The information on the composition of imports from July 21 to March 22 was released recently by the Pakistan Bureau of Statistics (PBS). Over the nine-month period imports have shown an unprecedented growth rate of over 49 percent. Exports in the same period have exhibited a rise of 25 percent. Consequently, the trade deficit has widened by 70 percent. This is the principal reason for the current account deficit reaching a peak of over $13 billion in the first nine months of 2021-22.
A number of questions arise about massive growth in imports. What is relative contribution of the rise in volumes and prices respectively? What has been the impact of various fiscal and monetary measures undertaken to contain imports? What is the likely level of imports in the last quarter of 2021-22?
The expectation is that when prices of imported goods jump up internationally there is a reduction domestically in the quantity demanded of these goods. Historically, the impact has been determined by the price elasticity of imports. This is estimated at minus 0.25 for total imports. However, there is a big variation in the response of demand to higher price of different items imported. Special factors may lead to less response of import demand to rising prices like expectation about future increase in prices. This may even lead to larger imports and buildup of inventories.
A methodology has been developed for determination of the volume index of different groups of imports with 2015-16 as the base year. Quantities of imports in different groups are reported by the PBS, except for two groups; namely, machinery and transport.
Application of the methodology has led to the estimation of the growth in volume, price, and value of imports in five groups, namely, food, petroleum, textiles, agriculture and other chemicals, and metals. The growth rates are given in Table 1.
============================================================= Table 1 Growth Rate in volume, prices and value of imports by Group July - March 2021-22 (%) ============================================================= Growth Rate ------------------------------------------------------------- Volume Prices Value (in $) ------------------------------------------------------------- Food -9.5 25.0 15.5 Machinery n.a.* n.a. 21.8 Transport n.a n.a. 67.5 Petroleum 13.8 82.3 96.1 Textiles -7.9 33.5 25.6 Agricultural and Chemicals 24.4 50.6 75.0 Metals 6.9 31.5 38.4 ============================================================= Total n.a n.a 49.1 ============================================================= Source: PBS * Not available =============================================================
Table 1 reveals widely different patterns of import growth. Imports of three groups, viz., transport, petroleum and agriculture and chemicals, show big increase of 67.5 percent, 96.1 percent, and 75 percent, respectively. Demand for automobiles has been buoyant, especially with low lease rates and big increase in incomes of the upper income group in 2020-21.
The near doubling in the value of petroleum imports in one of the main factors contributing to the big jump in overall imports. The fundamental reason is the big jump in the price of crude oil from close to $45 per barrel in the second half of 2020 to $105 per barrel currently. Also, there was a slump in the consumption of petroleum products in 2020-21, following the Covid-19 outbreak. However, the near 14 percent growth in import volume of petroleum products cannot be sustained and domestic prices will have to ultimately adjust with the rise in international prices by a phased withdrawal of the relief package announced by the previous Prime Minister.
The big jump in agricultural and chemicals group imports is largely due the colossal increase in imports of medicines of 347 percent, consisting primarily of anti-Covid vaccines. Given the wide coverage now, this import should decline. This has already happened in March.
What has been the impact of measures to restrict imports? Given the variable path of the exchange rate since June 2020, the PBS numbers indicate that the average exchange rate applied on imports from July 2021 to March 2022 was Rs 171.88 per US dollar, as compared to the average of Rs 161.46 per US $ from July 2020 to March 2021. Therefore, the depreciation was not large at 6.5 percent. This explains the limited impact of exchange rate policy.
Similarly, interest rates have been low till September 2021. With the policy rate at 7 percent, there was an incentive to invest. In particular, the good news is that there is a 65 percent growth in imports of textile machinery.
Other measures have also been taken to limit imports. One hundred percent import margin requirements were introduced on several imports and regulatory duties levied on 599 import items, with effect from the 1st of July 2021. The surprising finding is that from July to December there has actually been a decline from 9 percent to 7 percent in the effective duty rate on non-oil imports. This unexpected outcome in the presence of regulatory duties needs to be explained by the FBR.
More restrictive policies have been adopted now on imports, including the jump in the policy rate to 12.25 percent, fall in the exchange rate to Rs 186 per US $ and introduction of 100 percent import margin requirement on 177 more items. If domestic petroleum prices start adjusting upwards also, then the overall mix of policies should lead to a containment in the month-to-month growth in imports. This is essential if the current account deficit in the last quarter of 2021-22 is to be brought down to a sustainable level.
However, there will continue to be some pressure for higher imports. First, large imports of LNG are required to reduce the fuel shortage in the power sector and curb load-shedding. Currently, the import price of LNG is almost three times higher than last year. Second, large imports of wheat and cotton will take place at much higher prices. Third, if the exchange rate continues to fall while dollar import prices maintain an upward trajectory than a speculative component may raise the level of imports.
Overall, there is likely to be a high import bill in coming months and this will continue to put pressure on the current account deficit and the foreign exchange reserves of the country.
(The writer is Professor Emeritus at Beaconhouse National University and former Federal Minister)
Copyright Business Recorder, 2022