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Government curbs imports in a bid to manage the growing CAD

The government has signaled a steep reduction in imports through a combination of regulatory duties and import controls to curtail the current account deficit (CAD) to $10 billion in the next fiscal year. These measures might provide temporary relief, but countering the increasing CAD in the long term will require a macro adjustment to reduce aggregated demand, a step that the government must take to prevent the economy from defaulting.

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Finance Minister Miftah Ismail, while talking to a private news network, signaled a steep reduction in imports through a combination of regulatory duties and import controls as part of the government’s effort to curtail the Current Account Deficit (CAD) by around 40 percent to $10 billion in the next fiscal year.

To achieve this objective, the government planned to curb imports through various measures, including a complete ban on the import of automobiles and the imposition of new regulatory duties on the import of mobile phones, machinery and other luxury items, along with an increase in the current duties on the import of auto parts.

Pakistan’s energy imports are a significant cause of the increasing CAD. 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 that it could widen to $18 billion. Reducing the deficit to $10 billion could take a heavy toll on the economy, but the government is left with no other option to avoid default.

The Pakistan Tehreek-e-Insaf government had left behind more than $16 billion in foreign exchange reserves, which have since then constantly fallen as the new government has struggled to secure additional flows due to lack of progress in its negotiations with the International Monetary Fund (IMF).

A few days before PML (N) came into power, the State Bank of Pakistan (SBP) imposed 100 percent cash margins on 177 items in a bid to curb their imports. The incumbent government has decided to further increase the number of imported products subject to 100 percent cash margins. It is worth noting that the regulatory duties and cash margin requirement have not proved effective in the past in reducing imports, as 80 percent of the country’s imports are either raw material or intermediary goods, according to the World Bank.

Read more: India imports 25 times larger supplies of Russian oil after US pressure

The government might face objections from the World Bank and the IMF, which often oppose such restrictions on imports. If import duties did work, then Pakistan would have been among the economies with lowest trade deficits but unfortunately this is not the case. Despite imposing relatively high import duties, Pakistan has continuously struggled with CAD.

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High import duties negatively impact the economy. According to Gonzalo Varela, a trade and macroeconomist working with the World Bank, the high import duties result in the following:

1: Creates distortions by increasing the profits of selling domestically rather than exporting.

2: Creates distortions by reducing incentives for productivity upgrading by curtailing competition and the scope for technology transfers.

3: Creates distortions by increasing policy uncertainty because they affect relative profits of investing in one sector relative to another one and thus encourage a wait-and-see approach by firms.

Read more: Pakistan imports to GDP ratio surpasses 18 percent

The new regulatory duties and import controls will not solve the challenge of increasing CAD. These measures might cut imports in the short run, providing temporary relief, but countering the increasing CAD in the long term will require a macro adjustment to reduce aggregated demand, a step that the government must take if it wants to prevent the economy from default.

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