‘Imports unlikely to be dented by cash margins, rupee fall’

ISLAMABAD: The ministry of Planning said on Friday the central bank’s moves to impose cash margins on over 500 items and an exchange rate depreciation to curb imports and ballooning current account deficit are unlikely to dent demand.

“Real Effective Exchange rate (REER) has historically shown ineffectiveness to curb imports in the past. Import substitution strategy has also failed in the past,’ the ministry said in its first quarterly (July-Sept) report. “Cash margin requirement was used in 2008 as well but was unable to make a significant contribution to bridle imports.”

The report said the country’s economy has a strong correlation between the increase in economic activity and a surge in imports.

It said the post-pandemic pickup in economic activity has once again fueled import demand and an imperative to preempt any balance of payment crisis in the near term. “In this regard, two major policy decisions are enhancing the cash margin for 500 plus items and market-determined exchange rate policy. These two steps failed to curtail imports in Pakistan.”

The ministry further said global commodity prices have a very strong correlation with fluctuation in imports and the main determining factor besides domestic demand generated by economic activity. Global commodity prices and imports growth have moved in tandem between January 2000 to September 2021, it maintained.

“One lesson can be drawn (from data analysis from 2007-8 to 2021) that four-fifth of imports are essentials and could not be avoided. Looking ahead, a broad-based policy thrust is needed to focus on the increase in exports rather than curtailing imports” the report added.

The ministry also conceded that the inflationary pressures would continue to persist mainly because of imported petroleum products and food commodities.

“Global commodity prices are expected to remain bullish for the next few months and thus its pass-through to domestic inflation will keep the inflationary situation complex. Improved domestic supply situation of essential items is likely to offset further build-up of inflation albeit at elevated levels of 8.5 percent target for FY22.”

The report said the State Bank of Pakistan has anchored the core inflationary expectations well until now, despite some upward pressures from supply management issues and surge in international commodity prices as well as upward adjustment of utility tariffs.

The policy rate remained supportive at large; however, a case could be advanced for upward adjustments. On the fiscal side, improved tax revenue collection is likely to emerge as a key challenge mainly owing to foregone import duties and sales tax collected from POL products and cash margin requirements on non-essential imports.

The report said global commodity prices led by energy remained elevated and thus effective import prices of essentials like POL and palm oil touched new heights.

Food and palm oil prices eased a bit in September 2021, however, the energy index was more than doubled the level of one year ago.

The cotton price index is up by 46.4 percent in September 2021 which will add to the trade deficit as the textile industry is expected to import raw cotton this year as well to bridge the domestic supply gap.