Finance Minister Miftah Ismail, while speaking to a private news network, reported a sharp reduction in imports through a combination of regulatory duties and import controls as part of the government’s efforts to reduce the account’s deficit (CAD) by about 40% to $10 billion. during the next fiscal year.
To achieve this goal, the government planned to curb imports through various measures, including a complete ban on the import of automobiles and the imposition of new regulatory taxes on the import of cell phones, machinery and other items. luxury goods, as well as an increase in the current duties on the import of auto parts.
The government has banned the import of the following luxury items to save valuable foreign currency. pic.twitter.com/7JVMYQ0HNx
— Government of Pakistan (@GovtofPakistan) May 19, 2022
Pakistan’s energy imports are an important cause of the CAD increase. In the first nine months of the current fiscal year, the CAD has already ballooned to $13.2 billion, and by the end of the fiscal year it is feared to widen to $18 billion. dollars. Reducing the deficit to $10 billion could weigh heavily on the economy, but the government has no other choice to avoid default.
The current account deficit was reduced to $623 million on April 22; only two-thirds of the March 22 deficit of $1,015 million. An increase in workers’ remittances (by $315 million) and a decline in imports (by $246 million) explain this reduction. Cumulatively, the CAD reached $13,779 million in July-April FY22.https://t.co/Od8ikVdOd5 pic.twitter.com/smhwJlyTZu
— SBP (@StateBank_Pak) May 19, 2022
Pakistan’s Tehreek-e-Insaf government had left behind more than $16 billion in foreign exchange reserves, which have since steadily declined as the new government struggled to secure additional flows due to the lack of progress in its negotiations with the International Monetary Fund (IMF).
Days before PML(N) came to power, the State Bank of Pakistan (SBP) imposed 100% cash margins on 177 items in a bid to limit their imports. The current government has decided to further increase the number of imported products subject to 100% cash margins. It should be noted that regulatory duties and the cash margin requirement have not proven effective in the past in reducing imports, as 80% of the country’s imports are either raw materials or intermediate goods, depending on the World Bank.
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The government could face objections from the World Bank and the IMF, which often oppose such restrictions on imports. If import duties worked, Pakistan would have been among the most deficit economies, but unfortunately that is not the case. Despite imposing relatively high import duties, Pakistan has continuously struggled with the DAC.
High import duties have a negative impact on the economy. According to Gonzalo Varela, a trade specialist and macroeconomist working for the World Bank, high import duties have the following consequences:
1: Creates distortions by increasing profits from selling domestically rather than exporting.
2: Creates distortions by reducing incentives to improve productivity by limiting competition and opportunities for technology transfer.
3: Creates distortions by increasing political uncertainty as they affect the relative returns of investing in one sector versus another and thus encourage a wait-and-see approach by business.
Read more: Pakistan’s import-to-GDP ratio exceeds 18%
New regulatory duties and import controls will not solve the challenge of increasing CAD. These measures could reduce imports in the short term, offering temporary relief, but countering the rise in the CAD in the long term will require macro-adjustment to reduce aggregate demand, something the government must take if it is to prevent the economy of default.