Desperate times

Call for desperate measures. Despite a turnaround in global trade that started slowing down in 2014 and improvement in commodity prices worldwide, Pakistani exports are still falling with trade deficit exacerbated by the rising imports bill. It hasnt helped that oil prices have also rebounded. In a move to relief pressure on the growing trade deficit, the Central Bank has imposed a 100 percent cash margin on imports of over 400 consumer items.

This non-tariff measure is meant to discourage imports by requiring importers to make 100 percent payment at the time Letter of Credit (LC) is opened, which could cause liquidity constraints. The regulation is extended to items ranging from motor vehicles (both CKDs and CBUs) to mobile phones, cigarettes, jewelry, cosmetics, personal care (soaps, shampoos, perfumes), electrical & home appliances including fans, air-conditioners and ovens as well as arms & ammunitions.

The concern is indeed valid but this measure may not even yield desired result. It is true that imports will soon start to skyrocket already rising by 14 percent in 7MFY17as demand for machinery rises particularly those used in power generation and construction. In fact, share of machinery in total imports rose to 24 percent in the period July-Jan of this fiscal against 19 percent during this period last year, according to data reported by Pakistan Bureau of Statistics (PBS). That is a significant share increase, overtaking the top spot from oil imports that have historically been the heaviest burden.

Less import of consumer items, the SBP believes, would cushion the distress of rising and expensive capital imports. This is contestable since most of the items in the list have had marginal increases in the recent past. Unfortunately, quantum numbers are not made available by PBS, but 2015 data reported by International Trade Centre (ITC) shows, for instance, that Pakistans volumetric import of electrical and home appliances have fallen since 2007. Import of soaps in 2015 were half of what they were in 2013, meanwhile mobiles phone imports have fallen from 33 million units to 8 million between 2012 and 2015.

In fact, the recent duty bump on mobile phones has already discouraged imports and resulted in an 8 percent decline in 7MFY17. Compared to the expected growth in machinery and oil imports, would the decrease in imports of these consumer items be significant enough? It is unlikely.

Perhaps the only pressure relieving item in the list could be motor vehicles, as car imports have been significantly moving upward and constitute about 16 percent of all imports (in 7MFY17). There are several models currently imported by the three carmakers either in CBU or CKD form which could affect business. In fact, many new models are being imported to test the market which could become a cumbersome task for auto makers after this new regulation. The measure does not extend to new investors in the auto sector that are coming in, which if expectation reach fruition would bring a handful of new models to the fore (imported at first), only adding to the demand of dollar in the near future.

While the SBP seems optimistic, this solution to tackle the trade deficit is insufficient, even if well-intentioned. As this column has talked about time and again, a more long term strategy is needed to smoothen the trade deficit, on top of which should be the agenda to boost exports. A strong focus on value-added manufacturing; using the countless free trade deals Pakistan has signed to gain more targeted market access; while letting the market find the currencys true value as the overvaluation has been hitting exports hard.

Rome is not built in a day. This government cannot solve this problem by merely offering an 18 month financial package to exporters and introducing cash margins to discourage imports. Alas, in absence of substantial reforms, and growing demand for capital goods, perhaps this is the only solution the government can offer. And we will have to take it, with much reservation.