Pakistan’s Foreign Trade And The Spillover Effect

Globalisation and open trade policies are immensely encouraged by current economic theories. But, since globalisation has taken hold around the globe, a spillover effect has emerged. Giant economies benefit from the spillover effect over the struggling ones. This spillover effect refers to a higher trade ratio in comparison to the international trading partner. And this spillover effect negatively affects the nation which incurs it. The USA and China, the giant economies, have a dominance in trade in the current world. Trading with them usually has a spillover effect for the other country.

In the case of Pakistan, the trade deficit was PKR 0.46 billion for the month of February, 2023. Pakistan has faced spillover effects mainly from six countries in 2023. The following are: China, India, United Arab Emirates, Saudi Arabia, Kuwait and Malaysia. It had a surplus in trade in comparison to: Afghanistan, Germany and United Kingdom.

Pakistan’s economy is consistently sailing against the wind regarding international trade. The trade deficit was USD 31.11 billion for the year 2021, USD 24.39 billion in 2020 and USD 32.49 billion in 2019. The situation was quite deplorable in 2018, with the country facing a USD 37.26 billion trade deficit. In 2017, the country was facing a trade deficit of USD 30.63 billion. According to macrotrend.net, Pakistan is finding it increasingly difficult to cope with the problems of international trade. In fact, the country is facing a trade deficit since 1960 – which is jaw-dropping.

Considering that, the foreign reserve ratio is in turmoil as usual. In the time span of the last year, the foreign reserve ratio has drastically plunged. In February 2022, the foreign reserve ratio was USD 22,637.800 million, which dwindled to appalling levels and equalled USD 8,393.700 Million in 2023. Trade balance has a direct influence on foreign exchange reserve ratio. The experiences of trade balance have not been in good conditions. There has been a significant affect on the Pakistani currency in terms of its exchange rate with the US Dollar, which is the medium of international trade.

Having low levels of foreign exchange reserves, the country has to put forward the borrowing bowl towards either the IMF or countries like China, the USA, Saudi Arabia etc. This is done in order to keep the wheels of the economy moving, because the country has never been self-sufficient. The situation of international dependency is worsening day after day. Such situations give birth to certain other linked issues: inflation, unemployment and poverty.

Inflation has precipitously increased to unprecedented levels. Pakistan’s inflation was recorded as 31.5% in February 2023, which is the highest since 1974. The trending hike of inflation has caused multinational companies to shut down their businesses in Pakistan. Such examples are: Suzuki Motor Corporation announced to shut down its business in the country on 21 February due to a parts shortage attributed to inflation. Gandhara Tyre and Rubber Company announced to shut its plant on 13 February 2023. Inflation in Pakistan has jumped to unacceptable levels for the masses. Life has turned out to be intensely worrisome for the populace.

Meanwhile, the unemployment rate is also expected to grow from 6.2 % to 6.4 % by the end of 2023, and to 8.5 % in 2024. According to data from the World Bank, the incidence of poverty was 39.8 % in 2018, and 39.3 % in FY 2021-22. It is projected to be 42.5 % in FY 2023-24.

One way or the other, international dependency, the spillover effect and a trade deficit are the major causes behind this economic crisis. The country must aim for relatively greater self-sufficiency – this is the only way to make it less vulnerable to exchange-rate shocks vis-à-vis the US dollar.