A number of South Asian countries adopted the policies of attaining self reliance in manufacturing industrial raw mater, intermediate goods and import substitutions. In Pakistan, the policy of brute nationalization of industries in 1970s and neglect of policy formulation for promoting industries of these goods and technology improvement had left the government to enforce import restrictions to reduce the bulging current account deficit. But the policy of across-the-board restrictions is impacting the efficiency of domestic industries.
In October the government imposed regulatory duties on import of 570 goods in order to discourage their import and generate minimum revenue of Rs. 20 billion to tackle fiscal deficit. The Inland Revenue department of the Federal Bureau Revenue missed the tax collection target by Rs.90 billion in the first quarter of the current fiscal which may have necessitated the option of imposing new import duties. Consequently, in order to generate fiscal revenues, there is a preference to raise custom duties by imposing additional duties on imported goods. The bureaucrats of stereo type thinking in the Federal Bureau of Revenue and Finance Ministry may have believed that this most tested and failed strategy may work wonders to tackle the widening trade deficit. However, such measures are rarely effective as a number of Pakistani export products consume imported raw material and consumers goods, which will become expensive with the imposition of additional duties. Hence the comparative advantage of exportable finished goods will be impacted.
Higher import tariffs are usually imposed on several items that are considered luxury goods such as expensive mobile phones, cheese and automobiles. The goods that were previously imported duty free now face import tariff. Additionally, the import tariffs on goods are raised under the guise of countervailing duties in order to protect domestic industries even when such measures have historically been ineffective. Unfortunately, such measures fail to differentiate between necessary and luxury goods. According to the summary released by Pakistan Bureau of Statistics (PB) in November, the month-on-month decrease in exports in October was 9.28 percent while the year-on-year decrease in imports was 1 percent. On the other hand month-on-month increase in exports was 10.15 percent and year-on-year rise was 1.17 percent. Although the trade deficit decreased year-on-year basis, it increased month-on-month basis by 8.72 percent.
Moreover, the exports in first four months of FY 19 in creased 3.48 percent over the same period in FY 18, while imports decreased 0.10 percent over the same period last year. In the essence the imports have decreased negligibly. Although the trade deficit at the end of the FY year may decline if exports continue to rise despite the rise of prices of imported raw material and intermediate goods, the imposition of new custom duties as well as additional custom duties may create distortions in the market, which will eventually lead to a wedge between domestic and international prices.. This wedge breeds inefficiencies in the manufacturing sector. Large scale manufacturing has already shown a decline of 1.7 percent due to escalation in production cost.
Import of the food group, machinery group, transport group, textile group and miscellaneous group decreased in October last year as compared with the same month of 2017. On the other hand the import of petroleum group, agriculture inputs and metal group increased in October 2018. The most notable decline was in power generation machinery as its import decreased more than 60 percent, equivalent to $ 130. On the other hand imports of crude oil and LNG increased more than 37 percent and 85 percent respectively, a combined increase of more than $250 million in monetary terms. In addition to this, in the first four months of FY 19, the import of power generation machinery decreased by almost $ 500 million over the same in FY 18. On the other hand the import of LNG increased by more than $650 million.
The petroleum group is regaining its share in the import composition as the scope of CPEC related projects shifted from investment to day-t- day operations requiring imported fuel such as LNG. If the government successfully prioritises industrial development the import of machinery will go up. Although there has been a decline of more than 50 percent in the import of dry fruits and completely built units of transportation their total decline is slightly more than $150 million. The repercussion of ill-conceived tariff measures and other import restrictions are evident in higher prices of various domestically produced goods. The fall in trade value may also indicate an increase in informal trade. In view of the forgoing, long term focus should be on setting up raw material and intermediate goods producing industries and promotion of industries of import substitutions.