The foremost and immediate concern of both SBP and MoF is to control imports and to bridge the gap between imports and exports in order to curb the current account deficit. The economy is in a state of despair and government institutions are using the tools which are not recommended in any liberal economy. This is reducing the confidence. With limited use and transmission of monetary actions and fiscal measures, the reliance is on administrative measures – such as scrutinizing almost every payment.
Many businesses are facing severe constraints in opening the L/Cs of raw materials, and spare parts etc. The dividend repatriation or other payments fate is no different. There are some informal rules to restrict imports in some sectors – such as auto and smart phones where quota is restricted to half. Many other areas are grey, and there are different shades of it. White goods manufacturers are shutting down. Textile and other players are facing problems due to machinery and parts import restrictions. And many complaints (by influencing businesspersons) are dealt on case-to-case basis. Every issue is handled ad-hoc where case to case approvals is signed from Deputy Governor Level at SBP and pushed by ministers including FM and PM.
It's completely chaotic. There are unintended consequences of importers tractions. There are fiscal implications, as half of taxes are collected at the import stage. There are job losses and inflationary consequences due to shortages. There is implication for exports as they are finding it hard to import raw material. The top exporters in the country are issuing request case by case with the FM to open the L/cs for parts and small raw materials – such as dye and buttons.
On top of it, the commodity super cycle and nose diving currency are taking the cost of production through the roof. The chief components of higher costs are energy and raw materials. In a few industries where the government sets the prices, businesses are closing (or reducing) production, as government is not increasing the prices – such as pharma. In other cases, businesses are lowering the production by themselves.
And those who wish to operate have serious constraints of working capital lines. Banks are getting more risk averse. The working capital lines are choking, and banks are not increasing them. Some have to reduce the production due to this. There are examples where businesses are closing operations as it viable for them to shut the business and absorb the fixed cost as due to growing negative gross margins, running factories is a worse-off situation. They make the commercial decisions to shut off.
All these are going to unravel in a worse form in the coming months and quarters. There would be widespread shortage of goods and services. The quality to deteriorate, as businesses are forced to cut corners. The exports volume will suffer. The job losses would be huge in the supply chain of numerous industries.
The government will lose on tax revenues, as lesser imports (and production) result in low tax collections. This will trigger contingencies in the IMF programme, and new taxes will be imposed and additional burden will be placed on already heavily taxes sectors. These all lead to further suppression of margins and reduction in production.
The restriction on imports is forcing many to move towards the black market for payment. Big players cannot import parts themselves. They go to dealers and get the material and pay the dealer. The dealer will buy dollars from the black market to pay. That will push pressure of PKR in the open market and that is pushing the PKR down in the interbank market.
On top, add the woes due to floods. The economy is simply heading towards a stage of higher fiscal deficit, high inflation, low growth, and less employment.
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