How To Add Some Salt To The Current Account Deficit


There is a lot of speculation about the future economic performance of Pakistan. The government spokespeople are claiming to have put Pakistan on a solid economic track. The business fraternity simply refuses to add any positivity in the already gloomy sentiments. And between these two, there is public, whose opinions are either led by their own political beliefs or by what appears on the media. All this has stirred up a magnanimous amount of confusion, and people really don’t know whether Pakistan is on the verge of becoming the next economic super power or is sliding fast towards a doomsday scenario. So let’s take a quick look at the current economic situation, and we might have a few answers.

The biggest of the problems facing us recently was the current account deficit, which in simple terms means that the country lacks the money to pay for imports and other payments that are to be done in foreign currency. This justifies all the foreign loans that were secured by the government during the past year, including the one from IMF to keep the country from default in the immediate term. The terms of the latter loan, though, resulted in stiff measures that included tightening of tariffs and the currency devaluation by a huge margin.

The other problem was revenue collection that was off by a huge margin. This pushed the government to revise utility tariffs, duties and taxes. And the inflation reached double digits rapidly. State Bank started revising the interest rate, which went up from 6.5% to 13.25% within 6 months and is tipped to reach 15% by the year-end. This measure is usually taken to slow down the money circulation and eventually control inflation. But that is the only positive that it can potentially bring, because in order to control the inflation, it increases the cost of doing business immensely and discourages businessmen to invest in their businesses. In short, it slowed down an already sluggish economy. But this is not the worst of what it brings. In our situation, the inflation was not tied to the heating up of the economy. A GDP growth of roughly 3% or less, can at best, be called sluggish, but definitely not bullish. The inflation was tied to the dramatically increasing cost of doing business, mainly owing to the dramatic devaluation of Rupee and increasing power tariffs, cost of living and taxes. Take, for example, the auto industry. It has come to a sudden halt from charging an illegal premium (On) of Rs. 200,000 to a surplus of 1000’s of unsold units in a matter of months. But has this lack of demand pulled the prices of the cars down? No, it has done just the opposite. Reason: The industry still imports its major components from abroad, and import has become very expensive because of rupee devaluation. It’s a vicious circle. But this is not the only vicious circle that there is.

To solve the intensity of current account deficit, governments usually make policy revisions to reduce imports and induce exports, which is also what our government intends to do. So, theoretically, devaluation of over 20% of Pakistani Rupees should help exporters get their goods to export markets cheaply and hence increase their share. But in order for the exports to grow, businesses have to expand their capacities and increase output. But we just increased our interest rates drastically to deter the business entities to expand further. Additionally, most of the industries are reliant on importing the raw material, the machinery, or both. And that too, is now expensive owing to the same devaluation, so exports are not going north anytime soon. Another vicious circle.

I will talk about 2 things that are closely related to this entire economic whirlpool that we are in for the next few years, if not longer.

One; the impact that it will have on local businesses, especially small to medium enterprises. We all know that owing to the depreciating rupee value, the imports that not only run our industries, but also our households have become immensely expensive, where the revised custom duty structure will put further pressure on imports. If there were local alternatives of good quality available, this step would have had a positive impact on businesses, and the situation would be different.

But we live in a country where even a quality saltshaker is not manufactured locally.

So inflation, combined with heightened interest rates will put pressure on disposable income, will lower demand, slow down manufacturing and in turn, slow down the economy further. The impact has already started to be seen. A confectionary manufacturer knows the value of a price point of Rs. 2, and a biscuit manufacturer of Rs. 5. Becoming expensive for such products that use imported materials, or are imported, coupled with shrinking demand, has pushed them to reduce, if not stop, their spending on marketing and advertising. While the big industries are likely to pass through this phase (unless it lingers on), the smaller associated industries will get cash starved and start to die in a year or two, if not months. These would not only include media houses, TV channels, advertising agencies, production houses and all the allied marketing support industries, it will also be bad news for small local suppliers of the bigger manufacturing concerns. These companies might not be able to swim through the tides to make it to the other side of the storm. TV channels are already in losses, owing to flawed business models. Why would a TV channel be reliant on funding and TV ads from the government, and not subscriptions like everywhere else in the world? The same questions are relevant for other industries. Like, why would ad agencies always claim to have better foresight of their clients’ brands but fail to foresee the shifting trends of the global brand spend to reinvent their own businesses? Why would the production houses not use their expertise to diversify in other relevant industries? But a more important question is, why would not the government have a composite strategy about these industries before jumping into a halt-it-all mode? This will be collateral damage that cannot be undone. Don’t agree with me? Look at the publishing industry. Demand dwindled before being finally laid to rest for decades, but the governments were busy with what appeared as more important matters. Result is a dead industry, and an illiterate nation. Can we name an authentic Urdu poet alive today apart from Iftekhar Arif? Do we have Urdu prose writers? One may want to question if we really do need them. And it will be understandable, because actions taken (or the lack of them) in the past decades have asked the same question without even wording it out. The same happened with the film industry and the music industry, and many other small and medium industries that could simply be the cultural influencers locally and the soft identity of Pakistan internationally. These industries might not have huge significance in terms of their contribution to the GDP, but they have the potential to become a huge asset for the country’s image if nurtured properly.

The second thing is the responsibility of this state of affairs that someone needs to own. Let’s have a look at some numbers quickly, and a few random examples to understand the other perspective.

Pakistan’s total imports are at US$ 56 billion, whereas the exports are at roughly US$ 24 billion. Pakistan exported readymade garments and knitwear to the tune of US$ 5 billion in 2018-19 roughly. H&M global alone bought merchandise worth more than this figure in 2018 from their suppliers. Pakistan also exported approximately US$ 4 billion worth of cotton yarn and cotton cloth. Here’s where our priorities have gone completely wrong. Why can’t the government discourage exporting cotton yarn and plain cloth leading to an eventual ban? It’s the raw material that other countries buy cheaply from us, produce finished garments, and resell at a much larger premium; competing, and a lot of times, beating our exporters. On the other hand, why have the businesses failed to add the value addition chain to their units? Why have successive governments not paid any attention to facilitating the value addition over a designed course of time?

H&M is just one brand. There are thousands out there. Here’s what a government that is focused on enhancing the textile exports would do: Hire a panel of experts from the textile buyers’ fraternity internationally, and use them to train the industrialists and their teams on the requirements that need to be met to become preferred vendors of all the international brands. People lack training on material, processes, efficiencies, machines and methodology to make it all happen. A panel with such skillset would bridge that gap and enhance exports exponentially. Perhaps.

Now, the imports. Pakistan imported US$ 1.2 billion worth of power generating machinery. And US$ 400 million worth of textile machinery. All in all, Pakistan imported roughly US$ 26 billion worth of raw material for consumer and capital goods, and US$ 7 billion worth of finished consumer goods.

A major chunk of this US$ 26 billion worth of raw material could be avoided by developing local industries that can produce equally good quality raw material. It is a slow process, but we have spent 70 years prioritizing things mistakenly. While Pakistan also imported US$ 600 million worth of tea and approximately US$ 1.8 billion worth of edible oil, it is understandable since we do not produce these commodities. But an industrialization culture could have been inculcated, where over the years, machinery could have been completely manufactured locally, and we could save these precious dollars. Cars are being assembled and partially manufactured since 1982 in Pakistan. It is a technology that was invented over 100 years back. Why have not we been able to get to 100% deletion? Are we not skilled to manufacture a car completely in Pakistan? Can we not manufacture the power generation machinery locally? Can we not start by 5% deletion? But again we are living in a country where even a quality saltshaker or a saucepan is imported.

Where the responsibility of all of the above lies with various governments with wrong priorities, the major problem lies with the mindsets of our businessmen: It is driven by a false sense of contentment. It’s not contentment. It’s complacency. Laziness. We do not have a single Pakistani brand that reaches out to the world. Our businesses would love to export generic commodities and products to the world. Our brands would like to export the same products that they make for local consumption to Pakistanis living abroad. We have not found the courage to develop brands that could sell to the rest of the world. Our food companies have failed to become multinational companies. The ones who have crossed borders too, are selling to Pakistanis overseas. Not to the global audience. We keep exporting raw food commodities. We don’t sell manufactured food to non-desis. We don’t have a single clothing brand that sells to anyone except Pakistanis and a handful of Indians abroad. There can be one or two exceptions, but it’s a trader mentality that we are stuck with as a nation. Either because we are content in our own way with what we have, or because it is not easy and we are lazy, and would go for easy money only. The one that is obvious, safe and attainable. Are we a nation completely devoid of innovation and enterprising spirit? Or are we just complacent?

The responsibility of developing the infrastructure of an economy that produces what can reduce our dependence on imports, and can lure the world into buying, lies on the government and the business community together. And unless we are able to do this, increasing custom duties to suppress imports and devaluing currency to increase exports is not going to kill the current account deficit. Not anytime soon. Let’s start somewhere. Let’s start with a saltshaker, maybe.

“The tragedy of life is not found in failure, but complacency. Not in you doing too much, but doing too little. Not in you living above your means, but below your capacity. It is not failure, but aiming too low, that is life’s greatest tragedy.”

– Benjamin E. Mays

Sources for financial figures: Federal Bureau of Statistics | Pakistan Economic Survey | H&M 2018 published annual report.