Table of content

Executive summary -------------------------------------------------------------------------------02

Introduction -----------------------------------------------------------------------------------------03

Trade Deficit ----------------------------------------------------------------------------------------03

An overview of Pakistan’s economy ------------------------------------------------------------04

Major exports of Pakistan in 2014 ---------------------------------------------------------------04

Exports of goods and services percentage of GDP --------------------------------------------07

Major imports of Pakistan ------------------------------------------------------------------------11

Imports of goods and services percentage of GDP --------------------------------------------11

Net trade --------------------------------------------------------------------------------------------13

Reasons behind trade deficit in Pakistan -------------------------------------------------------16

o Energy crisis ------------------------------------------------------------------------------16

o Increase in imports -----------------------------------------------------------------------17

o Low domestic saving --------------------------------------------------------------------17

o Poor utilization of resources ------------------------------------------------------------18

o Conclusion --------------------------------------------------------------------------------18

References ---------------------------------------------------------------------------------------19

1

Executive Summary

The purpose of this paper is to examine the trade deficit in Pakistan, the main causes or what

factors affects trade in Pakistan in different periods. In this study, we took data of last 44 years

from 1967 to 2011 and we did analysis of balance of trade from 200 to 2014. Trade deficit

explains the negative trade balance of a country when its net imports exceed its net exports for a

particular period. There exist economists with two schools of thoughts on trade deficits. One

school of thought, which is in the favor of trade deficit, argued that it increases the standard of

living of people. The rest of the economists argued that continuously trade deficit is a bad thing

for the economy. Since the independence of Pakistan, balance of trade is mostly remains

negative. The highest trade deficit, which is seen in Pakistan economic history, is from 2009 to

2013. The highest trade deficit faced by Pakistan is 280964.00 million rupees in 2014. The

highest trade surplus was in 2003 is 6457.00 million rupees. Trade deficits occur due to

inefficient local industry, loose monetary policy, export raw material and import finished goods.

However, achievement of reducing trade deficit is difficult, but not impossible. Government

should take appropriate measures, which are mentioned in the paper to take care of such

situations and to grow the economy smoothly.

2

Introduction:

The action of buying and selling of goods and services is called trade. In other words, we can

say that the exchange of something for something else i.e. typically a commercial transaction is

called trade. Trade refers to the buying and selling of goods and services for money or money’s

worth. It involves transfer or exchange of goods and services for money or money’s worth. The

manufacturers or producers produces goods, and then move on to the wholesaler, then to the

retailer, and finally to the ultimate consumer.

Trade is essential for satisfaction of human wants, trade is conducted not only for the

sake of earning profit but it also provides service to the consumers. Trade is an important social

activity because the society needs uninterrupted supply of goods forever increasing and ever

changing but never ending human wants. Trade has taken birth with the beginning of human life

and shall continue as long as human life exits on the earth. It enhances the standard of living of

consumers. Thus we can say that trade is a very important social activity.

Trade deficit:

The trade deficit is defined as the amount, by which the cost of a country's imports

exceeds the value of its exports, is called trade deficit. The balance of trade is the relationship

between a nation's imports and exports of goods and services. Any imbalance in these trade

implies an equal and opposite imbalance in asset trade. A positive balance of trade is known as a

trade surplus and consists of exporting more than is imported, while a negative balance of trade

is known as a trade deficit or, informally, a trade gap. A trade deficit means that exports are

insufficient to pay for imports and a trade surplus is the opposite of it -corresponding to the

capital account deficit. Trade deficit risks have threaten nation’s economic growth because

current account deficit leads to net selling of international assets. Hence, current account trade

surplus increases country’s international asset position correspondingly and a trade deficit

decreases the net international asset position accordingly. The balance of trade is generally

affected by the factors like: Prices of goods manufactured at home, trade agreements, tariffs and

non-tariff barriers, exchange rates, state of business cycle at local or international market.

3

An overview of Pakistan’s economy:

Pakistan is facing continual trade deficit for more than half century except two fiscal years. In

1951 Pakistan earned foreign exchange by the export of raw jute and cotton and trade surplus

was Rs.176 million this increase in export demand was due to Korean War. In year 1972/3,

Bhutto Government devalued rupee by 56% and imposed high tariff on imports of luxury goods.

Trade surplus was Rs.153 million that year. Although Pakistan balance of trade remained

negative for most of the years, because of negative current account Pakistan has obliged to

remain dependent on the foreign donors such as International Monetary Funds (IMF) and

creditors to pay for the short fall of its balance of payment. Due to depending on external

financial liabilities, the debt service payments had put on barriers in front of national

developmental goals. The debt burden and social development deteriorated to such an extent that

Pakistan's external debt and liabilities stood at $61.8 billion as of March 31, 2014.

Major exports of Pakistan in 2014:

o Raw cotton

o  Leather and leather products

o Carpets and rugs, Tents

o Sports goods

o Readymade garments

o Vegetable, fruit and fish

o Textile

o Rice

Pakistan exports its products to large number of countries including USA, Germany, Japan, UK,

Hong Kong, Dubai, Saudi Arabia and Afghanistan.

The value for Exports of goods and services (current US$) in Pakistan was $29,756,880,000 as

of 2011. Over the past 44 years, the value for this indicator has fluctuated between

$29,756,880,000 in 2011 and $678,985,800 in 1967.

4

Table:

Year Value

1967 $678,985,800

1968 $740,984,600

1969 $747,984,300

1970 $778,983,700

1971 $757,234,100

1972 $1,096,084,000

1973 $855,556,200

1974 $1,200,200,000

1975 $1,230,800,000

1976 $1,430,100,000

1977 $1,404,400,000

1978 $1,646,700,000

1979 $2,107,300,000

1980 $2,958,200,000

1981 $3,461,200,000

1982 $3,055,881,000

1983 $3,419,646,000

1984 $3,448,628,000

1985 $3,246,344,000

1986 $3,796,228,000

1987 $4,414,018,000

1988 $5,227,069,000

1989 $5,576,987,000

1990 $6,216,943,000

1991 $7,725,444,000

1992 $8,442,739,000

1993 $8,394,305,000

1994 $8,449,778,000

1995 $10,132,270,000

1996 $10,703,070,000

1997 $10,040,500,000

1998 $10,252,210,000

1999 $9,668,691,000

2000 $9,940,179,000

2001 $10,600,270,000

2002 $11,007,710,000

2003 $13,917,670,000

2004 $15,350,080,000

2005 $17,195,690,000

2006 $19,418,010,000

2007 $20,320,950,000

2008 $21,056,880,000

2009 $20,808,540,000

2010 $23,955,250,000

5

2011 $29,756,880,000

19671969

19711973

19751977

19791981

19831985

19871989

19911993

19951997

19992001

20032005

20072009

20110

5

10

15

20

25

30

35

Exports in US $ (billion) Exports in US $ (billion)

6

Exports of goods and services (% of GDP):

Exports of goods and services (% of GDP) in Pakistan were 14.16 as of 2011. Its highest value

over the past 44 years was 17.36 in 1992, while its lowest value was 7.14 in 1971.

Table

Year Value

1967 9.17

1968 9.16

1969 8.66

1970 7.77

1971 7.14

1972 11.77

1973 13.53

1974 13.68

1975 10.85

1976 10.72

1977 9.28

1978 9.24

1979 10.69

1980 12.49

1981 12.32

1982 9.95

1983 11.92

1984 11.07

1985 10.42

1986 11.90

1987 13.23

1988 13.59

1989 13.88

1990 15.54

1991 17.00

1992 17.36

1993 16.31

1994 16.28

1995 16.71

1996 16.90

1997 16.08

1998 16.48

1999 15.35

2000 13.44

2001 14.66

7

2002 15.22

2003 16.72

2004 15.67

2005 15.69

2006 15.23

2007 14.19

2008 12.85

2009 12.86

2010 13.57

2011 14.16

8

19671969

19711973

19751977

19791981

19831985

19871989

19911993

19951997

19992001

20032005

20072009

20110

2

4

6

8

10

12

14

16

18

20

Exports % of GDP Exports % of GDP

Source: World Bank national accounts data, and OECD National Accounts data files.

List of Major Imports of Pakistan 2014:

o Vehicles and spare parts. o Edible Oil.

9

o Plastic material.

o Machinery

o Paper Board

o Iron ore and steel.

o Pharmaceutical products.

o Tea

o Chemical

o Petroleum

Pakistan import product from the countries including USA, Japan, Kuwait, Saudi Arabia,

Germany, UK and Malaysia. The exports of last 44 years are shown in the table below

Table

Years Value

1967 $1,340,972,000

1968 $1,194,975,000

1969 $1,196,975,000

1970 $1,470,969,000

1971 $1,355,999,000

1972 $1,580,919,000

1973 $1,031,186,000

1974 $1,822,800,000

1975 $2,539,300,000

1976 $2,584,200,000

1977 $2,877,100,000

1978 $3,293,000,000

1979 $4,485,001,000

1980 $5,709,197,000

1981 $6,466,601,000

1982 $6,687,354,000

1983 $6,592,699,000

1984 $7,048,454,000

1985 $7,105,458,000

1986 $7,230,436,000

1987 $7,005,030,000

1988 $8,337,114,000

1989 $8,735,975,000

1990 $9,350,912,000

1991 $8,434,857,000

1992 $9,984,114,000

1993 $11,552,190,000

1994 $9,883,123,000

1995 11,777,210,000

1996 $13,567,630,000

1997 $12,967,600,000

1998 $10,900,340,000

1999 $10,684,440,000

2000 $10,862,330,000

2001 $11,361,300,000

2002 $11,073,080,000

2003 $13,423,660,000

2004 $14,337,310,000

2005 $21,441,920,000

10

2006 $29,603,690,000

2007 $30,555,710,000

2008 $39,137,640,000

2009 $33,030,000,000

2010 $34,300,240,000

2011 $40,423,580,000

19671969

19711973

19751977

19791981

19831985

19871989

19911993

19951997

19992001

20032005

20072009

20110

5

10

15

20

25

30

35

40

45

import in Us $ (billion)import in Us $ (billion)

11

Source: World Bank national accounts data, and OECD National Accounts data files.

Imports of goods and services (% of GDP):

Imports of goods and services (% of GDP) in Pakistan were 19.23 as of 2011. Its highest value

over the past 44 years was 24.10 in 1980, while its lowest value was 12.79 in 1971.

Table

Year Value

1967 18.11

1968 14.77

1969 13.87

1970 14.67

1971 12.79

1972 16.98

1973 16.30

1974 20.78

1975 22.39

1976 19.37

1977 19.2

1978 18.48

1979 22.76

1980 24.10

1981 23.01

1982 21.76

1983 22.98

1984 22.63

1985 22.81

1986 22.67

1987 21.00

1988 21.67

1989 21.75

1990 23.37

1991 18.56

1992 20.53

1993 22.44

1994 19.04

1995 19.42

1996 21.43

1997 20.77

1998 17.53

1999 16.97

2000 14.69

2001 15.71

2002 15.31

2003 16.13

12

2004 14.63

2005 19.56

2006 23.22

2007 21.34

2008 23.88

2009 20.41

2010 19.44

2011 19.23

13

19671969

19711973

19751977

19791981

19831985

19871989

19911993

19951997

19992001

20032005

20072009

20110

5

10

15

20

25

30

Imports % of GDP Imports % of GDP

Source: World Bank national accounts data, and OECD National Accounts data files.

Net trade:

Net trade is the difference between exports and imports of a country.

14

Net trade = Net exports –Net imports

Net trade of Pakistan from 1967 to 2011:

Table

Year Exports – Imports Net Trade

1967 678,985,800-1,340,972,000 -661986200

1968 740,984,600-1,194,975,000 -453990400

1969 747,984,300-1,196,975,000 -448990700

1970 778,983,700-1,470,969,000 -691985300

1971 1,355,999,000-757,234,100 598764900

1972 1,096,084,000-1,580,919,000 -484835000

1973 855,556,200-1,031,186,000 -175629800

1974 1,200,200,000-1,822,800,000 -622600000

1975 1,230,800,000-2,539,300,000 -1308500000

1976 1,430,100,000-2,584,200,000 -1154100000

1977 1,404,400,000-2,877,100,000 -1472700000

1978 1,646,700,000-3,293,000,000 -1646300000

1979 2,107,300,000-4,485,001,000 -2377701000

1980 2,958,200,000-5,709,197,000 -2750997000

1981 3,461,200,000-6,466,601,000 -3005401000

1982 3,055,881,000-6,687,354,000 -3631473000

1983 3,419,646,000-6,592,699,000 -3173053000

1984 3,448,628,000-7,048,454,000 -3599826000

1985 3,246,344,000-7,105,458,000 -3859114000

1986 3,796,228,000-7,230,436,000 -3434208000

1987 4,414,018,000-7,005,030,000 -2591012000

1988 5,227,069,000-8,337,114,000 -3110045000

1989 5,576,987,000-8,735,975,000 -3158988000

1990 6,216,943,000-9,350,912,000 -3133969000

15

1991 7,725,444,000-8,434,857,000 -709413000

1992 8,442,739,000-9,984,114,000 -1541375000

1993 8,394,305,000-11,552,190,000 -3157885000

1994 8,449,778,000-9,883,123,000 -1433345000

1995 10,132,270,000-11,777,210,000 -1644940000

1996 10,703,070,000-13,567,630,000 -2864560000

1997 10,040,500,000-12,967,600,000 -2927100000

1998 10,252,210,000-10,900,340,000 -648130000

1999 9,668,691,000-$10,684,440,000 -1015749000

2000 9,940,179,000-$10,862,330,000 -922151000

2001 10,600,270,000-$11,361,300,000 -761030000

2002 11,007,710,000-$11,073,080,000 -65370000

2003 $13,423,660,000-13,917,670,000 -494010000

2004 $14,337,310,000-15,350,080,000 -1012770000

2005 17,195,690,000-$21,441,920,000 -4246230000

2006 19,418,010,000-$29,603,690,000 -10185680000

2007 20,320,950,000-$30,555,710,000 -10234760000

2008 21,056,880,000-39,137,640,000 -18080760000

2009 20,808,540,000-33,030,000,000 -12221460000

2010 23,955,250,000-34,300,240,000 -10344990000

2011 29,756,880,000-40,423,580,000 -10666700000

16

19671969

19711973

19751977

19791981

19831985

19871989

19911993

19951997

19992001

20032005

20072009

2011

-20

-15

-10

-5

0

5

Net trade

Net trade

The net trade of Pakistan during last 6 years in million rupees:

Table

Year Exports Imports Net trade

2009-10 1,617,457.6 2,910,975.3 -1293517.7

2010-11 2,120,846.7 3,455,285.6 -1334438.9

2011-12 2,110,605.5 4,009,093.0 -1898487.5

2012-13 2,366,477.8 4,349,879.5 -1983401.7

2013-14 2583463.2 4630520.8 -2047057.6

17

2009-10 2010-11 2011-12 2012-13 2013-14

-3

-2

-1

0

1

2

3

4

5

6

ExportsImportsNet trade

Source: World Bank national accounts data, and OECD National Accounts data files.

Reasons behind trade deficit in Pakistan:

Energy Crisis:

Energy sources in Pakistan’s current energy mix include hydel, thermal (coal, gas and furnace

oil) and nuclear. Pakistan does not produce enough energy to meet demand due to which it

currently has an electricity shortfall of approximately 5,000 megawatts (MW) per day. Energy

shortfall in Pakistan reflects years of underinvestment where power consumption has risen 80

percent, but supply has fallen to maintain this pace, around 30 percent of the population does not

have access to grid electricity, with around one-third of the population meeting its energy needs

through noncommercial sources. As more of these people seek access to grid electricity, demand

for electricity will increase.

18

According to the government of Pakistan, power shortages are estimated to cost the economy

2 percent of its GDP every year, although some observers have suggested the figure is higher.

Major shortfalls were in evidence in 2011, with even some urban areas, which has suffered

fourteen to eighteen hours without power per day, while some of the areas have suffered by

greater ratio of load-shedding. The government has previously estimated that approximately $10

billion is required to meet the country’s immediate energy needs, and at least twice this is needed

for its longer-term energy plans.

Currently, Pakistan has also a gas supply shortage of approximately 20 percent. Natural

gas supplies fell 33 percent in 2010 when compared with figures from 2009. This situation

prompted the government in December 2011 to announce gas rationing in an attempt to counter

the deficit. Domestic oil and gas supplies are forecast to be exhausted by 2025 and 2030

respectively. Already Pakistan imports around 30 percent of its energy supplies (mainly from

Iran). Recovery Report and Plan for Pakistan has suggested that in 2008–9 energy imports

totaled more than $10 billion, which it argued could rise to as much as $38 billion by 2015–16 if

there is a failure to take action to increase indigenous resources.

Gas shortage has caused a rise in oil imports, which in turn has both increased

inflationary pressures and placed added strain on the budget deficit. As for employment, it is

estimated that 4.1 million jobs and employment opportunities have been lost due to the country’s

energy problems, roughly 7.5 percent of the workforce.

Increase in imports:

Pakistan’s trade deficit is widening as imports grow fast while exports are moving up

slowly, since 1950 Pakistan is importing more than it is exporting , this import depends upon

country’s demand and production capacity. The inability of local producers in the production of

enough goods and services has also increased the level of imports in fulfilling the domestic

demand. Further lowering of tariffs as per IMF and WTO requirements has actually led to an

increase in imports, and an infiltration of consumer goods produced in the developed world.

Pakistan’s economy during 2007-08 registered imports worth was about $40billion while its

exports was only at around $20billion. In its trade policy for the fiscal year 2007-08, the

government had targeted imports at $29.6billion and exports at $19billion with a trade deficit of

19

$10.6bn but due to high import oil bill the trade deficit ended up with $20 billion. A high volume

of imports especially capital goods, and diminishing exports is one of the major causes of

Pakistan’s trade/ current account deficit.

As Pakistan is an agricultural country, about 70% of the population depends on

agriculture, but the decline trend in agriculture growth that ranged from 1.5% to 6.5% during the

last few years had threatened our food security, instead of giving boost to export and add to our

current accounts. Pakistan’s total imports for food group are reported at $4.21 billion in 2008

against 2007 imports of $2.74 billion.

Low domestic saving:

Higher the rate of consumption lowers the rate of domestic savings evaporates the money

available for domestic investment which causes inflow of foreign investment. Pakistan has set

new record of consumption during the last few years and gravitated huge imports resulted in to

widening state of trade deficit and shrinking current account. Pakistan is earning less foreign

exchange through exports and spends almost double on imports, with the result that there was

precarious trade deficit of $20 billion last year. If sum of $5.5 billion of remittances by expatriate

Pakistanis and foreign direct investment of $3.5 billion is taken into account, still there is current

account balance of $10 billion. It is high time to cut and curtail imports substantially. Reportedly,

Pakistani politicians, industrialists and businessmen have at least $125 billion stashed in foreign

banks or invested in bonds and real estate in the US, UK, Spain and other European countries.

The nation expects of them to bring their money back to the country so that we could overcome

the financial crisis. They have to realize that in the event of international economic crisis and

recession, their dollars would not hold much value.

According to Economic Survey of Pakistan 2010-2011, real GDP is estimated to grow at

2.4 percent based on the performance of services sector which is lower than its target of 4.5

percent. Such slow growth is because of the slower growth in the manufacturing and agricultural

sector.

It is also observed in table 1that there is positive association in savings and investment, if the

savings rates are high, the investment is high or vice versa. Both the savings and investment

jointly determine the growth rate of economy. Therefore, the present study provides the

20

empirical analysis of the determinants of the saving in Pakistan considering the globalized

economy.

Poor utilization of resources:

Pakistan is one of resource rich countries in the world having a large amount of coal, gas,

gemstones, copper and gold reserves. Other resources also included oil, iron, titanium and

aluminum which are a necessity for any growing economy. In Pakistan the utilization of

resources is improper due to which our imports have been increased over exports. The utilization

of resources is inefficient because of our political instability.

Conclusion:

Minimizing trade deficit for Pakistan is difficult but not impossible. Pakistan can minimize its

deficit balance through proper use of its resources by improving its infrastructure. With the

implementation of high import duties we can reduce our imports and by encouraging our export

and our industries. It can achieve through installing import substitution and export promoting

industries. Government should control and check the import of luxuries.

References:

o http://www.indexmundi.com/

o http://www.pbs.gov.pk/

o http://www.sbp.org.pk/

o http://www.ead.gov.pk/

o Mohammad Asif(2011) “Impact of devaluation on trade balance of Pakistan”

o Abdul Rauf, Dr Abdul Qayyum (2011) “An empirical study to find the relationship

between Trade deficit and Budget Deficit in Pakistan”, Academic Research International

Vol.I, Issue 3. November 2011.

21

o Aurangzeb, Anwar ul Haq (2012) “Factors affecting the trade balance in Pakistan”.

o Sulaiman D Mohammad(2010) “Determinants of Trade deficit: “Case study of Pakistan”.

22