Economists back tariff cuts, urge govt to shed protectionist past

KARACHI: Leading economists are throwing their weight behind the government’s ambitious plans to slash tariffs, arguing the move is a vital first step towards revitalising the nation’s stagnant economy. However, they caution that without significant institutional overhauls, the reforms risk falling flat.

The Economic Advisory Group (EAG), a collective of independent economists, has long championed greater global integration for Pakistan. The group recently issued a strong endorsement of the proposed tariff reforms, which aim to reduce the simple average tariff rate, including regulatory and advanced customs duties, from nearly 20 per cent to less than 10 per cent over the next five years.

“Pakistan’s economic landscape is dominated by sectors shielded from international competition,” the EAG stated, highlighting the urgency of these reforms for the country’s future prosperity.

The EAG’s report underscores how the country’s current tariff structure not only inflates costs for industries reliant on imported goods but also stifles innovation. It effectively traps resources in inefficient firms, hindering the country’s export potential and encouraging businesses to lobby for protection rather than striving for competitiveness.

Compounding the issue is Pakistan’s unusual reliance on tariffs for government revenue. In 2023, trade-related taxes shockingly accounted for over 40 per cent of total tax revenue -- more than eight times the global average of 5.0 per cent. “Our trade policy has been held hostage by the twin impulses of protectionism and revenue extraction,” the report said.

While acknowledging the paramount importance of tariff liberalisation, the EAG stresses that its success hinges on creating a stable macroeconomic and institutional environment conducive to producing complex, high value-added goods. Citing research by Nathan Nunn and Daniel Trefler, the economists point out that strong institutions are crucial for economies to climb the value chain, while weak institutions can trap them in low-value production. This institutional difference, they argue, is key to understanding why trade liberalisation thrived in East Asia but yielded mixed results in Africa and Latin America.

To ensure the reforms bear fruit, the EAG is urging policymakers to adopt a comprehensive policy package. This includes improving institutional quality to empower both domestic and international businesses to engage in long-term partnerships and implement sophisticated production processes essential for economic transformation. Upholding a market-based exchange rate, allowing currency movements to absorb trade pressures rather than artificially suppressing import growth, is also deemed vital. Maintaining positive real interest rates is seen as crucial for curbing excessive consumption-driven import demand as tariffs are reduced. Ensuring a level playing field by rationalising indirect taxes like GST and FED is necessary to prevent domestic manufacturing from being disadvantaged against imports. Finally, prioritising policy credibility and consistency is paramount; without clear communication and political ownership, the EAG warns, businesses will delay investment and the reform process risks being reversed.

“These measures should be part of a policy package that includes responsible fiscal and monetary coordination, and institutional constraints which give a credible signal that these reforms will not be rolled back,” the EAG concluded.