The policy of controlled imports is working as monthly import bill is down to $5 billion (on average) over the last two months. However, the desired objective to bring the import bill at par with the sum of exports and remittances is not working, as both (especially remittances) are falling with the imports. The end goal of bringing current account in surplus (or in balance) has other risks.
There is another element of primary income in the current account which is prone to run a high deficit – due to growing backlog of dividend payments to foreign shareholders of companies operating in Pakistan and expected higher interest payment in external debt servicing due to rise in global interest rates.
The other side of the equation is fiscal. Here, FBR (Federal Board of Revenue) tax collections are highly dependent on imports. The policy of shifting increasing burden on taxes at import stage was initiated by Ishaq Dar during the last PML-N (Pakistan Muslim League-Nawaz) government. FBR net taxes collected at import stage increased from 39 percent in FY13 to 45 percent in FY19. Now that approach is biting back. Efforts to control imports is reducing FBR tax collection.
Then there are signs of formal imports shifting to informal. Since SBP (State Bank of Pakistan) is controlling payments through formal channels and restricting issuance of LCs (letters of credit), some importers have moved towards the informal channel for payments. These imports are not reflected in official figures. And the payments are netted off through informal hundi/hawala system against home remittances. That could be one reason for the decline of formal remittances. On overall balance of payment, the effect is neutral – as inflows are netted off outflows. But it has fiscal implications - FBR loses taxes on smuggled and under-invoiced imports.
The government needs to rethink the policy of controlling imports through administrative measures. These control the ‘supply’, not ‘demand’. It could have other unintended consequences as well. One is tax revenue loss. Other is shortage of goods and loss in employment.
The way things are in white goods industry, it appears there would be massive shortage of ACs and fridges in the upcoming summer. Some exports are suffering due to restrictions in imports of machinery parts. Then, in import substitution industries, domestic products are short and partially being filled by imports; for example, higher iPhone sets are available in the market versus similar category domestic assembled phones.
Fear of massive job losses will grow further if the SBP doesn’t increase the quota of imports. The story of other industries such as textile is not good due to problems in the buyers’ market. Large number of job losses risk is growing.
Focus of import control is on supply. A better policy is to work on demand side. SBP wants the nation to live within its means. That can be achieved by reducing overall consumption. The patch work is not optimal. SBP is restricting people from buying cars. But there are no measures to lower the fuel bill of those driving existing cars. SBP is also restricting the public from buying ACs. But there is no policy to reduce the energy bill emanating from use of existing ACs.
Demand control measures by SBP are increasing interest rates and allowing the currency to depreciate. Here, new finance minister has divergent views, and wants to control SBP. And no autonomy on paper is apparently stopping him from doing so. And there is a limit to the effectiveness of interest rate and exchange rate policies. The former has fiscal implication as government loans constitute lion’s share of banking assets. And exchange rate depreciation has inflationary consequences, as the economy remains highly import-dependent.
One measure is to control demand and encourage conservation of energy. The import bill of energy and food was higher than that of goods’ export last year. That needs to be controlled. There should be 3-4 days working week. Shopping malls and shops should be closed by 6pm. Marriage halls and other social gatherings should be restricted. In this manner, there could be more savings and reduced adverse unintended consequences. Job losses could be lower and would not be concentrated in some industries. And FBR revenue loss can be filled by higher taxes on the energy products, and from normal sales of products that are restricted today.
However, there is no political will to implement any of this. No government has been able to impose direct tax on traders and retailers. No government has been able to restrict the number of guests in wedding halls and other public gatherings. No government has been able to impose tax on actual income in real estates. It is high time people should ask questions regarding interests of influential people and institutions in real estate and marriage halls’ businesses.
Without fixing the real issues, it will remain impossible to fix macroeconomic imbalances. The gap between the formal and informal economy is growing and that has done far more damage. The country is supposedly on the verge of external debt default; yet the hustle and bustle on roads, restaurants, malls, beauty parlors and marriage halls gives an entirely different picture. Austerity is required in these areas.
The patch work policy of controlling imports administratively needs to be rechecked and should be replaced with real austerity measures. Otherwise, tax gaps would be filled by imposing more taxes on the tax-paying segment. The FBR’s tax growth is bound to fall, as income tax collection would be reduced as well. Higher collection in the past few months was due to retrospective imposition of taxes on corporate income for the previous year.
The primary income deficit in the current account is bound to grow. Almost all companies having foreign shareholding are complaining about restrictions over repatriation of dividends. How long can the government stop these? Then global interest rates are rising and that will raise the payment on all the loans that are linked to LIBOR. IPPs’ (independent power producers’) payments will grow as well.
It is about time we put our own house in order and stopped doing politics over economics. The mantra of saving political capital is serving some individuals who are in power and control. Is anyone really thinking of helping the economy out of the mess?
Copyright Business Recorder, 2022