EconomyNationalVolume 13 Issue # 12

Curtailing imports is the only way

The latest reports show that imports are growing at a high rate – up by 23 percent in July-November. Exports for November stood at $1.1 billion, while imports are up by $4.2 billion. The increase in imports is four time the exports, worsening an already too-wide trade deficit. Apparently, the exports growth cannot substantially reduce the CA deficit.  The focus should, therefore, be on reducing imports. But that is not happening. The growth in imports is broad based – food imports are up by 19 percent with the bulk of increase coming from cooking oil.

Machinery imports are up by 27 percent where the lion’s share in growth is taken by power and electric machines. The most problematic area is petroleum imports: they increased by 29 percent to reach $5.3 billion last year. According to experts, the demand can be curtailed in the short run by jacking up petroleum prices, and in the long run by developing indigenous energy resources.   As a whole,  the transport group imports growth is outpacing the other goods imports; and this can be curbed through interest rates tightening as auto finance is a big beneficiary of the low interest rate environment. Similar is the case of the metal group in which iron and steel imports are up due to protectionist policies.

It seems that Pakistan is increasingly becoming dependent on import of processed goods rather than on the import of primary goods. World Development Indicators reported value addition in the manufacturing sector as a percentage of GDP at 12.7% in 2016, the lowest value since 1962. The highest ever was in 2005 at 18.6%. This shows that while upgrading the quality of infrastructure within the country, it is also crucial to maintain the level of industrial growth. For this, a viable industrial policy that attracts investments across several vital industries is the need of the hour.

Despite various remedial measures, the current account deficit is growing without any let-up. The trade deficit stood at $12 billion, up by 34 percent, while the remittances remained flat (up by 3% to $9.8bn) to explain why CAD is growing furiously. The FDI is up by 57 percent to $1.1 billion to fill in some foreign financing gap. But again, it’s too low to make any meaningful impact. The SBP foreign exchange reserves came down by $3.2 billion in July-November. The government raised $2.5 billion from global bonds in December and is planning to go for another round of financing soon.  Since the current account deficit is growing without any brakes, the case for monetary tightening is becoming imminent as the currency depreciation alone might not be enough to curb the import demand.

The authorities have now realized the gravity of the issue and have imposed regulatory duties on an array of imports, and have depreciated the currency by around 7-8 percent in this fiscal year.  The impact of regulatory duties imposed has not yet started biting. In the recent round of 7-8 percent currency depreciation, the impact may surface by end January 2018. However, the emerging figures in the months ahead will tell the real story.

The impact of regulatory duties imposed would start reflecting from the January figures; though the dent would not be much. In the recent round of 5 percent currency depreciation, the impact may surface by February 2018. Hence, it’s time to wait to realize the impact of steps taken to curb the current account deficit.

An important development is that exports have finally started to move up a bit. The numbers grew by 12 percent in July-November with an incremental growth being observed every month. Food exports are up by 16 percent owing to a onetime jump in sugar exports; a similar boost is needed by exporting accumulated surpluses of wheat.

In case of textile exports, the value added sectors are showing some promise as exporters are benefiting from the cash rebates in the textile package. The recent 5 percent fall in currency may push export proceeds further up in the months to come. Similar is the story of value added sectors in other manufacturing as leather manufacturers’ exports are up by 29 percent. The toll is set to come close to the peak of FY15 in FY18.

Apparently, the exports growth can substantially reduce the CAD.  The focus should therefore be on reducing imports. But that is not happening. The growth in imports is broad based – food imports are up by 19 percent with the bulk of increase emanating from cooking oil.

In case of machinery imports, the economic expansion is so far unperturbed by the balance of payment and political worries. They are up by 27 percent where the lion’s share in growth is taken by power and electric machineries. Too much electric power is coming into the country, which may surpass the country’s importing capacity; and electricity distribution threshold may be reached soon. No need to mention the inefficiencies demonstrated by the government as PSO is exporting back the imported furnace oil after paying demurrage charges.

However, the recent shift in power policy for new projects from capacity payment to take and pay policy may put a stop to the staggeringly growing power supply. The textile machinery growth is moving up, which is showing that the players are pumped up by recent measures. The most problematic area is petroleum imports. The fuel oil imports may come down going forward, but the RLNG imports would surely surpass the replacement. On the other hand, the steel industry is expanding and monetary easing is helping construction grow. Plus, the infrastructure building is also gathering pace as elections inch nearer. All these factors call for imposing new import curbs. But it must be remembered that imports growth can come down at the cost of sacrificing high growth in auto, power and steel sectors. It’s a bitter pill that the economy must swallow. And the sooner it is done, the better.

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