The rising import bill is the most important economic issue in the country right now as it adversely impacts the current account deficit. The spillover effect of widening current account deficit is weaker currency which leads to rise in inflationary pressures. The resulting price hikes have become the talk of streets these days. These pressures may decide the choice for the corridors of power in the next election. So let’s look at this issue closely and try to understand what we can and cannot do about this.
The total imports of Pakistan increased to $23,484 million during July-October FY22 against $14,119 million in July-October FY21. This reflects an absolute increase of $9,365 million and translates into 66% rise in imports on free on board (FOB) basis.
The largest contribution, of almost 29%, in this increase came from the petroleum group. Imports of items belonging to this group increased from $2,744 million in July-October 2020 to $5,475 million in July-October 2021, a meteoric rise of almost 100%.
However, analysis reveals that average crude prices increased from $39 per barrel to $80.5 per barrel in the same period last year therefore, the rise in import value of petroleum products was due to 106% increase in international oil prices.
The gas import bill surged by $675 million ie 179% however, the increase in spot price of LNG (China Landed-Waterborne) was almost 397% in the same period.
Since the demand for all petroleum products is inelastic ie it does not respond much to price changes, there is nothing we could have done about it.
The “all other” import group is the second largest contributor to the rise in the import bill after petroleum products. Import of items under this category increased by almost $998 million or 85%. Since we do not have the breakup of these, we cannot really comment on this increase.
The third largest import group is ‘agri and other chemical’ which reported an increase of $883 million or almost 36%. Here, the jump was witnessed due to a rise in fertiliser and plastic related imports. Fertiliser prices are closely related to gas rates hence the rise is understandable. Plastic prices soared due to post pandemic supply chain issues.
Food group also contributed to the swelling of the import bill by $857 million or 9.15% to the overall increase in import bill.
Inward shipments of palm oil climbed by $492 million which translates into a growth of 78%. This is slightly surprising because palm oil prices, on average, increased by just 35% in the period under review. Similarly, sugar shipments rose $87 million depicting a growth of 202% over the same period last year.
For food related items, the Afghanistan crises played a role as well because Afghans are trading with us in local currency.
These imports are also basic necessities and not much can be done about them as well
The fifth major contributor to the import bill is the transport group which includes shipments of all sorts of vehicles. Imports of road motor vehicles (cars, trucks, etc) increased by $618 million posting a growth of 165% over the same period last year. This rise is primarily due to the fact that many new players entered Pakistan’s transport sector over the past few years. Furthermore, the demand remained docile last year due to the pandemic therefore partial recovery in orders in also driving the increase.
Since these goods are non-essential, the government is trying to arrest the growth in their imports by levying duties and taxes
Imports in the metal group soared by $687 million in the period under review translating to a rise of about 54%. Within this group, steel imports increased by $440 million or 82%, driven largely by the incentives announced for the construction sector. Since construction related activities remained minimal last year, the escalation was also witnessed due to the low base effect.
Textile group imports increased by $677 million which is a good omen as it contributes to exports. Furthermore, textile machinery shipments also increased by 154% in the period under review which will also contribute to the overall export performance of the country.
All in all, the rise in import bill is due to the low base effect of last year and the rise in commodity prices. It must be understood that last year was actually an outlier and this year, the economy is taking its natural course of high current account deficit, depreciating currency and soaring inflation. Long term structural interventions (public transport, import substitution, research and development in agriculture) are essential and there are no quick fixes for this situation.
THE writer IS A BANKER AND TEACHES ECONOMICS
Published in The Express Tribune, December 13th, 2021.