Trade detail numbers are here. And there are no more surprises. But much noise. And fear. And all sorts of prescriptions to control imports. But are they really out of control? Depends on how you decide to see them. Highest ever monthly number? Check. Highest ever Jul-Aug imports? Check. Imports growing double-digit over last year? Check.
While there is no denying that eventually it is the dollar outflow that will matter in terms of real impact – and not whether it is price driven or quantity driven. By that token, the imports are a concern and that is already showing in how the currency market has reacted. But how much of it is really a concern and how much of it can be somewhat controlled without disturbing the natural growth rate, is the real question. There is no easy answer to it of course. But is the current demand too much? Is the economy anywhere near overheating? The import pattern suggests otherwise.
Here is how. Petroleum imports (ex-LNG) have almost doubled year-on-year in 2MFY22. That is where the bulk of criticism is aimed at. Mind you, this has come with just 11 percent year-on-year increase in quantity of imports – unit prices have an impact of 77 percent. The quantity goes up 25 percent when compared to 4-year average. Mind you, two of those years were extremely challenging where growth had dipped to multiyear lows.
One wonders if this demand is nothing but a result of natural demand, and has little, if anything to do with the government’s decision to provide tax relief. Petroleum retail prices are already considerably higher than corresponding period last year. While there will definitely be a check on demand should the government decide to levy maximum taxes, one wonders if the extent of the potential savings is worth the inflationary consequences, often irreversible, that come with it.
Also don’t forget, much of Pakistan’s celebrated power capacity has been built on imported fuel – be it coal or LNG. That element can’t be curtailed. The HSD consumption is already nowhere near the highs seen in the past. At best, there could be a case of taxing petrol higher, but it has to be weighed against the inflationary consequences versus finding other avenues where imports could be curbed with much lower inflationary consequence.
Areas such as pulses, tea, and textile imports have notched considerably higher quantity growth. In the case of tea and pulses it could well be the case of reduced smuggling, as highlighted earlier in this space. Textile imports primarily owe to bad domestic crop, and not much of it can be stopped, barring worn clothing. That said, combined, these three constitute less than 7 percent of the overall import bill. One could argue more measures could be taken to curtail palm oil imports – but undeterred consumption even at double the prices suggests that may not necessarily work.
Steel imports in quantity are down by over 20 percent from last year, and the growth is entirely price driven. Even compared to the last 4-year average, steel import quantity is still down by 21 percent. Surely, all the construction boom and the supposed PSDP spending spree has not yet transpired into more steel volumes being brought in. How much of that can you control, when the volumes are still down?
On the other hand, mobile phones and automobile imports have mushroomed of late. All sorts of relief measures have been thrown at automobile, and the resultant demand increase is a no-brainer. If curbing imports to arrest the currency slide is indeed the way to go – it may well suit to introduce barriers on non-essential imports. Instead of increasing fiscal revenue from petroleum and then curbing demand inviting high inflation, the alternate route could be to get creative by introducing some curbs on mobile phone and automobile imports. Reverse it when commodity prices soften.
Growth does not function like an on and off switch. Derail it now after a long stabilization period, and then wait longer to get back on track. Current account must be managed, but in measured ways. Lowering growth prospects and inviting direct inflation versus getting creative in managing current account and living with a brief period of high deficits are the two options. More evidence-based research needs to be out there for the policymakers to take informed decisions.
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