Bulk of Pakistan’s exports consists of primary commodities and low tech manufactures like cotton, rice, wheat, Kino, mangoes, sugar, surgical instruments, sports goods, electrical appliances and light engineering goods. The prices of primary commodities and low techs industrial goods often fluctuate in the interregnal market, resulting in the unfavourable terms of trade. The extremely high tariff of electricity and gas has pushed up the cost of production and the finished goods cannot compete with the identical products of other countries. Moreover, innovations are not applied while manufacturing goods for foreign markets.
Formulation of long term trade policy has been abandoned and the commerce sections in Pakistani embassies abroad are not regularly instructed and sensitised to arrange visits of exporters abroad and explore new markets. Pakistan’s terms of trade, which measures the ratio of exports to imports, have not only been adverse but have also deteriorated over the years, which have adversely impacted the economy. If an economy’s terms of trade are less than 100 percent, they are regarded as adverse. This signifies that capital inflows into the economy in the form of exports are less than the capital outflows in the form of import payments.
In the case of Pakistan, both trade balance and terms of trade have remained adverse, which shows that not only country’s imports are more than its exports, but in monetary terms our exports are much cheaper than imports. This is hardly surprising, because exports of primary products and low technology goods which are derived from products such as textile and leather articles. On the other hand, Pakistan’s imports comprise largely crude oil, palm oil, industrial raw material, intermediate goods, consumer products, capital goods and machinery. Prices of non-oil primary products are generally much lower and prices of lower technology goods are less than those of machinery and equipments which are high and medium technology products.
Pakistan’s terms of trade problem is compounded by the fact that commodity based products which are exported fetch very low price because of very low value addition and low technology content. The manufacturing sector is stuck in second generation technology whereas developing countries like Bangladesh, Thailand and Vietnam have moved to fourth and fifth generation technologies. The industrial base of a number of south Asian countries was primitive as compared with that of Pakistan during 1960s. The extremely harmful and deliberate policy of nationalization of private sector enterprises in Z.A Bhutto era slammed the doors for introduction and indigenization of emerging technologies. It also discouraged the trends of invocation to give competitive edge to Pakistani industrial goods in the international market. Lack of products upgrade and sophistication, make the exports less competitive and have to be sold at lower price.
In the last one decade for fiscal year 2008-17 Pakistan’s terms of trade continuously deteriorated and touched and slipped to 55.82 percent. On the contrary, in the preceding decade for year 1999-2007, the average terms of trade were 88.26 percent as the tariffs of energy inputs were low which give a comparative advantage to exports. This data of Pakistan bureau of statistics shows a sharp deterioration in terms of trade over the past 10 years. In FY 17, Pakistan’s terms of trade stood at 57.17 percent, which suggests that average export prices are nearly half of the import prices. When a country faces a gap so large between its exports and imports, it can avoid substantial trade deficit by drastically increasing the quantity of exports. However, this requires a large exportable surplus which Pakistan does not have. Besides, increase in export surplus tends to depress their prices. Hence, it has not been possible to compensate for low export prices by increasing export surpluses.
On a disaggregate level, it is only in primary sector as food and fuels that Pakistan terms of trade have been mostly more than 100 percent. In the value added sector, notably manufactures, machinery and transport equipments, the terms of trade have mostly been adverse. Conversely, the import of chemicals, high tech manufactured goods, capital goods and transport equipments carry higher prices than that for the products of the same category that are exported because they lack high technology content and innovations of current trends in the export markets.
The swollen trade deficit is greatly disturbing for the new government which is forced to adopt measures such as regulatory duties and restricting imports including those which are needed by domestic industry. Export revenue is an important source of saving. When businesses earn low revenue per unit of exports, they are deficient in funds required for capital formation, which discourages private sector investment. Adverse terms of trade may also cause balance of payment problems. In order to improve terms of trade, the country needs to move towards a high value added and technology content export base.