Interventions to control trade gap
September 19, 2018
Preparation and implementation of a well-thought and properly constituted strategy to effectively control the fast widening trade deficit to strengthen country’s macro-economic position is urgently required. Latest data released by state bank of Pakistan suggests that the trade deficit has reached USD 36.3 billion and current account deficit is over USD 18 billion as of fiscal year ended on June 2018.
This drastic increase in the trade deficit would have dire consequences on the economy of Pakistan; therefore, all future trade policy initiatives should take a comprehensive view of this problem. Economic realities show that the country cannot sustain a high and growing trade deficit; therefore, the trade should be enhanced through close coordination with both economy experts and private sector. The growing trade deficit, led by 13 percent increase in imports (102pc higher than exports), is posing a key challenge to the macro-economic stability of the country besides converting it into a consumer society.
The galloping imports propelled the outgoing government to take certain measures, including levying regulatory duties ranging from 4-60% on 731 products on October 2017, imposition of a 100pc cash margin requirement for cars and devaluing the local currency against US dollar to curb imports. Apparently, these measures could not achieve the desired targets (as shown in graph below).
Imposition of RD’s did not have any lasting impact on imports. Imports did fall but only for a very short period of time, i.e., for about a month and only by 2.6 percent. On contrary the exchange rate/devaluation seems to have a significant impact on the imports. As expected, the devaluation impact came with a lag of a month and is continuing to date. Despite high regulatory duties and currency devaluation, imports have increased by almost 13pc in fiscal year 2017-18 while exports improved by only 8 percent.
The failure of these measures basically lie in the inelastic nature of the imports. As many of our imports are inelastic and there are no substitutes available domestically. Infrastructure development has boosted the demand for machinery, steel, cement, and coal, which cannot be met with domestic production yet imports for these products, cannot be cut despite RDs and other duties on them. Similarly, high energy demand does not allow to reduce oil and petroleum imports despite high prices.
Considering inelastic nature of imports, imposition of duties, taxes and depreciation of currency will only contribute to increase in imports bills and will also violate the world trade organization’s treaties. Thus, imposition of regulatory duties is not a wise decision to discourage imports. Following the footsteps of other developed countries, government should utilize non-tariff barriers (NTBs) to achieve the desired results. NTBs can take the shape of
a) 100% cash margin for import L/C’s.
b) Quotas and outright bans on imports categories
c) Phytosanitary requirements made more stringent
d) Cumbersome customs and administrative Entry Procedures
A policy or measure cannot succeed to curb imports until and unless the inelasticity of imports is considered. There should be separately import policies for the two categories of imports i.e. essentials and unnecessary imports. Custom duties and other restrictions should be imposed on imports of luxury
items but subsidies and relaxation should be provided on essential items, especially on imports of raw material like cotton, polyester and machinery, etc., to promote local production and export industry.
Along with the imprudent import policies, government’s export unfriendly policies have also taken heavy toll on trade position of the country. Exports are highly sensitive to exchange rate and have increased significantly after currency devaluation in February 2018 (a 4% depreciation lead to 17% increase in exports). However the amendment in DLTL offset the positive impact of exchange rate and exports started to fall drastically. After the amendment in DLTL policy in June 2018, exports fell by 12%. (As shown in graph below).
The ground realities suggest that in order to encourage maximum exports, the government is required to maintain a market based exchange rate for both curtailing imports and increasing exports. The current government should also revise the DLTL changes made by outgoing government which have resulted in a precipitous fall of exports in July 2018.
In order to develop the domestic market all future DLTL schemes may only be applicable on the value added with Pakistan. Further in order to encourage the value added sector the DLTL rates may be designed to favor end products. We suggest a gradual shift in DLTL rates towards the value added sector given the duties, etc., in the cost of doing business the possible rates could be:
Apart from effective trade policies, government should also cut the cost of doing business in Pakistan and evolve a long-term strategy to make its products attractive in the global market to enhance its exports. If the PTI government adapts to analysis and information based import-export policies, the BOP crisis can certainly be controlled.
======================================================================= PROPOSED DUTY DRAWBACK SCHEME ======================================================================= Commodities 2018-19 2019-20 2020-21 2021-22 2022-23 ======================================================================= Cotton Yarn 4% 3% 2% 1% 0% Greige Fabric 4% 3% 2% 1% 0% Processed Fabric 5% 4% 3% 2% 1% Made ups 6% 7% 8% 9% 10% Garments 7% 8% 9% 10% 11% =======================================================================