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Morning Call about Economy – Arif Habib Limited

Karachi: Trade deficit update and MFN Status to India

As per the latest figures by Federal Bureau Statistics (FBS), the country’s trade deficit for the month of Oct’11 slightly retracted showing a decline of 4.2% MoM to the tune of USD 1.7mn, ~36% YoY higher than Oct’10.

According to Arif Habib Limited, this was led by swelling import payments worth USD 3.6bn, showing a ~13 % YoY growth. This brings the period (Jul-Oct) exports and imports at USD 7.9bn (+12.3% YoY) and USD ~14.7bn (+20.4% YoY). While in terms of inward, export earning which remained healthy during FY11 have finally started to show signs of slowing down, ~2.2% YoY decline. The slowdown in exports are explainable through fall in commodity prices in particular that of textile related goods (cotton down by 13% YoY to USD 110/lb, Oct’11). While higher growth of imports is likely due to downward sticky prices of major contributing commodities (oil, food and agri-based products).

Going forward in FY12, given the current pace of trade, Arif Habib Limited expects exports to remain depressed as global commodity prices eases while volumetric growth remains intact. Arif Habib Limited expects the exports to post a mere increase of ~4% YoY in FY12 to reach USD 26.5bn. In addition to this with oil prices staying downward sticky alongwith a high domestic demand, will likely push the import bill to USD 36-40bn. This will bring the total trade deficit to USD 12.6bn in FY12 (a 24% YoY jump from FY11). Further in the long-run Pakistan exports are likely to get push from enhanced bilateral trade agreements with India, Turkey, Russia and China. Arif Habib Limited briefly touches the recent MFN status granted to India and possible implication on Pakistan economy.

How Pakistan economy is likely to benefit of trade with India
Pakistan recent act of granting India Most Favoured Nation (MFN) under the principles of World Trade Organisation (WTO) regime 1995, has gained much of the importance. Arguments against granting the MFN status to India is mainly of political nature while the question of, lack of Pakistan export competitiveness as compared to India due to existence of infant industries and high non-tariff barriers in India. However earlier studies on the opinion suggest that Pak-India trade liberalisation is likely going to benefit both countries reaching an estimated trade value of USD 5.2bn (estimated bilateral increase of 79% going forward from FY04 levels), with a potential to push Pakistan’s exports by another USD 2.5bn.

India as a source of direct investment
India holds a very small portion of direct and portfolio investment in Pakistan USD 0.5mn for Jul-Sep’11 (0.2% of the total foreign investment), historically, languishing at a meagre USD 0.1mn (3-Yr, average) of the total investment inflow. In the recent years India has stand out as major global sourcing, particularly in the sectors of technology and expertise. This Arif Habib Limited thinks with the acceptance of MFN status to India potential source of investments alongwith expertise within Pakistan cannot be ruled out. As per SBP report the mutual cooperation between the two countries holds potential benefit to sectors, including auto, minerals, agri, pharma, energy and telecommunication etc.

In terms of trade
On average Pakistan has remained a net importer of goods and services from India. In FY11 alone Pakistan’s total share of exports to India stood at 1.1% (USD 0.3bn) against the import share of 4.0% (USD 1.44bn). As per the SBP report Pakistan can potentially bag in export earnings of 800 varied commodities through trade liberalising trade with India, while import 1,300 varied commodities.

In terms of commodities
Commodity wise composition of Pakistan exports to India remained concentrated in six sectors mainly. Even of which textile, clothing and fresh food contributes ~80% of the total exports to India and Pakistan holds comparative advantage over India in these commodities, in terms of product diversification and overall performance. Over the years both the share-wise and value-wise exports of goods to India have increased but at a slower pace (FY95: USD 41mn, 0.51% of total exports, FY11: USD 286mn, 1.1% of total exports). While Pakistan import wise commodities have remained skewed towards food and technology.

Granting the MFN status to India would not only allow Pakistan excess to larger more culturally harmonised market in terms of exports but while importing technological expertise can be beneficial in the long run. Gains through such trade liberalisation enhance efficiency of country’s factors of production translating in to higher output frontier. This alongwith political soothing between the two countries, can reduce defence expenditure and allow both countries to mutually concentrate on achieving Millennium Development Goals, such as poverty alleviation, awareness etc.

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