Our policymakers seem to believe that they have almost resolved the most challenging issue of external sector imbalance of the economy. According to the Advisor to the Prime Minister on Commerce, Textile, Industry and Investment, exports of the country would increase to $27 billion this fiscal year which will be the highest level in the history of the country. "The country's economy is heading for improvement amid difficulties. This year will see more good news," he is reported as saying the biggest challenge of the country is current account deficit and the government is making efforts on war-footing to overcome this crisis. The government had devised a new strategy to curtail imports and increase exports aimed at reducing the widening trade deficit and is also trying to provide substitute of imports by increasing local production. "We have asked China to enhance Pakistan's rice and sugar import," the Advisor added. The precious foreign exchange could also be saved if production of edible oils could be indigenized by promoting local production of edible oils. Pakistan cannot afford to import edible oils worth $4 billion. The country has suffered greatly owing to lack of good research institutions. As a result, yield in the agricultural sector is far from being adequate. The country's cotton production has also plunged to 10.5 million bales from 15 million bales due to low quality of seeds.
Although the Advisor to the Prime Minister was speaking at the Pakistan Edible Oil Conference (PEOC) held in Karachi, his emphasis on exports and the overall balance of payments of the country, rather than on edible oils, is a clear indication that the challenge of overcoming huge deficit on the external sector is weighing heavily on the minds of our policymakers. Their obsession on the subject, in our view, is for the right reasons. Current Account (CA) deficit of the country during the FY18 was about $19 billion. Although this deficit has declined somewhat during the first half of the current fiscal year, it is still huge and unsustainable. Foreign exchange reserves held with the State Bank of Pakistan are also dwindling at a fast rate despite a substantial depreciation of the Pak rupee, infusion of a large amount of foreign exchange into the kitty of the SBP from some friendly countries and a sharp increase in home remittances during the current year. Razak Dawood seems to think that the solution to fix this problem lies in the promotion of exports and containment of imports through import substitution and he is very much on the right track but his over-optimistic tone at the Conference does not reflect the reality of the situation. For instance, he is sure that the country would be able to achieve the target of $27 billion of exports which will be the highest level of exports in the history of the country. His confidence perhaps stems from the export data of December, 2018 which is better as compared to the same month of last year. However, the Advisor, in all probability, is forgetting that one month data is not enough to establish a trend in the future and the target of $27 billion is too high to be achieved. The latest data show that country's exports amounted to $11.5 billion during July-December, 2018, meaning that $15.5 billion has to be earned through exports in the remaining part of FY19. The increase of $4 billion or 35 percent in the next six months appears to be an impossible task. Also, there is nothing wrong with the idea of import substitution to narrow the gap in the external sector but it takes a considerable length of time for materialising such an idea because the necessary capital has to be arranged, machinery has to be fixed, necessary raw materials have either to be imported or domestically arranged and marketing facilities have to be put in place throughout the country. Razak Dawood also seems to think that cotton production has plunged due to low quality of seeds but this is only a minor reason. Cotton output has mainly dropped due to the shift of agricultural land from cotton crop to sugarcane. Cotton is suffering mainly because of the strong lobby of sugar mills and sugarcane growers to gain heavy subsidies from the budget. Besides, it is true that Pakistan's oil and fat market had grown significantly, from 2.7 million tonnes in 2000 to over 4.4 million tonnes in 2017 and the country is spending a huge amount of foreign exchange on the import of edible oils. It needs to be recognized, however, that more area under a certain crop could only be cultivated by shifting acreage from certain other crops and such a shifting could only take place over time by altering the price signals in the market.