INTRODUCTION

Pakistan has been experiencing severe macroeconomic problems since the last one year. Two
biggest economic problems faced by the new government are inflation and the trade deficit. This
report focuses on the later and suggests a strategy for reducing the deficit through import
management.

Trade deficit, defined as exports minus imports, started increasing in 2003-04. The deficit figure
increased from $1060.1 in 2002-03 to $3278.5 in 2003-04, showing a rise of 209 percent. The
average growth in imports since 2009 is colossal 33.17%. Table 1 and Chart 1 shows that the
imports has reached 28.47 billion US dollars in 2009-10, which is even higher than the total
exports of Pakistan.

Year Imports Rank Percent Change Date of Information

2003 $11,100,000,000 55 FY02 est.
2004 $12,510,000,000 57 12.70 % 2003 est.
2005 $14,010,000,000 60 11.99 % 2004 est.
2006 $21,260,000,000 55 51.75 % 2005 est.
2007 $26,790,000,000 53 26.01 % 2006 est.
2008 $28,760,000,000 57 7.35 % 2007 est.
2009 $38,300,000,000 57 33.17 % 2008 est.
2010 $28,470,000,000 58 -25.67 % 2009 est.

Imports
$40,000,000,000
$35,000,000,000
$30,000,000,000
$25,000,000,000 Imports
$20,000,000,000
$15,000,000,000
$10,000,000,000
$5,000,000,000
$0
2003 2004 2005 2006 2007 2008 2009 2010

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 THE IMPORT PICTURE
Coming to the imports now, the country’s total imports had grown by 28.3 per cent in 2007-08
(July-April), compared to the same period last year, reaching a formidable $32.06 billion.
Petroleum group occupied the largest share of 27 per cent in total imports, followed by 16.6 per
cent share of raw material, 13.2 per cent of machinery, 11 per cent of food group, 5.9 per cent of
telecom sector-related imports, 5.3 per cent of consumers’ durables and the remaining 21 per
cent share of others.
Below table is showing increasing trend of imports of all group of commodities. The highest
import growth is recorded in Petroleum, Food and Textile group, which was around 50%. On the
other hand a 6% decline was recorded in Transport Group. Overall imports increased by 31% in
2007-08 in terms of value calculated in US$, while in terms of Pak rupees this growth rate was
36%.

Commodities Value in thousand $ Growth Share

Grand Total 39,968,496 30.87 100
A Food 4,209,742 53.51 10.53
B Machinery 7,376,383 10.32 18.46
C Transport 2,251,116 -6.04 5.63
D Petroleum 11,380,048 55.14 28.47
E Textile 2,348,808 49.96 5.88
F Agriculture and Chemicals 5,828,912 31.59 14.58
G Metals 2,542,409 8.37 6.36
H Miscellaneous 738,115 11.62 1.85
I Other items 3,292,963 38.55 8.24

Imports (2007-08)
12,000,000
8,000,000
4,000,000
0 Imports (2007-08)

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Group Petroleum constituted the largest share in our import bill which was 28.5%, while
Machinery Group and Agriculture & Other Chemical Group, was second and third highest
groups, with 18.5% and 14.6% share, respectively. Our major focus is on the imports of food
items and their contribution in the trade deficit of the country.

Out of the total $ 9.4bn rise in imports, $ 7.45bn i.e. almost 80 percent was contributed by few
commodities. The import values of these commodities, namely wheat, spices, soybean oil, palm
oil, power generating machinery, CBUs & CKDs of motor cycles, CKD/SKDs of buses, trucks
and other heavy vehicles, crude petroleum, petroleum products, raw cotton, worn clothing,
fertilizer and iron and steel scrap, have increased more than 20 percent in 2007-08 over 2006-07.
Highest growth was recorded in wheat (1269%), CBUs of motorcycles (165%), soyabean oil
(154.5%), fertilizer (98%), palm oil (76%), petroleum products (65%), iron & steel scrap (63%),
power generating machinery (59.5%), spices (58%), crude petroleum (45%), and CKD/SKDs of
motorcycles (40%).

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 IMPORTS OF PAKISTAN AND ITS EFFECTS ON
EXCHANGE RATES
The exchange rate of a country’s currency is its value compared to the value of the currency of
any other country in the world. All major countries like Pakistan have their own currencies.
When Pakistan is selling to these countries, Pakistani sellers will be willing to pay in their own
currency, while Pakistan can demand for a payment in Pakistani own currency. The buyer must
then go to his bank and have his currency converted. This conversion will be done at foreign
exchange rate. Rate of exchange is the value or price of one currency in terms of another
currency. Rate of exchange is also a very important factor of the economy, having an impact on
country's overall imports & exports. In general, Pakistan has not imported an unusually large
amount as a share of its GNP, but it has been highly dependent on imports for a variety of critical
raw materials. Pakistan has by no means been the only industrialized nation dependent on
imported raw materials, but it has depended on imports for a wider variety of materials, and often
for a higher share of its needs for these materials. The long-term growth in imports was
facilitated by several major factors. The most important was general growth in the Pakistani
economy and income levels. Rising real incomes increased demand for imports, both those
consumed directly and those entering into production.

Under the indirect channel, depreciation of the exchange rate makes Pakistani products relatively
cheaper for foreign buyers, and as a consequence exports and aggregate demand rise and induce
an increase in the domestic price level. Since nominal wage contracts are fixed in the short run,
real wages decline. However, when real wages approach to their original level over time, the
production cost increases and the overall price level moves up.

We are living in an era of liberal trade regime. Using a floating exchange rate in a market
economy, trade balance is the most important factor (besides interest rate and inflation) in
determining our exchange rate. Vice versa, the floating exchange rate is also a corrective to
negative trade balance. As the trade deficit rises sharply (like in Pakistan case), the rupee starts to
depreciate against dollar and other currencies of our major trading partners, this automatically
would make our imports more expensive (for the local population) and our exports cheaper and

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more attractive for our trading partners. Thus as the basic economic theory would predict,
imports should fall (if they are elastic) and exports should rise (if there are no supply
constraints), correcting our deteriorating trade balance. In such a scenario, the talk of using tariff
measures to restrict imports is not advisable, as the depreciating currency is already taxing the
imports. In case of Pakistan, rupee-dollar exchange rate has changed from Rs.61 to Rs. 72 (in
August 2008), thus imposing an implicit tariff of around 20 percent on all of our imports. In such
a situation, imposing tariff on even non-essentials would be of dubious use, besides creating
distortions in the economy, resulting in what economists term as a ‘net welfare loss’.

Pakistan imports were worth 3238.8 Million USD in July of 2010. Pakistan imports mainly
petroleum, petroleum products, machinery, plastics, transportation equipment, edible oils, paper
and paperboard, iron and steel and tea. Its major import partners are: European Union, China,
Saudi Arabia, United Arab Emirates and United States.

The exchange rate of a currency plays a crucial part in the import business, it can be understood
here very clearly that the volatility of the exchange rate can make Pakistani import a very
profitable proposition or can give Pakistan very heavy losses. In first case suppose Pakistan is an
exporter of any commodity and Pakistan have signed a deal with foreign client in the currency of
their choice, at the time of completion of Pakistani order the amount Pakistan will receive will
either be less or more than that Pakistan had expected when Pakistan signed the deal. This
change in exchange rates thus makes the import business very risky. Now if Pakistani product
requires some raw material which has to be imported then Pakistan is again in a fix, because at
the time of calculating the cost of Pakistani product, the value of that raw material will be either
more or less at the time Pakistani purchase it. It is a very fine balance that Pakistan has to
maintain to avoid any losses in import.

The import business is also affected by daily changes of exchange rates as the raw material and
the finished product has to be shipped to various parts of the world. If the exchange rate is low
then the shipment becomes profitable but when exchange rates are high the shipment can incur
huge losses. A business man in the trade of import and export is always irked by the changes in
the exchange rates.

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It is an established fact in the import business that if Pakistani Government ignorant to the
exchange rate volatility then it is sure to give losses and the ones who are watchful to the
exchange rate are sure to taste the fruits of success. If Pakistan is exporting and its local currency
becomes strong then its products become more expensive for its buyers. If Pakistan is importing
and its local currency becomes weak then the products it is importing become more expensive.

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