Spearhead Opinion – 13.09.2018
By Farrukh Karamat
Senior Research Coordinator, Spearhead Research
The economic advisors have been contemplating a ban on the import of luxury cars, smartphones, cheese and fruits, apparently to avoid having to approach the International Monetary Fund (IMF), for another bail-out package. These measures appear almost farcical in the face of the rising current account and trade account deficits and the falling reserves. Such measures serve to highlight the fact that the government did not have a plan in place and is searching for solutions, hard pressed for time.
On top of this indecisiveness the government received a severe blow when three of the top international Economists exited the Economic Advisory Committee. Speculation has been rife around the real reasons behind their leaving the austere committee, but for now the religious card has been brought into play for Dr. Atif Mian and the other two apparently left in protest over his removal. Whatever the reasons, this is a great loss for Pakistan at a difficult time.
As if that was not enough bad news, another Advisor stated that the government would be putting the China Pakistan Economic Corridor (CPEC) projects under hold and review for a year. This came at a particularly critical time when the only financial ally Pakistan has is China. The news has been denied, but the damage has been inflicted.
The newly inducted Finance Minister is quiet and there is a feeling of lingering uncertainty, with all kinds of rumours doing the rounds from hike in taxes, to import curtailment, to higher gas prices, to the revival of wealth tax and so on. This at a time when the government needs to infuse confidence among the investors and attract Foreign Direct Investment. The lingering uncertainty is doing more harm than good and it is reflected in the continued under performance of the Pakistan Stock Exchange.
The government by delaying the finalization of its financial plans may be creating more problems for itself. Most financial analysts have predicted that the country will have to turn to the IMF for a bailout package, but the government continues to criticize the culture of dependency, apprehensive about the kind of reforms and austerity measures that the IMF might demand, which could be in stark contrast to the social welfare spending spelt out by the Prime Minister in his inaugural address.
Banning cheese or other items is not a solution. What the country needs is an increase in exports and inward investment. Yes, hike the duties on these items, plug the pilferage and under invoicing on imports and increase the revenue collection. Similarly, revoking the income tax concessions is no solution, instead focus on expanding the tax base and including more tax payers in it. Ban the import of cars but then ensure that the local manufacturers are producing products in line with international standards. Ban the cell phones but ensure that locally manufactured phones (if there are any) are up to international standards.
Draconian import control measures are difficult to manage specially when the country has no import substitution industry in place. A complete ban on items leads to the further development of a parallel black market based on smuggled goods, where the government ends up losing more than it gains.
The previous government hiked tariffs by up to 50 percent on 240 imported items, including cheese and cars, and imposed regulatory duties on dozens of new imports. However, no meaningful results came out of this exercise as the people continued to prefer the now more expensive imported items over the sub-standard locally produced goods.
There is no easy way out of Pakistan’s current economic woes, but a ban on imports is no solution. Rather the efforts need to be focused on enhancing exports and creating an environment conducive for investment. One had hoped that the government would hit the ground running, but there are emerging apprehensions that they are learning on the job. No one doubts their intentions, but these are trying times when every day of inaction could be compounding the problems by fueling rumour mongering. Those who can will continue to eat cheese and it will be available for their consumption if they can pay the price. The government needs to focus on macro-level structural changes to change the business and economic environment and boost the revenue generating capacity of the country. In the absence of other alternatives, CPEC is a strong link in that chain and it needs to be capitalized on to make maximum gains through regional connectivity and trade.