Budget duties

With the current account deficit continuing to increase despite the depreciation of the Pakistani rupee, the caretaker government is considering imposing additional customs duties to put a halt to the rising import bill. Merely depreciating the Pakistani rupee is not a sufficient measure to reduce the current account deficit on its own. Depreciating the rupee can give a competitive advantage to exporters but any advantage is accrued over the medium term. The only real way to sort out imports in the short term is to restrict imports. This seems to be the approach that the caretaker government is advocating in coordination with the FBR. The option under consideration is to announce a mini-budget, which increases customs duties by around one percent on all imports or increase the regulatory duty on 1,550 luxury items. The trouble is that one percent import duties are not going to reduce imports in any significant way. It seems like a measure that is too little, too late. Any regulatory duties will have to be much higher for the import bill to be reduced in a significant way. Much like the mini-budget announced by former finance minister Ishaq Dar in late 2017, it will be ineffective.

With elections a day away, this is a decision that the caretaker government should leave to the elected government. One would hope that political parties are aware of the grim nature of Pakistan’s fiscal situation and have a proper plan for how to reduce the current account deficit. There is certainly a case for imposing much higher regulatory duties on imports as well as creating a friendlier space for exporters. The trade gap has gone up to over $5 billion this month. The signs are not good as oil prices have gone up. We have said before that the federal government and the Ministry of Finance need to offer a proper plan for how they will sort out the fiscal crisis in Pakistan. There has been lots of high-minded talk about how miniscule regulatory duties could end up reducing imports. This is unlikely. Any measures that will need to be taken will have to be far more stern. Pakistan will have to consider import restrictions if it is to avoid going to the IMF for a bailout, which would not be a solution for the current account deficit problems. There will be need for more serious thinking on the economic front.