Fast growing imports are the bane of policymakers in Islamabad right now. Exports have grown by 10 percent in 5MFY18, but that offers little relief as imports have grown by twice that much. Measures to cut down on imports have not started yielding the required outcome as we move into the first half of the fiscal year. In fact, in 5MFY18, incremental exports are at $857million, while the change in imports is $4.2 billion. This means: the increase in imports is nearly five times the increase in exports!
According to the numbers reported by the Pakistan Bureau of Statistics (which vary from the numbers reported by SBP), trade deficit has climbed by 29 percent in 5MFY18 year-on-year. Rising imports have propelled policymakers to impose several stop-gap solutions—ranging from levying regulatory duties (RD) on a wide variety of products that are deemed inessential or imposing 100 percent cash margin requirement for car imports.
There is also the requirement for duty payment on imported cars to come from abroad and demonstrate money trail that would likely bring the mammoth number of used cars imported in the country down. The effect of the latter measure will start to reflect in numbers in January 2018 and the RDs as early as next month. However, the effectiveness of these measures can only be short-term, and perhaps that is the point: Keep afloat until elections.
Imports have traditionally faced a bad rep but realistically, this country is not prepared to bring exports up substantially enough to level rising imports. Measures to curb them hence, are deemed the only solution even when their mobility is a sign of growth. Let’s see.
Construction and infrastructure development has given rise to machinery imports, some of which have been imported already while others will be imported throughout the year. Infrastructure activity also means import of more coal (for cement), more parts (for commercial vehicles) and more steel products. Local manufacturing of latter can’t keep up with the demand and steel imports have soared (15% in 5MFY18) despite anti-dumping duties and RDs on them.
Energy projects and greater transportation activities will need more fuels that come from abroad and carry the highest weight in all imports. RNLG imports would replace any decrease in furnace oil imports. Meanwhile, vehicle imports specially cars are a direct result of higher incomes.
As we mentioned earlier though, in some cases, RDs might not result in desired outcomes as some goods have inelastic demand so changes in prices may not result in a sequential decrease in demand. An example of inelastic demand is cars. Customers are buying local Honda and Toyota cars at steep premiums, because incremental changes in price does not deter them from buying these cars that are expensive to begin with.
Interestingly, with the new auto policy in place, new players entering the market will mean more imports, not less. They will be imported in CBU form first and then in CKD/SKD form (Completely Built Unit, Completely/Semi Knocked Down) while Suzuki, Toyota and Honda are themselves racking up import bills on imports for their expanding assemblies. Commercial vehicles are writing a similar story.
With the currency depreciation of 5 percent, exports may pull up. But long term strategies are still absent. Textile package has been promising, with rebates bolstering the value-added sector. Food exports have also retrieved with rice and sugar. Subsidies have been offered by provincial governments and like sugar, surplus wheat (about 2 million tons) from carry-over stocks will also now be exported, which will help. However, basmati rice still faces competition from Indian exporters. Meanwhile, exports of other small manufacturing goods like sport goods, carpets, footwear and leather haven’t done remarkably well.
As this column mentioned last month, the Strategic Trade Framework Policy is under process backed by World Bank. The earlier versions of the policy did not spearhead an export revolution, though such was not even expected. Aside from some subsidizing, rebate or tax concessions that may have worked, exports have not revived. This will however, remain a recurrent and debilitating concern for the country beyond this year, so we hope the program does not end in vain.