The question of our overall trade balance, how much we export and import, is one that has always been of significant concern, and one that has bedeviled many successive administrations, particularly those of recent times. It is generally ideal for a country to have a high level of both exports and imports, with roughly an equal amount of both. If exports are too great, there are negative effects such as strong appreciation of the currency, the need to reinvest surplus forex, and inflation. If imports are too high, a country must borrow to fill the foreign exchange requirements of the import bill, leading to a reserves crunch and to a devaluation of the currency. We lie in the latter camp, with imports exceeding exports by roughly $1-2 billion per month. This is because we have importation across the value chain: energy is imported to run society, imports are inputs into our exports themselves, and imported goods are preferred by consumers.
Therefore, it is an incessant problem for governments to seek a trade balance, and they have at times resorted to counter-productive or self-defeating measures to attain some semblance of balance, with a prominent example being the State Bank’s restrictive policies on issuing letters of credit (LCs) last year, which contributed to the decimation of industrial production during what was already a strained period of global economic turbulence. The need of the hour, in the SBP’s reading, was to strictly control imports as a way of preserving precious foreign reserves. Be that as it may, Pakistan’s absolute volume of imports is already comparatively low for a country so large, and the issue is one of boosting exports, and weaning ourselves away from imports at various levels of the value change through indigenizing the economy.
Yet the fact that such hard decisions are being taken on such an economically vital area as our trade balance belies a crucial assumption: that we really know how much we export and import. In a richly documented society, such as Austria or Canada, one has a fairly clear picture of the levels of exports and imports over given intervals. In any developing country, however, the accuracy of statistics is much more tenuous, and this is particularly true for countries that have even more developing countries and/or sanctioned countries at their borders. Pakistan is one such case study, whose western neighbors include Afghanistan and Iran. The problem is not simply one of statistical aggregation by a bureaucratic institution, but also one of corporate and private sector reporting of their sales. When oversight, enforcement, and cultural practices are all comparatively lax, there are strong incentives for companies to under-invoice on both exports and imports, because they can pay lower taxes and even claim rebates or qualify for support of various sorts.
But there are significant consequences for the country as a whole when its companies engage in rampant under-invoicing of exports & imports, in terms of taxation, forex reserves, and the trade deficit, all of which are areas of concern as mentioned above. Yet recent data triangulated by the Pakistan Business Council shows that Pakistani companies have been severely under-invoicing the value of their exports & imports, with an alleged discrepancy of up to $8 billion. The Pakistan Business Council (PBC) conducted a focused study that triangulated the value of exports and imports in terms of (i) the trade value reported in Pakistan, vs. (ii) the trade value reported by the partner countries. By looking at the trade volume with just four countries: the UK, Germany, Singapore, and China; they could identify a significant discrepancy: Pakistani importers reported a total value of $18 billion in imports, but those 4 countries reported exports of $26 billion to Pakistan. Similarly, there was an under-invoicing of $600 million in exports to China, equal to 20% of reported exports to that country.
At a time when our forex reserves are low, tax collection is insufficient, and trade promotion is a priority, this sort of under-reporting of trade value and volume is a severe concern because it affects several elements of the economy simultaneously:
- Taxation: a significant source of tax is on imports into the country. By under-invoicing, importers worsen the fiscal deficit as government revenues on imports shrink. The PBC estimated that, given the range of collections and possible scope of under-invoicing, there was probable revenue loss of Rs.590-640 billion at the average currency rate over calendar year 2022.
- Foreign exchange: at a time when foreign reserves are low, under-invoicing exports translates into less foreign exchange through formal channels.
- Trade deficit: since under-invoicing appears to occur on both the export and import side, it is difficult to know the true scope of the trade deficit.
The problem of living in a data-poor society is that we do not have an adequate grasp of what our economy really looks like. So when governments fret about the picture of the economy, it is worth noting that they do not (and therefore neither do we) have an accurate picture of the economy. Without transparent, real-time data, it is difficult to do research, planning and forecasting, which are key functions in driving the overarching exercise of economic development. The fact that the PBC has highlighted this is important, because one can always fall prey to the temptation of pointing the finger at the government, without realizing that public value creation is premised on a multi stakeholder effort where the private sector is also a key player.
Nevertheless, the specific problem of improving trade oversight can be done through several measures. First, data-sharing with major trading-partner countries’ oversight bodies can help to give a clearer picture and allow for cross-referencing data, thus highlighting significant discrepancies in sectors with major partners. Second, continued harshness against smuggling and illegal cross-border flows is necessary, and the government has done an excellent job recently in curbing such activity, which has also resulted in a reshoring of the Rupee. Third, tougher punitive measures (e.g. fines) for the sectors with the most discrepancy is warranted, but with the caveat that oversight is a continuous process that cannot depend solely on one-time actions, but rather on proactive vigilance. Fourth, computerization and technology-use in the relevant agencies is necessary, and a track record exists where such reforms, dating back even three decades ago, have been delayed and stifled for vested interests.
All of these measures must undertaken with a resolute attitude towards leading a successful economic revival, such measures must be pursued proactively to bring greater clarity to our economic understanding, forecasting, planning, and decision-making. If we have to fret about a significant economic problem, we should at least have robust data to fret about it effectively!
Dr. Usman W. Chohan is Advisor (Economic Affairs and National Development) at the Centre for Aerospace & Security Studies, Islamabad, Pakistan. He can be reached at cass.thinkers@casstt.com.
