Govt considers tariff hikes on imports

Measures eye to curb $1.4b losses, focusing on used cars and wheat

ISLAMABAD:

Pakistan is considering erecting higher walls of duties against imports of up to 1,300cc used cars and wheat aimed at discouraging their imports, which this year cost the country heavily, to the tune of about $1.4 billion in reserves and unrest among farmers.

Sources informed The Express Tribune that the government is considering two separate budget proposals regarding restoring the customs duties on the import of wheat and increasing the rates of duties on the import of used cars with up to 1,300cc engine capacity.

Another proposal is to impose a 1% additional customs duty on a host of items currently subject to 3% to 11% normal customs duty, according to government sources. This 1% additional customs duty may generate at least Rs20 billion in revenues in the next budget.

The budget proposals were discussed in the middle of an IMF mission that landed in Pakistan on Thursday. The technical team held discussions on Friday ahead of full-scale negotiations from next week.

Esther Perez Ruiz, the Resident Representative of the IMF said on Saturday that, “A mission team led by Nathan Porter, IMF’s Mission Chief to Pakistan, will meet with authorities next week to discuss the next phase of engagement. The aim is to lay the foundation for better governance and stronger, more inclusive, and resilient economic growth that will benefit all Pakistanis.”

Her statement implied that IMF is here to test the waters, as she emphasised upon “next phase of engagement”. The IMF team is here to gauge whether the PML-N government is serious about reforms and if it has the capacity to undertake reforms given higher level of political uncertainty, according to the sources.

These proposals are in the initial stage of budget discussions and may soon be presented before the Tariff Policy Board for endorsement and inclusion in the fiscal year 2024-25 budget. Pakistan has so far spent $1.1 billion on the import of 3.5 million metric tonnes of wheat and another $290 million on the import of 20,000 cars during this fiscal year, according to official statistics.

Despite bumper crops, the government of former prime minister Anwarul Haq Kakar facilitated wheat imports by ensuring the availability of foreign currency reserves and providing priority berths to ships. Moreover, the caretaker government extended the timeline for wheat imports by one month on February 23rd, just a week before the new National Assembly took oath.

As a result, farmers did not receive the official support price of Rs3,900 per 40 kilograms and sold their cash crop at about 24% less than the official rate.

Prime Minister Shehbaz Sharif’s government has already ordered an inquiry to determine the facts of wheat imports during the caretaker regime. The government had zero-rated the 11% customs duty on wheat imports under the 5th schedule of the Customs Act. Sources said there was a proposal to restore the 11% customs duty by amending the 5th schedule through the new Finance Bill.

In case of the government’s need for wheat imports, the cabinet will have the authority to waive the 11% duty to the extent of government imports, according to the sources. This proposal has been discussed at the level of the Commerce Ministry and Finance Minister Muhammad Aurangzeb. Sources mentioned an active budget proposal under consideration to increase import duties on used cars. The proposal is to raise customs duties by 5% to 15% or align them with the existing rates for new cars with up to 1,300 cc engine capacity. The revenue impact from this proposal is estimated to range from Rs5 billion to Rs15 billion, depending on the rate increase. During the first 10 months of the current fiscal year, Pakistan imported nearly 20,000 used cars worth $290 million, almost three times higher than the less than 5,000 vehicles imported in the last fiscal year.

In April last year, Pakistan completely abolished regulatory duties on the import of used cars up to 1,800 cc and also reduced duty rates for new cars. Consumers of old used cars up to the 1800 cc category received significant relief with the removal of 100% regulatory duties.

Overall, duties on 49 tariff lines of vehicles were reduced by 10% to 100%, and the 7% to 28% additional customs duties on cars were also removed in April last year, leading to an influx of used car imports. Another factor contributing to higher imports was that local assemblers were unable to ensure timely deliveries due to government-imposed import restrictions. The central bank closely monitored almost every major letter of credit opened for imports, implementing rationing and purchasing dollars from the market.

Pakistani consumers also imported second-hand vehicles due to their better quality, despite the government providing local assemblers with 240% to 500% protection.

Sources mentioned that the government is also considering a proposal to impose a 1% additional customs duty on items currently subject to 3% to 11% customs duties but not attracting any additional duties. This proposal, while inflationary in nature, could generate around Rs10 billion in revenues.

Published in The Express Tribune, May 12^th, 2024.

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