Govt split over import curbs

The government on Monday appeared deeply divided over the extent of import curbs, as the prime minister wanted a steep reduction to avoid the looming default but was not ready for reduced working days while the economic team wanted the economy to keep running. Back-to-back meetings were held in the capital to find a solution to the dwindling foreign exchange reserves through a combination of import curbs and reduction in energy bills through administrative means.

Sources said that Prime Minister Shehbaz Sharif ordered that a plan be drawn up to reduce the annual import bill by at least a quarter. But he did not accept the central bank’s proposal to reintroduce a five-day working week and order early closure of markets to save the energy bill. The proposals initially presented by the central bank, Ministry of Commerce and Federal Board of Revenue (FBR) suggested that the import bill could be slashed by $1 billion a month through import compression and administrative measures, they added.

However, the directives given by Finance Minister Miftah Ismail would at best result in a reduction of $300 million to $400 million in the monthly import bill, which in April stood at $6.6 billion. The government on Monday ruled out a targeted ban on imported goods and discussed the possibility of imposing regulatory duties for reducing the import bill, which is pushing Pakistan fast towards insolvency.

The government could ban 70 to 80 imported items being used by superstores but their impact could not be more than $200 million a month, said the sources. In the first 10 months of current fiscal year, imports reached a record high of $65.5 billion and could increase to $77 billion by the end of June. Sources said that the economic managers reviewed two options – whether to ban some of the imported goods or increase the regulatory duties. The average $6.5 billion monthly import bill has fast eaten into the foreign exchange reserves.

The finance minister was clear that the government wanted to protect the economy from any adverse impact of banning imports, thus, the authorities should work out some options to increase the regulatory duties, a participant of the meeting said. The minister directed that the energy, food, machinery and export-oriented sectors should be exempted from import compression measures, according to an official. The meetings took place a day before the cabinet is scheduled to take presentation from the Ministry of Commerce about the growing trade imbalance. Another senior official said that the regulatory duties may not help to achieve a major reduction in imports.

Depending on the final tariff lines to be picked for imposing regulatory duties, the monthly impact on imports may not be more than $300 million to $400 million, he added. This means there will be hardly an impact of $500 million on the import bill during the remaining period of current fiscal year. In case the government decides to impose restrictions on imports, the bill can be reduced by $700 million to $900 million a month, which can cause a meaningful reduction in imports, said the official.

The finance minister has now tasked the FBR to prepare a proposal for imposing the regulatory duties and a follow-up meeting would be held before his departure to Doha, Qatar, for talks with the International Monetary Fund (IMF) about the possibility of reviving the stalled loan programme. The rupee on Monday fell to another record low of Rs194.60 to the dollar amid increasing demand for the greenback for imports and due to political uncertainty.

The prime minister has contacted various stakeholders to know about the reasons behind the steep fall in the rupee value but he himself did not seem to be prepared to take tough economic decisions. The current account deficit has already ballooned to $13.2 billion in nine months of the current fiscal year and it is estimated to widen to $17 billion to $18 billion by the end of the year, if no corrective measures were taken. Miftah Ismail said last week that the government was willing to opt for a steep reduction in imports through a combination of regulatory duties and import controls.

He said that the government would compress imports through various measures with the objective of reducing the current account deficit to $10 billion in the next fiscal year. The previous government of Pakistan Tehreek-e-Insaf (PTI) had left behind $10.9 billion in foreign exchange reserves, which included $10 billion borrowing from China, Saudi Arabia and the United Arab Emirates (UAE) and another $4.5 billion borrowing from commercial banks.

Effectively, the reserves were negative. The reserves have further slipped to $10.3 billion as of May 6 and if the government is unable to convince the IMF, the country may soon reach a point where it will not have reserves to pay for imports and meet debt obligations. In the past, the regulatory duties and cash margin requirement have not proved effective in curtailing imports, as 80% of the country’s imports are either raw material or intermediary goods, according to the World Bank.

Sources said that the increase in regulatory duties may help the government to enhance revenue collection but would not bring the current account deficit under control in a big way in the current and next fiscal year.