With cheap labour, Pakistan can establish linkages with foreign producers

KARACHI: Imports into Pakistan are continuing their upward trend. According to data of the Pakistan Bureau of Statistics (PBS), imports increased 13.8% between May 2017 and April 2018 and more than 14.8% in May 2018 over May 2017.

Imports between July 2017 and May 2018 were reported at $55.2 billion, a 14.1% increase over the same period in FY17. It is likely that imports will touch $60 billion in FY18, widening the trade deficit to over $35 billion.

Imports of all major commodities increased in May 2018 compared to April 2018. However, there was a decline in imports of food items and transport goods in May 2018 over May 2017. Major items such as palm oil and completely built units of trucks, buses and cars showed the biggest decline.

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According to data compiled by the State Bank of Pakistan (SBP), China was the largest source of imports, followed by the UAE (Dubai), Singapore, Saudi Arabia and USA between July 2017 and May 2018.

Imports from China crossed $10.3 billion, a 17.5% increase from the same period of FY17. Imports from the UAE (Dubai) and Saudi Arabia increased 26.8% and 29.8% respectively.

There was also a significant increase in imports from Qatar and Thailand, with both reporting 42% rise for July 2017 to May 2018 compared to the same period of previous year. Imports from Qatar and Thailand are expected to be more than $1 billion in the current fiscal year.

Interestingly, China is the only country among top 15 import-sourcing countries that has a free trade agreement (FTA) with Pakistan. Malaysia and Sri Lanka are the other two countries. Imports from Malaysia were less than $860 million while imports from Sri Lanka stood at $63.5 million between July 2017 and May 2018. Approximately, 1.5% of total imports into Pakistan were from Malaysia and Sri Lanka.

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A deeper analysis using UN Comtrade data indicates that industrial products constituted 73.5% of total imports into Pakistan in 2017, petroleum products had a 12.9% share and agricultural products comprised 13.5%. In 2013, 21.1% of total imports were petroleum products that dipped to 13.41% in 2015.

A classification of goods based on different stages of production, for example, raw material, intermediate goods, consumer goods and capital goods from the World Integrated Trade Solution (WITS) shows evidence of a surge in contribution of capital goods to total imports from 21.36% in 2013 to 31.95% in 2017.

During this period, total imports of industrial capital goods doubled from $6.90 billion to $13.5 billion. On the other hand, the increase in imports of industrial raw material and intermediate goods had been smaller.

Although there was a fall in global commodity prices during this period, the most important reason for the surge in imports of capital goods had been increasing demand from China-Pakistan Economic Corridor (CPEC)-related projects.

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More than 98.2% of goods imported from China in 2017 were industrial goods, of which 47.5% were capital goods, 36.04% were intermediate goods and 15.5% were consumer goods. Approximately 50% of imports of industrial capital goods into Pakistan originate from China.

Between 2013 and 2017, the import of industrial capital goods from China increased threefold.

However, majority of the capital goods were either communication equipment or power-generating equipment. Imports of industrial capital goods for enhancing manufacturing activities within Pakistan, such as textile machinery used for weaving and spinning, were significantly lower. Import demand has likely been generated by CPEC-related projects that are focused on energy and transport infrastructure.

However, there is little evidence that Pakistan is currently participating in global value chains of industries such as vehicle and electronics as the country imports final products and exports a negligible quantity of these goods.

Almost all imports of intermediate goods in vehicle and electronics industries are likely to be converted into output for domestic consumption. Hence, any participation in global value chains, even of intermediate goods, is likely to be negligible.

Based on the contribution of products to global value chains within textile, vehicle and electronics industries, there is evidence that Pakistan imports mostly intermediate goods in the textile industry. More than 88% of imports in the textile industry were intermediate goods. On the other hand, more than 70% of electronic products imported into Pakistan in 2017 were in the form of final goods instead of intermediate goods.

In recent years, there has been an increase in imports of vehicles into Pakistan in the form of final goods, primarily from Japan and Thailand. More than 72% of imports of vehicles came from the above origins.

Even though domestic automobile manufacturers use domestically produced parts and accessories, the global value chains will increase production linkages between Pakistani manufacturers and foreign producers. This would consequently improve quality and increase total exports from Pakistan.

Several Southeast Asian countries have benefitted from global value chains as foreign producers there take advantage of relatively cheap labour, easier access to large markets and production linkages across the region.

Pakistan, with its abundant and cheap labour, can provide opportunities for foreign producers. The incoming government must adopt right policies in order to attract industrial investments that improve the quality of domestic production and consequently increase exports.

Such incentives may become increasingly necessary as the largest trading countries become more restrictive and their firms less willing to invest in foreign production.

The writer is Assistant Professor of Economics and Research Fellow at CBER, IBA


Published in The Express Tribune, July 2nd, 2018.

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