EAG opposes import ban

The Economic Advisory Group convened a meeting to assess the existential balance of payment crisis amidst rising political instability in the country. EAG is of the opinion that imposition of a ban on the import of a few commodities to curtail the current account deficit (CAD), expected to reach $16bn in current fiscal year) will be futile as it fails to address the underlying causes of the crisis. In addition, an import ban creates an anti-export bias, which erodes competition in the economy, prompts local firms to focus excessively on domestic markets where they are shielded from competition and less likely to develop higher productivity over time, and results in the exploitation of consumers in the form of higher prices and lower quality. In dealing with the immediate liquidity crisis, the government should avoid taking steps that impede healthy growth in the long term.

The balance of payment issue arises from saving-investment imbalance where growth is financed through external borrowing instead of generating own revenues by rationalizing taxes and tariffs. Currently, IMF and friendly countries are funding our growth and the government is promoting consumption through indirect subsidies, which often benefit the higher income tier more than more indigent sections of society. Unfortunately, current growth is on the back of consumption instead of any significant improvement in productivity or overall productive capacity.

The government recently imposed a ban on the imports of commodities with an annual expenditure of around $6 billion to curtail CAD. However, it is unlikely to materially reduce overall imports. For example, the ban on cars will shift demand from CBUs to CKDs/ SKDs with limited net impact on trade balance. 

This limited trade balance impact of protectionary tariffs/restrictions on end user products can be shown by observing the net result of imposition of import duties of mobile phones in 2021. While it did result in a decline in import value of mobiles from $124mn per month in FY21 to $27mn in FY22, imports of CKDs phones increased from $52.8mn to $147mn per month as pointed out most recently by Gonzalo Varela, Senior economist at the World Bank. The net impact on trade balance has been minimal and there is substantial loss in revenues as duties on parts are lower than on the final product. More importantly, while import duties/restrictions do not address the underlying saving-investment gap problem, they do discourage exports by lowering the competition and productivity, reducing wages and increasing rents to the rich.

EAG has asked the government to reconsider the import ban, and use tariff measures judiciously. In the long run, the government also needs to rationalize the country’s tariff structure to promote competition, enhance productivity, and increase integration in global value chains for more sustainable growth.

The Economic Advisory Group is an independent group of individuals from economics, policy, and the private sector that deliberates regularly on economic developments and shares its views with the government and the public. It is supported by PRIME, an independent think tank.

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