Import bill surged by $16 bn in 2018

ISLAMABAD: The incumbent government has conceded that the import bill surged by $16 billion from $45 billion in 2016 to $61 billion in 2018 under PML-N regime primarily due to the investment-driven import of machinery under CPEC, industrial raw materials and intermediate goods.

In a draft policy for preparation of Strategic Trade Policy Framework (STPF) for 2020-25, the government has conceded that the imports had remained stable around $45-46 billion from FY2012 to FY2016, but surged by $16 billion to touch $61 billion in the next two years (2016-18) primarily due to (a) the investment-driven import of machinery under CPEC, industrial raw materials and intermediate goods, (b) 12 percent additional consumption of petroleum products due to 19 percent price decline, (c) 17 percent hike in palm oil price, and (d) increase in import of pulses and cotton by 60 percent and 7 percent respectively owing to shortfall in domestic production.

While throwing light on structure of exports, the draft paper of STPF stated that Pakistan’s export performance during the last decade has been inconsistent. During 2008-10, the exports remained at around $18-19 billion; in 2010-11, the tailwind of international commodity bonanza (cotton and rice) enabled a quantum leap in exports from $19.3 billion to $24.8 billion; for the next three years (2011-14), the exports remained range-bound between $24 to $25 billion. During 2014-17, exports declined by 19 percent to $20.4 billion, primarily due to 16 percent contraction of global market, 43 percent slump in global commodity price index and a sustained currency overvaluation of around 15 to 20 percent. During FY2018, the exports had an impressive recovery of 14 percent, affected mainly by the 12 percent expansion in global trade, 10 percent recovery of commodity price index and the Prime Minister’s Export Package. In FY2019, the exports remained stagnant at $23 billion. During the fiscal year 2018-19, the fundamentals of the export sector have significantly improved due to a set of policy measures. Firstly, the gradual rationalisation of exchange rate has improved the export competitiveness, by decreasing the cost, in dollar terms, of rupee denominated inputs e.g. energy, wages, overheads and indigenous raw materials. Secondly, the export sector remained insulated from hike in electricity and gas prices, though the impact has been passed on to the commercial and domestic consumers in the wake of price hike in the global energy market. Thirdly, the interest rates under export schemes i.e. Export Refinance Scheme and Long- Term Finance Facility, have been retained at the previous level, despite the multiple rounds of policy rate increases by the State Bank of Pakistan. Fourthly, the import duties have been reduced on more than 2,000 raw materials of export-oriented industries in the two supplementary budgets (in October 2018 and March 2019) and the Annual Budget FY2020, with a cumulative annual relief of Rs40 billion. Fifthly, the support provided under the Prime Minister’s Export Enhancement Package has been extended for three years to lend predictability to the export-oriented investment. Despite the above-mentioned tailwinds, the export growth remains sluggish because of the offsetting impact of equally strong headwinds. First, the contractionary monetary policy has gradually increased the cost of capital, especially for the small and medium enterprises, which cannot secure concessionary finance under the export schemes. Second, the availability of exportable surplus has shrunk as a natural corollary to the slow GDP growth. Third, despite a partial relief of customs duties on 1,635 raw materials in the Finance Act 2019-20, the tariffs on all other imports have been further increased, in turn, escalating the cost of doing business and generating anti-export bias. Fourth, the volatility of exchange rate during the first half of 2019 increased exchange-rate risk for the exporters, since at the time of quoting the price they did not know how many rupees would be realised for a dollar when the export proceeds arrive after 6 to 9 months of production.

Imports: During the last 15 years, Pakistan’s imports have increased from $15.6 billion in FY2004 to $54.8 billion in FY2019 at a compound annual growth rate of 8.7 percent. During the FY2019, the imports declined to $55 billon, mainly due to (a) exchange rate rationalisation making the imports expensive, (b) reduction in one-time imports of capital goods under CPEC projects, (c) tightening of regulatory controls on non-essential imports and (d) the demand compression due to sluggish GDP growth. The trend of import compression continues during the current financial year (FY2020) also. Though balance of payment remains an endemic concern for the economy, Pakistan’s imports-to-GDP ratio of 19 percent compares favourably with the comparator countries – China 19 percent, India 23 percent, Bangladesh 23 percent, Thailand 56 percent and Malaysia 63 percent.

It means that for an economy of the size of above $300 billion, the import bill of $53 billion is not outrageous. The problem, however, remains the composition of the imports. A meager 4 percent of total imports are used as inputs in the export-oriented production; whereas, 96 percent are either consumed directly as finished products or the raw materials for the goods consumed in the country, it concluded.