Import compression: déjà vu?

The goods imports bill in November 2021 at $7.85 billion has surpassed the wildest imaginations of analysts. Headline inflation was also higher than expected – at 11.5 percent with 3 percent rise in the index in just a month. Last week this space hinted about panic at ministry of finance (MoF) and State Bank of Pakistan (SBP) over vulnerable macroeconomic indicators. November numbers have confirmed these suspicions.

There was a direct rejoinder by the ministry to the article and a clarification from SBP generally on the media coverage (including op-ed sections) where central bank’s gist was that it is easy to criticise in hindsight on monetary policy decisions during unprecedented and uncertain times. Moreover, the clarification insisted that op-ed writers are quick to criticise, but do not offer any solutions.

A little year ago, the federal government and central bank were too keen to take credit of current account surplus arising from similar uncertainties. Fairness demands that today they should demonstrate magnanimity and grandness in response to criticism on the rising CAD (current account deficit) by combining their generosity of spirit with an intense seriousness of purpose. When government ministers cheerlead one-off monthly inflation of 5.6 percent in January-21, they should be ready to face the brunt when inflation climbs back up to 11.5 percent less than a year later (as it did for November-21). Pendulum swings both ways.

Policymakers remain obsessed with short-term management and firefighting. Right now, efforts are zeroing in the on curbing import bill. Pakistan’s import to GDP ratio is lower than its neighbors’. The component of luxury imports is not much. Most of the economic production is based on imported raw materials and intermediate goods. Reliance of energy is based on imported fuels. Not much can be gained from banning luxury imports. And an attempt to do so will send a wrong signal with minuscule savings.

However, since country’s exports are in the range of low-income African countries, the level of domestic development, based on imports, is not sustainable. Not much juice is left in remittances to finance trade deficit. Foreign direct investment is hard to come by due to structural issues and a volatile economy. And nothing of sort can be fixed in months. Thus, the question is how to curb import bill in coming months.

The easy path is to slow down overall economic growth. According to Asian Development Bank’s study, Pakistan’s balance of payment constraint growth is no more than 3.8 percent. Do not think to go beyond 4 percent without structural reforms. An obvious central bank policy response is to let currency depreciate and increase interest rates to curb demand. That is happening and SBP may increase the policy rate by another 100 bps (basis points) on 14th December. However, monetary transmission takes time. Right now, the impact of concessionary and expansionary policies of recent past is fueling economic and imports growth. Not much is left in SBP’s arsenal to curb the incoming (and more immediate) enthusiasm.

Islamabad needs to go beyond rhetoric of banning luxury goods imports. Overall monthly import bill seems to have peaked. Commodity prices were higher in October (than today) and those prices are reflecting in November’s imports. There were one-offs in the first half – such as machinery imports under TERF and Covid vaccine imports. In coming months, the impact of falling prices shall be more visible. Freight cost is coming down as well. Improved output of cotton and other crops would reduce agriculture imports. FinMin hopes that import bill in the second half will be substantially less than the first half.

If that is the case, the federal government should not do anything and let the mean reverting commodity prices and monetary and exchange rate tightening do the trick. However, the implicit assumption is that commodity prices (especially oil) shall remain lower than October’s level. That is a big assumption. There must be a ‘plan-B’ to mitigate this risk.

One theoretical approach could be to increase petroleum prices up to around Rs200 per liter. This would curb demand and imports. However, its inflationary consequences could be disastrous and politically a very tough pill to swallow. This may not happen. The other and an innovative way to have a broad-based slowdown is to impose smart lockdowns with a slogan “Stay home, Save economy”. There is readiness for the same as during Covid many educational institutions and offices learned the way of operating online. In central and southern Punjab, such steps are needed to improve the world’s poorest air quality, as around 40 percent of carbon footprints are due to transportation in Lahore.

And if the government ought to ban any imports, it should look at services rather than goods. Pakistanis spend around $3 billion a year on foreign travel – it is 8-10 times the imports of CBU cars. More than half of this travel is for leisure purposes. The government should think of imposing taxes on business and economy travel of resident Pakistanis.

Thus, some solutions to safeguard against the risk of higher commodity prices is to impose smart lockdowns and steps to discourage leisure travel aboard. These steps are for short term (next 3-6 months) and by that time monetary tightening would have its impact.

In the end, it is reemphasized that the policymakers must not opt for ambitious growth without undertaking structural reforms — to start with government should reduce its footprint in the energy and agriculture markets through deregulation.

Copyright Business Recorder, 2021