Imports have started growing rapidly once again. During May and June, they registered a growth rate of 80 percent and in the first quarter of 2021-22 they have increased by 66 percent. If sustained, this will be one of the fastest growth rates ever, due partly to a low base effect of much less imports last year after Covid-19.
The last time there was relatively rapid growth in imports was in 2016-17 and 2017-18, when there was a cumulative increase of 36 percent. The economy had moved up to a trajectory of a relatively high growth rate of above 5 percent. Simultaneously, the nominal value of the rupee was kept, more or less, unchanged with respect to the dollar. Both these factors contributed to a big increase in the volume of imports. Consequently, the current account deficit in 2017-18 rose to the highest level ever of over $19 billion.
What factors explain the recent jump in imports? The economy is not yet on the path of high growth and the rupee has been falling steadily since June. Therefore, the factors which contributed to the big jump last time are not operative this time.
Examination of the growth in value of different imports reveals that the operative factor is the big jump in commodity prices globally with the process of recovery in the world economy after Covid-19. This has been facilitated by very expansionary monetary and fiscal policies, especially in the USA, which has increased global demand. Also, in some cases there continues to be the impact of supply shortages.
Based on the international trade statistics released by the PBS (Pakistan Bureau of Statistics) an effort has been made by commodity group and product to decompose the growth in value of imports between the rise in $ prices and in volumes. The estimates are presented in Table 1.
Table 1 clearly indicates that much of the jump in imports is due to higher international prices. Prices have gone up generally between 30 percent and 100 percent. The biggest increase observed is in the case of crude oil and petroleum products of as much as 91 percent. Volumes have shown significant increases only in imports of textiles, agricultural inputs, and chemicals. Overall, almost 88 percent of the increase in the value of total imports is due to higher prices.
The fundamental question relates to the path of commodity and product prices globally up to the end of 2021-22. Most projections by the IMF, World Bank, etc., are that prices will remain high up to mid-2022 and may even continue to rise further in the intervening period. Since the end of September, the price of oil has increased further by 21 percent. Recent increases have also been recorded in prices of palm oil, sugar, cotton, and wheat.
============================================================================== Table 1 ============================================================================== Growth Rates in the Value, Volume and Price of different imports July to September 2021-22 - (%) ============================================================================== Group Imports ($ million) Volume Price Value (in $) ============================================================================== Food 2363 7.0 31.0 38.0 Machinery 2845 - - 35.1 Transport Equipment 1117 - - 169.7 Petroleum 4592 6.2 91.0 97.2 Textiles 1188 44.4 30.9 75.3 Agriculture & Chemicals 3416 18.8 58.9 77.7 Metals 1542 3.5 38.7 42.2 ============================================================================== TOTAL 18745 7.8 58.2 66.0 ============================================================================== Source: Estimated from PBS data.
This phenomenal jump in imports has already led to a big increase in the trade deficit in the first quarter of 2021-22 by 94 percent, despite faster growth in exports also of 35 percent. Consequently, the current account has gone into a large deficit of $3.4 billion, as compared to a surplus in the first quarter of 2020-21 of almost $0.9 billion.
The risk is that if the current trends persist the annual current account deficit in 2021-22 could approach the high level of over $13 billion. This likelihood is enhanced by other factors. First, there is the likelihood of a jump in the price of oil to $100 per barrel, due particularly to the global shortage of natural gas. Second, there will be need for additional imports of up to $2 billion of Covid-19 vaccines. Third, the wheat crop may be smaller than the record level last year due to water shortage during the current rabi season, thereby necessitating larger imports. Fourth, there is the likelihood of large repatriation of profits by Chinese power companies following payments to them.
Therefore, the current account deficit could be even larger and the biggest since 2017-18. This will create a big problem of financing such a large deficit along with the peak in external debt repayments of over $10 billion. Contrary to this projection, the IMF in its recent publication, World Economic Outlook, has estimated that the current account deficit of Pakistan in 2021-22 will be lower at 3.1 percent of the GDP, whereas it is currently operating at close to 4.5 percent of the GDP. According to this projection, the volume of imports will have to be curtailed by as much as 11 percent. This will represent a very large containment of imports.
Clearly, this must have been one of the major stumbling blocks to the negotiations with the IMF on the Macroeconomic Framework and targets for 2021-22. The big reduction in the volume of imports will require draconian measures in terms of extent of depreciation of the rupee, rise in interest rates, enhancement in import margin requirements and imposition of higher regulatory duties and sales tax on imports. This will lead to a quantum jump in the rate of inflation.
Higher resort to currency depreciation will, of course, exacerbate more the inflation problem which is already leading to street demonstrations throughout Pakistan. A bigger move in terms of enhancement of interest rates, as happened in 2019, will impact negatively on growth and on the size of the budget deficit.
The resort to regulatory duties on non-essential imports will not lead to much containment as these imports have a share of less than 5 percent of total imports. However, imports of automobiles need to be controlled by resort to significantly higher statutory import duties and less access to loans by potential buyers.
The option is to adopt a policy of keeping the import duties unchanged only of basic food items, agricultural inputs, medicines, and items with zero or 3 percent duty. The change may be an increase in import tariffs in the different slabs from 11 percent to 15 percent, 16 percent to 20 percent, 20 percent to 25 percent and tariff peaks by 10 percentage points. This will protect basic essential items from bigger escalation of prices and raise more tax revenues. Pakistan is caught
today between the devil and the deep blue sea. If steps are not taken directly to curtail imports, then the current account deficit will be larger, leading thereby to larger depreciation of the rupee and consequently higher inflation.
We await the finalization of negotiations with the IMF. In the event there is an agreement then the targets in the balance of payments for 2021-22 will be of critical importance.
(The writer is Professor Emeritus at BNU and
former Federal Minister)
Copyright Business Recorder, 2021