Impact ofImports ofEconomy ofPakistan

Impact ofImports ofEconomy ofPakistan

Dated: 18-November-2008

Topic: Impact of Imports of Economy of PakistanSubmitted to: Mr. Abdul Salam

Course: Economic Indicators of the Business

Group Names: Abdul Hameed (BM-25011)

Institute of Business and Technology

(BIZTEK)

IntroductionIntroduction Imports play vital role in enhancing exports, these imports could be in the form of raw materials or machineries; both are used in the manufacturing sector.

It is expected that imports of consumer goods have direct contemporaneous association with exports, while imports of capital goods affect exports with two period lags because machinery imported by the producers first setup and then start production, therefore, it starts impacting exports

Long-term economic growth of a developing country depends on the imports of capital goods and machinery that accelerates economic productivity.

In order to maintain the trade surplus, total imports should be less then total exports.

But Pakistan is victim of trade deficit since long time. The trade deficit in the fiscal year 2006-07 is  $ 9.9 billion against the deficit of $ 8.4 billion during 2005-06. The invisibles balance is anticipated to register a surplus of $ 2.8 billion. On this basis, the current account deficit is likely to be around $ 7.1 billion (5.0 percent of GDP) for the year 2006 -07.

Source: Annual Report SBP-2006-07

Introduction Cont’Introduction Cont’• Increase in exports results the increase in nominal GDP,

therefore the demand in imports also increases.

• Pakistan’s economy is highly dependent upon the imports like industrial inputs, machinery, fuel and essential food items.

• The final sector in the circular flow of income model is the overseas sector which transforms the model from a closed economy to an open economy. The main leakage from this sector are imports (M), which represent spending by residents into the rest of the world.

Objective of studyObjective of study• The purpose of this study is to find out, why

Pakistan faces trade deficit since long.

• Either Pakistan imports more capital goods or consumer goods.

• Construct some solutions to overcome the problems of trade deficit.

• For this purpose imports of goods and services have been estimated using annual data from 1970 to 2007.

Historical backgroundHistorical backgroundPakistan has always been victim of trade deficit.

See Table

Historical background Cont’ Historical background Cont’ Imports TrendsImports Trends

Imports Trends

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

Years

Imp

ort

s (

in M

illi

on

$)

Historical background Cont’ Historical background Cont’ Import to Exports TrendImport to Exports Trend

Exports & Imports Trends

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

Years

Exp

ort

s &

Im

po

rts

(in

Mil

lio

n $

)

Imports

Exports

Show table

ImportsImports(Capital & Consumer goods)(Capital & Consumer goods)

• The growth in the country's trade deficit slowed to 17.8 percent during FY07 as compared to 87.0 percent in FY06. Consequently the trade deficit widened to a record US$ 9.9 billion in FY07, against US$ 8.4 billion for the previous year.

• The main contribution to the sluggish import growth of 8.1 percent in FY07 was from the deceleration in the growth of petroleum and machinery imports. In addition, imports under food, transportation and metal group declined. However, the slowdown in import growth was offset by the lower export performance, as exports grew by only 3.2 percent in FY07 compared with the FY06 growth of 14.3 percent.26

Break-up of importsBreak-up of imports• Food Group

Against an extraordinary growth of 46.5 percent during FY06, the food group imports declined by 6.8 percent during FY07. (39.7)

• Machinery ImportDuring FY07, the machinery import growth fell to 8.1 percent from 40.6 percent growth (32.5)

• Petroleum GroupDuring FY07, the petroleum group imports increased by a nominal amount of US$ $ 0.66 billion as compared to extraordinary increase of US$ 2.6 billion during FY06 (see table). As a result, growth in petroleum group import decelerated to 10.0 percent during FY07 as compared to 66.9 percent growth in the same period of last year. (10)

Break-up of imports Cont’Break-up of imports Cont’• Metal Group

The metal group imports declined by 5.2 percent during FY07 as against extraordinary growth of 52.1 percent in last year.

• Other ImportsThe other imports increased by 13.3 percent during FY07 on the top of 19.0 percent growth during last year. The main items which contributed in this strong import growth included musical instruments & parts, professional scientific & control equipments, coal, coke & briquettes, oil seeds & oleaginous fruits, organic chemicals, feeding stuff for animals and manufactures of metal necessities.See table

Break-up of imports Cont’Break-up of imports Cont’

0

5

10

15

20

25

30

Percentage

Food GroupMachineryPetroleumMetalChemicalOther

Review of literatureReview of literature• Badar(2006) using the time series data from 1973-

2005, estimated import intensity for export production in Pakistan. The results of the study indicates a long run relation between exports and imports of intermediate and capital goods. The study also concludes that country’s exports are more sensitive to imports of raw-material rather than capital imports.

• Akhtar and Malik (2000) estimated bilateral price and income impacts on Pakistan’s trading performance with its four major trading partners [USA, UK, Germany and Japan]. Using quarterly data for the period 1982-1Q to 1996-4Q applied three stage least square technique.

Empirical resultsEmpirical results• The results, however, draw that the import of

raw materials and capital goods have an important role in boosting the overall export level of the country; whereas, the country’s exports are more sensitive to import of raw material rather than capital imports.

ConclusionConclusion This study indicates that in medium to long-run, it is the structure of imports, particularly capital and raw materials, which should be monitored closely.

Since this will help the policy-makers to focus on importing more of those items which are directly used into export production, thereby increasing the export capacity of the country and reducing the excess pressure on trade imbalances.

Suggestion & Suggestion & Recommendation Recommendation

• To overcome the trade deficit, there is a need to analyze the different policy options to control trade imbalances. In this context, restricting imports through tariff measures might not be desirable given the country’s obligation under WTO commitments. Thus, any slowdown in trade imbalance could only be achieved through appropriate exchange rate and interest rate policies.

• However, what is equally important for the policy-makers is not to significantly weaken the ongoing growth momentum.

Pakistan Reserves Pakistan Reserves

WTO is an organizationWTO is an organization

• Established: 1 January 1995Membership: 146 countries (as of July 2003),

• 3/4th membership comprises• Developing countries (self elected)

• Functions:• Administering WTO trade agreements• Forum for trade negotiations• Handling trade disputes• Monitoring national trade policies• Technical assistance and training for developing countries• Cooperation with other international organizations 

WTO principlesWTO principles

• The WTO trading system would be

• without discrimination – (MFN and National treatment to all);

• freer – with barriers coming down through negotiation;

• predictable – bound tariffs

• more competitive – by discouraging “unfair” practices such as export subsidies and dumping products at below cost to gain market share;

• more beneficial for less developed countries – by giving them more time to adjust, greater flexibility, and special privileges

Trade Liberalization

According to Khan and Zahler (1985), “trade liberalization may promote growth from the supply side but, if the balance of payments worsens, growth may be adversely affected from the demand side because the payments deficits resulting from liberalization are usually unsustainable and not easily rectified by relative price (real exchange rate) changes”.

Impact of WTO in PakistanImpact of WTO in Pakistan

• Trade liberalization effected positively the following sector

• Agriculture (cotton, Citrus fruits and etc)

• Textile Industry

• Telecommunication

Trade LabializationTrade Labialization

THANK YOUTHANK YOU