Decline in machinery imports

Till the end of the last fiscal year, the balance of trade deficit was careening out of control. Though the situation is still precarious, the latest PBS figures show a cooling down of imports. The year-on-year increase was controlled to less than 1 percent for July with imports down by 15 percent since June.

One of the drivers of the higher import bill has been CPEC with investments concentrated mainly in power generation and infrastracture projects, leading to higher machinery purchases. As projects reach their maturity stage, conventional wisdom implies that machinery imports will taper off.

The logic seems to hold since the last four quarter’s average rate of change of all machinery imports has been 1 percent whereas at its peak in FY16 it was 7 percent. However, the argument that Pakistan’s import bill will stabilize in part due to lower machinery imports would only be tenable if CPEC was the only driver of the machinery import bill.

Within the machinery group, power generation, electrical machinery, construction & mining equipment, and other machinery could have been strongly influenced by CPEC imports. However, telecom machinery, agricultural machinery, office equipment and textile machinery cannot be laid at CPEC’s doorstep entirely.

In FY13, non-CPEC related machinery had 43 percent share. This share had fallen to about 30 percent in FY18. Though lower than it used to be, it still accounts for nearly a third of all machinery imports. These imports have slowed down to 2 percent on average for the last four quarters from an average of 6 percent in FY17. A combination of factors such as regulatory duties, currency devaluation, higher interest rates that curtail investment, and cash strapped textile sector due to stuck refunds have led to lower machinery imports in various sectors. One arm of curtailing of trade deficit is to promote exports which will entail deeper investments in agriculture and textile side. Import of equipment related to these sectors could to a certain extent nullify the drop in machinery imports.

The recent dip in imports has been led by power generation machinery which declined by 36 percent YoY as per the latest PBS figures. This can be attributable to CPEC. However, to blame CPEC entirely for the growing deficit due to higher heavy machinery imports would be as erroneous as hoping that the pressure will ease as projects mature.