On Friday, the Economic Coordination Committee (ECC) proposed to levy regulatory duties on over 250 items in order to curb imports. It is clear that nobody in Pakistan—from the house of Premier to the Ministry of Finance to the State Bank of Pakistan—is not very clear on how to tackle the growing current account deficit.
It always comes down to putting Band-Aid on the floodgates, instead of really spending time into understanding why this issue is recurrent and formulating long-term policies to address it. And so another list of so-called luxury items will see a regulatory duty which most likely won’t work.
The first point to make is that imports are not the problem, exports are. Without a strategic plan to expand exports, increase capabilities of SMEs, promote value addition etc., short term incentives to exporters will yield little result.
Secondly, there isn’t an import policy in the country that has a direction. There are duty structures in place but distortions are added when import measures are taken ad-hoc under SROs. Moreover, policymakers have not studied or spent time analyzing what Pakistan imports, why and how they can be used strategically for the welfare of industries and consumers alike.
Imports into Pakistan are intermediary, raw materials or capital goods. Food imports have been cited as a major dollar item but they consist of palm oil imports. Despite being an agrarian country, Pakistan does not manufacture edible oils for a multitude of reasons. Over 20 percent of imports are petroleum products while recent infrastructure and CPEC related development have also contributed to an increase in machinery imports; another 20 percent share. The so-called luxury items simply do not amount to as much for them to hedge against increase in other imports.
This brings us to the issue of import restrictions measures, the most favourite and long-running of which is imposing regulatory duties (RDs). It is so easy to slap a duty, and policymakers probably believe it is killing two birds with one stone—earning additional revenue and helping to keep current account on shore. However, the most these RDs can do is the former.
In July, the government introduced RDs to 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). This is in addition to hundreds of items including steel products that had timeless RDs imposed to protect local industries. The RDs ranged from 10 percent to 60 percent; the higher RDs being imposed on old and used vehicles (not on imports by existing assemblers). This came after SBP’s 100 percent cash margin restriction on the import of non-essential items (read: “More Protection”, July 7, 2017). The interesting part is, neither of these policies worked to retain the rising trade deficit, as it continued to balloon.
Despite the fact that this measure hasn’t worked in the past, Pakistani policymakers keep jamming their foot in a closed door. While RDs are allowed under WTO, they are supposed to be short-term, time-bound measures and are not meant to be long-term instruments to curb a set of imports, or earn revenue. 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).
Protection or not, RDs are not the way to do. Most of all, Pakistan needs a strong national trade policy that would not only address fundamental issues with the exporting sector, but also juxtapose that with an import strategy where imports could be used for exports; and backward/forward linkages are established.
Once the CPEC infrastructure is built, we could be negotiating trade deals for an exchange of ideas, expertise, technology and inputs; improving capabilities of small and medium firms, removing barriers on entry and cultivating a skilled labor force. Stop-gap solutions simply will not work.
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