Trade deficit in August 2021 stood at $4.06 billion which is the highest ever number - previous high was $3.77 billion in June 2018. August imports stood at $6.3 billion – second time in the three months when imports are higher than $6 billion. There is a massive external shock as both economic activities and the international commodity prices are picking up.

A combination of higher imports and rising commodity prices are resulting in the growth of FBR taxes and imports. The other element is currency which is under pressure – down by 10 percent in 4 months. One reason for currency depreciation is higher trade/current account deficit and the other (lately) is net outflow of dollars to Afghanistan after the US exit. Things are not looking good. Steps need to be taken to curb import pressure – currency depreciation alone is not enough, and its impact will take a couple of months to come in action.

Imports at $6.3 billion is sending jitters in the currency market. Outflows are outpacing the inflows. It is dampening the sentiments as well. Given the imports pressure, demand for dollar is increasing. Then the equilibrium in kerb market has been disturbed as well. Kerb market dealers have been net sellers in the interbank market ever since remittances started moving up due to Covid related travel restrictions. The situation is Afghanistan is disturbing that equilibrium.

Previously, dollars were flowing in from the US to Afghanistan, and that used to have a supply spillover in Pakistan which were enough to meet the demand of the foreign currency in regions adjacent to Torkham. Now that market is demanding dollars as there is no inflows from Afghanistan. Instead, demand for US dollar is coming from Afghanistan, as its public is fast losing faith in its own currency. That shift in outflows to Pakistan seems to be a new reality we must live with.

This puts more pressure on curbing imports. There is a clear conflict in what policies Islamabad is propagating and what challenges SBP is facing. Imports were lower in FY21 as demand was low due to lockdowns and low commodity prices. Current account was in surplus for a long time and currency net flows were positive after initial shock. But the ministry of finance was under pressure as FBR revenues – which are import dependent (as on average 44 percent of FBR revenues in FY18-20 were collected at the imported stage), were not growing.

Now the tables have been turned. SBP is under pressure to manage current account and in turn currency. Growing imports are making FBR a winner. Revenues are up by 41 percent to Rs849 billion in the first two months of the fiscal, and the target has been surpassed substantially.

In August alone, the growth in FBR revenues was 45 percent. Custom duties are up by 62 percent and sales tax is up by 56 percent. The imports in August are up by 70 percent year on year. Growth in both taxes at imported stage and imports are growing in tandem. The good and bad news are coming together, and the impact is diluted at macro level.

Anyhow, the import momentum must be checked. Currency depreciation is the first line of defense. This is bound to bring imported inflation home. Other measures must be taken too. One is interest rate hike, another is to have higher Petroleum Levy on petroleum products to check the demand by raising prices. The third element is to arrest luxury imports – including cars, by imposing some form of duties on the same.

However, in the process FBR revenue growth may suffer. And that can be partially compensated by higher PL. Some may argue that higher PL may bring inflation due to increase in petroleum prices and its secondary impact. But if PL is not raised, currency depreciation will bring inflation home. The government needs to set its priority right before going to the IMF meetings in October. Sooner it is done, the better it is.