Thursday, August 28, 2008
KARACHI: The demand for imported goods continues to rise in Pakistan as items which were previously considered luxuries are now deemed to be necessities by those belonging to the affluent classes, complain economists.
Analysts are of the view that the post-9/11 return of many Pakistanis settled in the West is directly behind this, as these Pakistanis are more accustomed to a more pampered lifestyle. The trend has negative impact on the foreign exchange reserves and the local industry. The impact of importing luxury items was not felt as much in the past seven years, owing to notable foreign investments, the selling of government entities to foreigners in the private sector and the boom in the banking and telecom industries, which inflated economic numbers at macro level, say analysts.
However, now, the rising demand for imported goods, particularly items like luxury cars and mobile phones, is eating away a significant part of countrys forex reserves.According to the State Bank of Pakistans (SBP) quarterly report on Pakistans economy issued in the first week of June, depletion in foreign exchange reserves has also eroded the reserves adequacy of the country in terms of weeks of imports. Import coverage ratio declined to 18.1 weeks from 30.6 weeks in June of the fiscal year 2007.
Latest media reports say this import coverage ratio has further shrunk to 12 weeks. It is feared that the ongoing political tension may cause this figure to dip even further, said an analyst.
On August 16, the forex reserves reached a five-year low at $9.6 billion, registering a decline of 41.5 per cent, or $6.8 billion, in the last 10 months. The record high was $16.4 billion in October 2007.
Before Shaukat Aziz became prime minister, the import duty on vehicles ranged between 200 per cent and 300 per cent. Aziz reduced this to 90 per cent. M Muzammel Hussain, an economist at Alfalah Securities, said the current government has marginally raised this to 100 per cent.
Expatriates, higher-income families and professionals, who can afford a lavish lifestyle even during the current economic slump, claim that technologically-advanced mobile phones and the latest cars are a necessity for them.
The actual import of vehicles for personal use cannot be measured, as there is no category for personal vehicles in the monthly import data compiled by the Federal Bureau of Statistics (FBS) and SBP.
However, a rising number of expensive imported vehicles, such as the BMW, Hummer, Land Rover, Range Rover, Audi, Prado, Land Cruiser and Hi Lux Surf, have been witnessed on the roads, all of which are a burden on the economy. Heavy road vehicles are imported under the machinery and transport groups category.
FBS figures show the number in 2008 is lower than the previous year, but economists say the number of such vehicles has increased manifold since 9/11.Saqib Hussain, Vice-President, Noman Abid & Company Ltd, explained why it is difficult to curb the import of luxury items. We cannot stop importing cars, mobile phones and any of the other items, luxury or otherwise, because Pakistan has signed the Free Trade Agreement with many trading partner countries, he said.
According to the International Monetary Fund and World Bank, Pakistan cannot turn down locals demand for imported goods. Hussain suggested that to help the central bank maintain its reserves, the rate of margins could be enhanced to 100 per cent for luxury goods from the current 35 per cent at the time of opening the Letter of Credit.
The government has constituted a committee to formally differentiate between luxury goods and necessities so that the import policy can be amended accordingly, said Ahmad Waqar, Chairman, Federal Board of Revenue (FBR).
FBS, which maintains a list of nearly 6,500 documented imported items and publishes import and export statistics every month, does not so far differentiate between necessity items and luxury items at import level. Once separated, it could mean that unessential items, or luxury items, would have a high tax. If the import item list is cut short, the country can maintain comparatively high reserves and so expand the capacity of import for a longer duration.
In view of the depleting foreign exchange reserves, experts say the export of wheat, raw cotton and sugar should be discouraged. When these items are exported, there is a local shortage. The items which are already locally produced have to be imported. Already, large chunks of forex reserves are being used up with the rise in import of luxury goods, such as cars and mobile phones.
Data from the FBS shows an increase in the number of power generators being imported, owing to the acute shortage of electricity. In addition to this, the import of oil and food items, which utilised a major part of countrys reserves, also took a huge jump just as the fiscal year ended, although it would be unfair to blame oil and food for exhausting forex reserves, as these items are necessities.
The situation can be also controlled if the duty is increased on the imported goods that are also locally produced.
Experts suggested that the dumping of Chinese goods, ranging from needles to cars, needs to be checked, and that there should be a heavy import duty on items such as tiles, marble, gems and jewellery, cigarettes, file covers, toys, shoes, home appliances, kitchen and bathroom items, etc. They added that only political stability can fix the economy.
