Containment of imports

The latest international trade statistics for the period, July to February, 2022-23, have just been released by the Pakistan Bureau of Statistics. They show a big reduction in the deficit in the balance of trade of over 33%, equivalent to a fall of $10.5 billion. This has certainly helped in drastically reducing the current account deficit by over 67%, bringing it down to $3.8 billion from $11.5 billion in the first seven months of 2021-22.

The fall in the deficit in the balance of trade is mostly attributable to a fall in imports of $12.4 billion. This represents a very big decline of 23.5% in the dollar value of imports. In effect, the monthly average of goods imports in the first eight months of 2022-23 is $5.0 billion, as compared to $6.6 billion in 2021-22. The level of imports in February is down to only $4 billion, which is the lowest monthly import in the first eight months of 2022-23.

The fundamental question is what explains the drastic decline in imports? Is it due to lack of buoyancy in import demand because of stagnant aggregate demand in the economy especially due to a fall in consumption expenditure caused by the loss of incomes due to the floods? Has this reduction in demand been augmented by rising prices of imported goods, inclusive of depreciation of the rupee?

An alternative explanation can, however, be offered. This relates to the policy adopted of physical restrictions by the SBP on import LCs and delays in the clearance of the large number of consignments at Karachi Port.

We first look at the trends in international US$ commodity prices up to now in 2022-23. Given the mix of imports of Pakistan, the World Bank data source on commodity prices reveals that there is 8% drop in dollar prices of imports in 2022-23 up to January 2023. In particular, energy prices have fallen by 12%.

However, the rupee has depreciated by 35% during the July 22 to January 23 period. As such, rupee prices of imports by Pakistan have increased on average by about 27.5%. Beyond this increase in prices, there is the effect of higher interest rates and lack of growth in the GDP on import demand. Overall, it is estimated that if there had been no constraints on import, the volume of imports would have decreased by 6.5%. Instead, from July to January the volume has fallen by 14.5%. This implies that the process of physical restrictions on imports has led to a decline in the volume of imports by 8%.

The bottom line is that from July 2022 to January 2023 there has been a forced decline in imports of almost $4 billion. If this reduction had not been accomplished the current account deficit would have been close to $8 billion and not at the observed level of $3.8 billion. The SBP appears to have managed to more than halve the current account deficit. Otherwise, the foreign exchange reserves would have fallen to a near zero lower level by now.

The next question is where the curbs have been applied more? The largest drops in the value of imports are observed, first, in petroleum products of almost 34%. It is not surprising that the Oil Companies Advisory Council (OCAC) has warned that there is an impending shortage of petroleum products unless emergency measures are adopted.

The other surprise is the big decline in imports of textile inputs. Import of cotton is up in volume by less than 7%, when the 35% fall in the cotton crop will necessitate a near doubling of import volume this year. Other textile inputs have been imported less than the volume last year by almost 35%. Does this portend a big emerging constraint to textile exports in coming months?

Another cut in imports is also a source of concern. Import of medicines is down by as much as 41%. It is not surprising that there is an acute shortage of key drugs, injections, and OTC medicines. This shortage is certainly visible in Lahore, where I live. Similarly, the construction sector is being starved of imports of iron and steel scrap and products. Imports in volume are down by as much as 35%. Cement sales have also fallen sharply. Clearly, the construction sector is suffering a deep recession. The only redeeming feature of the policy of containing imports is the continuation of higher food imports. Palm oil imports are up in volume by 7% and of pulses by 38%. In coming months, there will be need to raise substantially the volume of wheat imports given the likely shortfall in output. The Governor of the SBP has indicated recently that the projected current account deficit in 2022-23 is $7 billion. In the first seven months, the deficit was $3.6 billion. This, however, does not cater adequately for the value of containers to be cleared at Karachi Port, which apparently have goods worth almost $1.8 billion.

The SBP has recently begun to implement a market-determined exchange rate policy. This is the appropriate policy as it links the level and composition of imports to market demand, rather than through the arbitrary exercise of physical controls. However, achieving the desired level of containment of the current account deficit will require a quantum depreciation of the rupee of the type that we have seen from end-January 2022 to end-January 2023 of over 51%. This will, of course, exert continuing pressure on the rate of inflation but will have a less distortionary and negative effect on the process of production in the country.

Copyright Business Recorder, 2023