Imports and the bogeyman

Boo! Parents (often cruelly) use the bogeyman to scare their errant children and condition better behaviour and obedience in them. In reality, the bogeyman is just an idea with the face of a monster. Imports in Pakistan are exactly that. Pakistan is termed an “import-driven” economy and businesses lobby for protections from imports—why spend dollars on imports, they say, dollars that you don’t have and are not earning through exports or other means. Why not substitute these imports and make them locally? The problem is most trade policies over the years have emphasized on exports; addressing import restrictions and relaxations only when needed, on an ad-hoc basis. This needs to change.

Let’s look at this year’s numbers. Trade deficit has shrunk 15 percent in FY19 with imports down 10 percent and exports down 1 percent, despite a more expensive dollar, great! Somebody somewhere is rejoicing, but let’s stop them short. Is there something to celebrate here? The answer is no, but not for the reasons one would automatically jump to.

Now break down these numbers. The only prominent decline that has come into import segments is in machinery and transport (see graph). The latter may be owing to recent import compression policies to limit import of cars. This is futile since under the auto policy 2016; so many new automakers will soon be importing a lot more CKD/SKD kits and fully built cars to launch in the auto market which will bring up the import bill once again. Ironically, the automobile sector which constitutes 6 percent of total imports (FY18: 7%) is a huge import substitution segment. Nevertheless, there is some substitution that could happen.

The decline in machinery imports can be associated to the completion of CPEC energy projects. Power generating and electricity machinery as a result are down. As a share of total, machinery imports have come down from 19 percent to 16 percent with dollar-value declines in nearly all kinds of machineries. Is the decline of capital goods (aside from CPEC related projects) used in industries to make local products, good or bad? Let’s hold judgment on that. Meanwhile, 26 percent of the imports are oil and gas products. Together these three make up for 50 percent of imports. Can these three be substituted? It’s debatable.

Another 16 percent goes into agriculture and chemicals, many of which are used to produce other chemicals that feed into a variety of manufacturing industries. It’s possible that many of these chemicals can be substituted but with hefty investment from the private sector. Another big ticket item is metals which primarily constitutes of steel and steel scrap. Volumetrically they have declined, though the share in total dollar imports remains the same. Many steel products have high regulatory and antidumping duties on them, but steel makers maintain that the import policy is warped and ineffective hurting some, favoring others (read BR Research interview with Amreli Steel, July 8, 2019).

Many folks also claim that luxury food items are a huge burden. Food is 10 percent of all imports, of which palm oil is 3 percent of all imports. There has been a lot of talk on building local extraction mills and producing edible oil locally but none of the plans have really materialized.

There is certainly a scope to localize a lot of imported goods, but it cannot be done with the way subsequent governments have been doing right now. First of all, it cannot be done through additional import restrictions, not least because they have been ineffective. In fact, with the IMF bail-out programme going online, one of the conditions prohibits the use of the myriad of additional restrictions levied on imports including different kinds of regulatory duties on inputs, intermediate goods and luxuries. This is the primary tool used to restrict imports in Pakistan.

Second of all, there is no import framework. One industry’s imported competition is another industry’s input. The policy is that if a product’s local substitute exists, import of that product cannot get a lower duty. The problem comes when the government uses the industry’s word for it. Since there are no sectoral or issue experts, the government does not have the expertise to determine whether the local product is indeed the exact substitute of the imported product. The result is, some local manufacturers end up having to pay higher duties on their raw materials. For instance, in 2017, when RDs were slapped on many steel products, auto parts makers cried foul.

The point is simple and it is that if policymakers care about industries at all, they need to re-evaluate how they look at trade. If they want to encourage import substitution (in the few segments they can), it should be done under a time-bound policy which is targeted and fully supported, with graduating tariff measures, affordable financing and other private sector boosting measures. Never-ending tariffs and regulatory duties does not encourage import substitution. The most it can do is make goods expensive or shift consumption behaviors, allowing rentiers to keep taking rent.