovernment. We were rated 100th in terms oftechnological readiness.


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Remedies

Diversifying the Export Base:Cost Competitiveness

Clustering of IndustryInternational Standards(Quality/Environment/Social)

Improving Technical SkillsRegional and Bilateral TradeRole of SME

Revitalizing Agriculture Base


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Remedies

Diversifying the Export Base: We will have to diversify the range of exportable products to

make Pakistan less dependent on textile. The need is to put in place a more effective marketing

mechanism aimed at finding new markets for the countrys

export products Pakistan stands 85th in terms of innovation. The government should setup some R&D department that

can help us in coming out with new products for new &existing market

Cost Competitiveness: Unless the cost of doing business is lowered, the drive toboost our exports and to reduce the trade deficit is likely toflounder

We were ranked 101st in overall competitiveness in theworld.

The government will have to reduce the pressure of inflation


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Remedies

Clustering of Industry Clustering is the process of combining five to ten small ormedium enterprises . This Help them to pool their resourcesfor improving productiontechniques, cutting down onunnecessary expenditure, take up research anddevelopment and come out with a better product in

domestic and export market. Industrial Cluster Development Program has achieved

considerable success in consolidation of industriesproducing electric fans, cutlery in Wazirabad, and garmentsin Lahore

International Standards: The reluctance of Pakistans exporter to ensure compliance

with environmental and labor standards agreed underinternational codes and agreements also hits their exportsadversely particularly in the areas of fish and fish

preparation and sport item Example of Nike canceling their contract in Pakistan. They


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Remedies

ImprovingTechnical Skills: Quality production with differentiation requires technical

skills to people entering in the industry For enhancing education level and technical expertise it is

suggested that the government should set up a chain of

polytechnics we one can learn technical skills. An international survey carried out a few years ago found

that the productivity of the average Japanese female factoryworker was four times higher than the productivity of theaverage Pakistani male factory worker

Regional and Bilateral Trade: The Government should also enter into such Free TradeAgreement (FTAs) in order to increase our export andreduce the barriers.

Successful implementation of the agreements alreadyentered like

Tokyo Round Agreements, Multi- Fiber Arrangement (MFA)


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Remedies

Role of SMEs: SME play a very important role inrevitalizing the economy of a country.

Govt. has taken some step in order to boost SMEsperformance by setting up Gujranwala Business Center

(GBC) and Sialkot Business & Commerce Centre(SBCC) in order to provide business developmentservices in the areas of product design, productquality and international standards and packaging.

Sports Industries Development Centre (SIDC), Sialkotis being established to facilitate technology up-gradationand human resource development of sports industry


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Remedies

Revitalizing Agriculture Base: Pakistan economy is mainly agriculture centered and

strengthening agriculture base would strengthen oureconomy accordingly.

Pakistan can earn foreign exchange by improving productionand storage techniques, up gradation of forms to marketroad network, and establishment of cool chains for diarymilk and other perishables .

Agro Food Processing Facilities Center (AFPC) ,Multan.

This Centre comprises of fruit processing (Mango and GuavaPulp), vegetable processing (Tomato paste/puree), FreshFruit/Vegetable Grading and Packing


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Conclusion

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