National Tariff Policy - the long haul

Earlier this week first meeting of Tariff Policy Board took place. It is a welcome change and could will lead to Strategic Trade Policy Framework (STPF) for the next 3-5 years. Work on STFP within ministry of commerce started when Younus Dhaga was at the helm and now is reaching its logical conclusion.

One of the reason of deindustrialization in Pakistan is skewed tariff structure which had in past supported import substitution for long. In the last government tenure, the situation exacerbated when Ishaq Dar used the tariff policy as a tax revenue tool. A saner approach could have been to use tariff for promoting trade and mainly exports. Now the government is trying to revert to position in a staged manner to what the country had in 2013. Since revenue loss is high by reduction in import tariffs, it is is not envisaged to be done at once. The progress would be slow but seems in the right direction.

A peep into the history suggests that trade liberalization in South Asia started in 1990s when India and Bangladesh entered into a liberalization regime. Pakistan lagged behind in the race. Back in 1987, average tariff rates in India (100%) and Bangladesh (80%) were higher than Pakistan (70%). By 1998, neighbors reduced the average tariffs to 30-40 percent while protectionist policies in Pakistan kept the rates north of 50 percent.

The higher tariffs kept Pakistan’s goods less competitive in the global markets. The industries at home did not have incentive for innovation, and technological transfer remained low. The industrialists in Pakistan spent more in advocacy capital to let the wealth to transfer in the hands of a few through protection against competition. The rent seeking culture spurred and excessive tariffs created an anti-export bias.  The complexities in the tariff structure bred the culture of smuggling through under invoicing.

In early 2000s, Pakistan started rationalizing its tariff. It was a little too late as neighbours were already climbing on the ladder of competitiveness through innovation and economies of scale. Nonetheless, there were some gains in the first decade of this century. The exports growth demonstrated it. In the next decade (2010s), Pakistan receded and others accelerated the paddle. The tariff reduction in Bangladesh (51%) and Vietnam (72%) made them amongst fastest export growing economies. In Pakistan, tariffs increased by 11 percent.

Tariff rationalization in Pakistan (after 2000) was not uniform. That incentivized low value addition and impeded backward industrial linkages development. The higher protection in value added sectors did not let the sectors become globally competitive and hindered foreign competition. The tariffs on raw materials and semi-finished staged impeded the value chains to develop.

The icing on the cake was Ishaq Dar’s policy of using tariffs as a tool for tax revenues. The tariff liberalization continued though in his time. The general tariff slabs reduced from 10 percent in 1993 to 5 percent in 2016, and maximum tariff was reduced to 20 percent. The worse policy action was imposition of tariff on basic raw materials- increased from 0 percent in 2014 to 3 percent in 2017. There was an additional duty of 1-2 percent imposed to take the effective tariff at 4-5 percent.

The tariff revenues increased by 169 percent during 2010-16, while imports were up by a mere 16 percent. Regulatory duties were on 105 tariff lines in 2013. That increased to over 1500 tariff lines in 2017. Import tariffs revenues share is hovering around 13-15 percent. In many other economies, the ratio is less than 5 percent. Adding sales tax and other taxes at imported stage, over 40 percent of FBR revenues are collected at import stage.

Today, Pakistan exports are in the league of countries like Afghanistan, Yemen, Sudan and Ethiopia. There are other reasons to contribute to the decline of exports. Skewed tariff policy is one. It is now seemingly on the path of correction.

Now the policy is reversing; but there are legitimate revenue considerations in the short to medium term. According to a news item in this paper, NTP implementation would result in revenue loss of Rs250 billion in FY21 and Rs270-320 billion in FY22. The NTP aims to have uniform low tariffs across the board eventually. There is a long way to go.