Tariff hike, LC margin: It\'s simply not sufficient

Tag : mobile telephone accessories
EDITORIAL (August 29 2008): The decision of the Federal Cabinet toimpose 15 to 50 percent additional customs duty on import of luxuryitems, including non-essential food items, is no surprise. In fact,given the huge trade and current account deficit over the lastyear, dwindling foreign exchange reserves and tremendous pressureon the exchange rate of the rupee in the recent past, such a stepseems somewhat belated.

The measure was complemented by increasing the cash margin by theState Bank on Letters of Credit (LC margin) for imports of over 386luxury items to 100 percent with immediate effect to curb importsand stabilise the rupee. Various non-essential items, according tothe revised list, would now be subjected to 50 percent import duty.An additional 15 percent custom duty has been imposed on more than300 items.

It may be mentioned that duty on these items had been increasedfrom 25 to 35 percent in the 2008-09 budget and the cumulative dutywould now stand at 50 percent. In the case of more than 30 items,including electric ovens and cooking ranges, the custom duty hadbeen increased from 20 percent to 30 percent in the last budget butwould now stand at 50 percent.

Vehicles of over 1800 CC to 3000 CC would be subjected to 50percent regulatory duty. An additional duty of Rs 250 has beenimposed on new mobile phones, besides 30 percent duty on landlinetelephone sets. This duty will also be in addition to Rs 500imposed in the budget for 2008-09. No additional duty has beenimposed on the import of raw materials or machinery. Also,regulatory duty will not be levied on the items imported under FreeTrade Agreements (FTAs) and Preferential Trade Agreements (PTAs).

ONE ITEM STANDS OUT IN THE LIST WHOSE IMPORT IS SIGNIFICANT: Cellular telephone sets. Around $500 to 600 million of cell phonesare reportedly imported every year. Import duty was raised from Rs250 to 500 in the budget. Now it has been raised to Rs 750 per set.High tariff on these sets would give rise to smuggling. Raising oftariff on home appliances and gadgets would provide tariffprotection to local assemblers.

This could result in higher sales of locally produced appliances.However, this would also lead to higher import of parts andaccessories by the assemblers and could balance out any reductionon the import bill. After taking into account the import of oil,machinery, raw material and food items, flexibility in an importregime is limited. The reason for announcing increases in importduties on a wide range of consumer items together with impositionof 100 percent cash margin on LCs by the State Bank is obvious.

It shows a serious concern on the part of the authorities to arrestthe rise in imports, contain the bulging current account deficit,arrest the dwindling level of foreign exchange reserves andstabilise the fast deteriorating trend of the rupee. Pakistan, ofcourse, cannot afford to sustain a trade deficit of over 12 percentof GDP and current account deficit of about 8.4 percent of GDP thatit incurred during 2007-08.

During July, 2008, the position seems to have worsened further withthe current account deficit of over one billion dollars or 23.77percent higher than the corresponding month of last year. A moreworrying aspect is that foreign investors are gradually losingfaith in the solvency of the economy and the ability of theauthorities to reverse its deteriorating fundamentals.

While there are reports of flight of capital from the country, thenet selling by offshore investors in the stock market has amountedto $396 million so far in the calendar year 2008. However, althoughthe present import restrictive steps announced by the governmentwould appear to be appropriate to the situation, to the generalpublic their overall usefulness, given the enormity of problems inthe external sector, would be very limited.

As it is, total consumer goods constitute about 10 percent of theimport bill and according to a senior official, the import ofluxury items ranges only between 1.2 to 1.7 billion dollars. Basedon last year's import value of these items ($800m), some savingsdue to enhancement of tariff and 100pc LC margin could possiblyaccrue some savings.

The total impact of restrictive measures on the aggregate importbill and current account deficit could, therefore, be onlymarginal. There are numerous challenges facing the economy,therefore, the need is to prioritise them. The necessity is tobring the foreign exchange market into a controlled and orderlymanner. We need to be more decisive and convince the investor classthat we are serious.

Country Credit Default Ratio (CDR) has reached 1000 basis pointsand holders of Pakistan Bonds are fearing a default by February2009. The SBP policy rate and the liquidity and credit ratios arerequired to squeeze the system to a point where keeping Pakcurrency is more attractive than forex placements outside. Let ustake the right but painful step ourselves and avoid going into anIMF programme.

The financial discipline and order enforced by the Fund will bemore painful and has to be avoided. This, however, requiresself-discipline by our economic managers. Monetary tightening alonewould not give the desired result. Avoiding fiscal slippages,financial discipline and better management in a sustained manner isthe need of the hour.

We strongly feel that the government must shift its emphasis fromfire fighting or ad hoc measures to a more coherent set of policiesto reverse the worsening macroeconomic trends in various areas andput the economy on a sustainable path of development. In order toachieve this, our economic managers have to think very hard,develop a macroeconomic model in a very professional manner andimplement it in a very co-ordinated fashion.

Measures like Saudi Oil Facility, even if we get it, and foreignprivate loans at very high rates would only provide a temporaryrespite and would be no solutions to the emerging problems.Policies in various areas of the economy interact with each otherand determine the final outcome. For instance, external sectoraccounts are closely linked to the monetary and fiscal policies ofthe country.

If the needed expertise to develop such a sound model is notavailable in the country, there is no harm in approaching the IMFfor advice to tackle various issues of the economy. Since we don'tneed its resources at this stage, no dictation or unacceptableconditionalities will be involved. The basic purpose of the wholeexercise should be to improve the overall health of the economy ona long-term basis and without crutches.

Copyright Business Recorder, 2008