Actually, this is not new. Our imports would always grow briskly whenever there are growth spurts because we have a weak manufacturing base. Import substitution has not been really given preference in the past. This government is making the right noises. However, the results of any concerted effort would be yielded after years. For import substitution to take place, capital in private hands has to be invested in domestic manufacturing. In an economy where speculation is rewarded, and real wealth creation faces hurdles at each step, it is difficult for capital to move in this direction. Secondly, the assertion that exports are growing briskly is not correct. While there is undoubtedly a growth in exports, it must be seen at what expense it takes. We are keeping interest rates fixed at low levels for a year, and import duties are reduced or eliminated in some cases (resulting in swelling of raw material imports), fixed power tariffs for the export sector, state bank's TERF for exporters. Despite throwing all these goodies at the exporters, the pace of import growth far outstrips anything exporters have managed to showcase in the name of results.
The point by
@Sainthood 101 about high global commodity prices is well received. However, we must note that many food imports we are making today were not done in the past. Continual neglect of agriculture has brought us to this point. This is a problem that has been in the making for decades now. Even the current budget for all its talk expended too little on agriculture. Some blame the 18th amendment for the decentralization in the agriculture sector policy making.
Another cause of concern is waiting for outsiders to assist us in breaking vicious cycles. For industrial development and agriculture sector reforms (improving crop yields, pest-resistant varieties, investment in farming technologies), we keep waiting for CPEC 2.0. CPEC 2.0 was to be launched 3 years back. We have not yet seen operationalization of a single SEZ or large-scale investments in the Pakistani agriculture sector. Our economy could not wait for the materialization of projects that may or may not benefit us at some point in the future. We have to do what we have to do with the available resources to us instead of waiting on others.
FDI is the only deliverance. Exports could not grow as quickly as we would like them to grow to bridge deficits or at least give us some breathing space. Only FDI could bridge that gap at the earnest.
An excellent post . On point.
I would like to add a few more points, and continue the conversation.
1) The entire structural problem of our economy is linked to bad/political policy decisions such as currency manipulation and bad FDI decisions too . We have especially in the last tenure amplified these problems, we developed an
entrenched ecosystem based on imports, and actively prevented not only import substitution but also suffocated our export industries.
Right kind of balanced sustainable growth as compared to our growth. Both countries imports increased over the period but one lagged behind in exports. This left us with no means to sustain the growth without exacerbating the BoP crisis.
2) Exports never take a huge leap in a limited amount of time as compared to imports, its basically productivity capacity enhancement vs accelerating consumption debate. To increase export one needs
capacity enhancement coupled with competitiveness against others ( REER value of currency) and effective marketing/ penetration.
3) Right kind of FDI is very important. Not every FDI is healthy.
Low interest loan is better than fixed return sovereign guaranteed FDI any day.
How to address this problem at basic policy level ( which the government is doing)
1) Facilitate capacity building such as Terf.
2) Improve competitiveness that is free market based currency ( REER value).
3) Attract right kind of FDI, CPEC industrial parks etc.
Along with other facilitations like you mentioned.
Making raw materials more expensive by duties/taxes is a big NO NO.
The government made a plan to stimulate growth, capacity building at the same time and setup a target to contain CAD at 2-3%. Use the currency tool to absord the impact of CAD (it has its limits but currently is being used in an exceptional way) , build reserves.
The catch-22 situation we are in is because we got caught in the international commodity inflation cycle, which was expected to ease out but in reality is not going to happen at least for the next 3-4 months. This coupled with Terf rollout, keeping growth momentum intact like low interest rate, and exempting tariff lines on raw materials becomes hard to handle.
This analysis is based on just August data only, in July we managed CAD in targeted range. Only a detailed breakdown of imports in August will tell the story. Also it will depend on the coming months at least a couple of months of data if this is a trend or an isolated month.
Using currency alone and without any SBP intervention will risk inflation. Inflation in August is stable at 8.35% . Rupee is at 169.9 I think as of today. Reserves are intact. Growth will be good. Revenue collection is extraordinary. There is no demand side pressure so economy has room to handle growth coupled with inflation at 8.35%, interest rates will be kept intact ( my expectation).
Unless some parameters deteriorate to an extent policy can be sustained.
. The chances of us getting in such situation is minimal. SBP will start using other tools at its disposal before we even come close to that point. Now some differences which makes things different.
