Rising import burden
One of the biggest challenges facing the new government is the rising import burden which has put the external sector at risk. Some time back, in order to curb imports, the Federal Board of Revenue had increased additional customs duty from one to two percent on import of goods in the month of May. The Board issued a new SRO to double the rate of additional customs duty on imported items. The increase in additional customs duty from 1 to 2 percent on imports across the board was meant to generate around Rs 30 billion in 2018-19.
Pakistan's import-export gap surged by nearly 35 per cent yearon-year to $20.202 billion in the first eight months of the current fiscal year. The trade deficit has been on an upward trajectory for many years owing to the liberalisation of the import regime some time back.In 2000-01, Pakistan's trade deficit was $1.527bn, which rose to $22.159bn in 2014-15. The import bill was $45.826bn in 2014-15. The deficit stood at $2.807bn in February, a rise of 87.88pc from a year ago. It is estimated that if exports do not rise and imports continue to swell, the trade deficit will reach $28bn.
Imports are going up and up. Machinery imports, which constituted 19 percent of total imports in 7MFY16, grew by 42 percent year-on-year and stand at 24 percent of the total import bill. The bulk of these imports are power generation and electrical machinery that grew by 91 percent and 16 percent respectively. The import of textile machinery has also gone up. Construction and mining machinery imports have increased because of greater infrastructure demand. Food imports were up primarily due to palm oil imported from Indonesia and Malaysia. The second biggest head in imports is oil which is 20 percent of total imports now. Due to a rise in RNLG plants that the country is building, liquefied natural gas imports will continue to rise: they grew by 136 percent in 7MFY17. At the same time, the rebound of oil prices will continue to put pressure on the total import bill.
In view of this there is an urgent need for the government to adopt special measures to curb imports, especially those of luxury items. Recently, the authorities moved to impose regulatory duty at the rates of five to thirty percent on the import of around 400 luxury items, which include perfumery, cosmetics, toilet preparations, articles of leather, fabrics, clothing accessories, air-conditioning machines, watches, furniture, toys and video games, etc. Regulatory duty has been imposed, in addition to customs duty, sales tax and withholding tax, on the import of such items. Various rates of customs duty from 50% to 100% have been imposed on import of cars and jeeps depending upon engine capacity.
The State Bank some time back directed banks to raise cash margin for the import of non-essential items to 100 per cent. This is an attempt to ease pressure on the country's trade accounts due to a spike in the import bill on account of the CPEC- induced capital goods demand. A 100pc cash margin will moderate imports of nonessential items. The cash margin requirements have been so framed as to contain the burgeoning trade deficit and at the same time accommodate the import of productive goods. The country spent $6bn on auto and food item imports which are also in the said list. This means that goods worth about one fourth of the import bill will be directly impacted. According to experts, these measures would go a long way to contain swelling imports.