In a move to restrict imports and reduce the trade gap, the State Bank of Pakistan has taken a major step by imposing a 100pc cash margin requirement on import of as many as 404 items.

These items consist mainly of motor vehicles (both CKDs and CBUs), mobile phones, cigarettes, jewellery, cosmetics, personal care, electric and home appliances, arms and ammunitions etc.

Margin requirement is a credit control tool in the hands of central banks. It is mainly used for facilitating or restricting the flow of funds to restrict import commodities not considered essential for the national economy.

This initiative is to spare scarce foreign exchange to import those capital goods needed for a growing economy.

In the backdrop of mounting pressure on the external sector, the SBP initiative of a 100pc cash margin requirement seems to be a step in the right direction

The real picture of the widening trade deficit is presented in the table.

Over the last four years, a liberal import policy has resulted in pushing up imports of commodities.

The most striking extravagance can be seen in case of vegetables and fruits because apples, oranges, bananas and vegetables of foreign origin are now a common sight in local markets and department stores.

During the past three years, more than $8bn has been spent on vegetable products as per official import data. Further, the annual vehicle import bill exceeded $2bn during this period.

Imported consumer goods have flooded the domestic market owing to liberal imports coupled with easy availability of foreign exchange in the local market. The magnitude of this import spree can be judged from the fact that 404 consumer items had to be brought under the margin requirement.

According to the SBP, discouraging import of the above items would have a nominal impact on the general public. If this is really the case, who were the main beneficiaries of the highly loose import policy?

During the past three years, the country had a windfall in the shape of the highly low international fuel and commodity prices. Home remittances also increased substantially during this period.

There was a net saving of around $16bn on account of decreased oil prices and increase in home remittances from FY14 to FY16, as is shown in the table. Fall in export earnings during this three year period comes at around $7bn.

Even after offsetting the adverse impact originating from exports, the trade deficit was likely to be below $15bn as against the current level of close to $25bn.

In simple words, gains made on account of low oil prices and enhanced workers’ remittances were wasted due to import driven consumerism. Continuation of this high trade deficit, particularly in the event of any price hike in international fuel prices, might add to external sector vulnerabilities.

In the backdrop of mounting pressure on the external sector, the SBP initiative of a 100pc cash margin requirement seems to be a step in the right direction. However, much more is yet to come from the import policy.

With accelerating CPEC projects, different types of machinery and raw materials will be required from abroad. The scare foreign exchange earnings need to be spent on importing essential items required for the development needs of the country.

Among other things, mainstreaming agri-processed products is also warranted so that millions of dollars currently spent on import of pulses, milk and butter etc. can be saved.

munir9511@outlook.com

Published in Dawn, Economic & Business, March 13th, 2017