‘Misguided import-substitution drive to take years to reap benefits’

KARACHI: The country’s drive to promote domestic products at the expense of imports is creating new opportunities for business, but it will take years for the benefits to show, a former finance minister said on Saturday.

Mifta Ismail, finance minister in PML-N last government, criticized the strategy of import substitution as “an example of misguided protectionist thinking”.

Ismail said import substitution is doing way more harm than good to the economy as instead of narrowing the yawning current account gap, it was widening it by leaps and bounds.

“I will tell you import substitution only increases the current account deficit,” said Ismail, speaking at the 13th Karachi Literature Festival.

Ismail said mobile phone makers were enjoying tax breaks of around 10 to 20 percent, while adding only 10 to 20 percent value by assembling imported cell phone kits.

“The 80 to 90 percent of the value of mobile is imported, thus adding to current account deficit,” he added.

Pakistan’s current account deficit increased to a 13-year high of $2.6 billion in January 2022 in the wake of a surge in import payments due to rising commodity prices in the international market.

Industry officials said despite the fact that several mobile phone assembling units were now operational in the country, the prices of cell phones were going up.

“All of the companies are assembling, not manufacturing. It means all parts have been imported and here they are just assembled. So, I don’t see price of cell phones going down. Moreover, since most of the value of a cell phone is derived from imported parts, therefore its cost is affected by an increase in dollar price or devaluation of rupee,” one official said.

According to Engineering Development Board (EDB), about 30 companies have been granted permission to operate in Pakistan of which 19 have already started operations.

Pakistan’s auto industry also remains under fire for the lack of localisation, while car prices continue to rise. According to automakers the main reasons for change in prices are increase in international raw material costs, continuously changing forex rates, and hike in freight charges.

Auto sector experts says some cars even derive 95 percent of the cost from imported parts.

“Auto part manufacturers also depend on 30 percent to 65 percent of imported raw material to produce car parts. It means the localised auto parts have their cost derived from imported parts,” an expert said.

Former minister Ismail came down hard on Pakistan’s economic model that allowed the government to grant billions in subsidies to the rich so that they would create ‘Rs20,000’ jobs for the poor. “And when they start getting jobs the economy overheats and the process has to be stopped,” he added.

“Pakistan’s land prices increase faster than inflation. It means the poor and the middle income group can never buy their own house,” Ismail said adding, “Economic growth has to be sustainable, which cannot be achieved if it’s not inclusive".