More protection

Some things in Pakistan will never change. Despite making promises in 2013 that SROs will be “phased out”, and following through in eliminating some of them, the FBR continues to issue a steady stream of new SROs and amended SROs into the mix. These have become part of the disruption that the subsequent governments have been known to adopt in absence of coherence policy. It seems there is no escaping these ad-hoc policy instruments

While concessionary SROs disrupt the environment no doubt, not to mention cost of the exchequer money, those that impose regulatory duties (RD) are more convoluted. A few days ago, FBR issued amendments to two old SROs dating 2009 and 2014 to impose RDs on the import of over 500 “non-essential” items including poultry, fish, milk and dairy, fruits and vegetables, food items, kitchen products, electronics and appliances, and vehicles (Reference: SRO 504(1) 2017, and SRO 505(1) 2017). The RDs range from 10 percent to 60 percent; the higher RDs being imposed on old and used vehicles (not on imports by existing assemblers).

This comes after SBP’s 100 percent cash margin restriction on non-essential items to discourage them and hedge against the rise in capital product imports. Precious good that policy did on the rising trade deficit.

These RDs too are apparently meant to discourage the import of luxury items while also help to boost government revenues. The latter is inevitable since the government has to make up for tax and duty exemptions it gives under other SROs due to CPEC, different trade deals or a myriad of other reasons and meet its revenue targets.

Meanwhile, the discouraging of import (of luxury or non-essential items or otherwise) is a long running policy in Pakistan, also reminiscent of Modi’s “Make in India” policy to boost import substitution; but here at home, it is not nearly as thoughtful and planned. For starters, just imposing duties on imports cannot lead to the growth of nascent industries.

One could question the rather ambiguous use of buzz words like non-essential and luxury items—who decided which items—since they do not follow a standard global definition but are mostly arbitrary. But even if they did follow a standard definition, the major problem is not that. The most urgent problem is the extensive use of RDs themselves within the policy framework for different objectives. RDs are allowed under the WTO rule book, but they are meant to be a temporary measure, and should be time-bound.

In Pakistan however, RDs just trail on and on for years, often increased in subsequent SROs after pressures from local industries (read our example of steel: “Steel: wrongful protection needs correction”, published on Feb 19, 2017) or in the current case to make up for foregone revenue from other places.

They hurt consumers in terms of greater prices. And while they deem to protect some industries, others get affected. In many cases, RDs are levied on products that are not being produced at home, or in fact, inputs for other sectors not produced locally (auto parts industry is an example of one such industry). Often they also end up protecting industries that don’t need further protection.

In fact, the existence of RDs affects how the trade regime of the country is viewed. The import policy order levies custom duties but then subsequent RDs just bump up the duties set by the import order, and they are not counted. Many in the country believe that the trade regime in Pakistan is too open, not accounting for the heavy RDs imposed on a wide-range of products, which otherwise may appear to have lower custom duties.

As a rule, RD should only be used as a stop-gap solution, not as a remedial measure for trade malpractice, not to curb imports, and not to safeguard industries. All of the above should be done through a coherent policy framework to have long-term, targeted, objective-based growth. But issuing an SRO it seems is simply easier.