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Impact of

Imports of
Economy of
Pakistan
Dated: 18-November-2008

Topic: Impact of Imports of Economy of Pakistan

Submitted to: Mr. Abdul Salam

Course: Economic Indicators of the Business

Group Names: Abdul Hameed (BM-25011)

Institute of Business and Technology


(BIZTEK)
Introduction
 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’
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 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 background
Pakistan has always been victim of trade deficit.

See Table
Historical background Cont’
Imports Trends
Imports Trends

45,000
40,000
Imports (in Million $)

35,000
30,000
25,000
20,000
15,000
10,000
5,000
0
85

87

89

91

93

95

97

99

01

03

05

07
19

19

19

19

19

19

19

19

20

20

20

20
Years
Historical background Cont’
Import to Exports Trend
Exports & Imports Trends

45,000
Exports & Imports (in Million $)

40,000
35,000
30,000
25,000 Imports
20,000 Exports
15,000
10,000
5,000
0
85

87

89

91

93

95

97

99

01

03

05

07
19

19

19

19

20

20

20
19

19

19

19

20

Years

Show table
Imports
(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 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 Import
During FY07, the machinery import growth fell to 8.1 percent from 40.6
percent growth (32.5)

• Petroleum Group
During 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’
• 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 Imports
The 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’
30

25

20
Food Group
15 Machinery
Petroleum
10 Metal
5 Chemical
Other
0
Percentage
Review 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 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.
Conclusion
 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 &
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
WTO is an organization
• Established: 1 January 1995
Membership: 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 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 Pakistan
• Trade liberalization effected positively the
following sector
• Agriculture (cotton, Citrus fruits and etc)
• Textile Industry
• Telecommunication
Trade Labialization
THANK YOU