Import bans are not the answer to balance of payments constraints, rather, they exacerbate the underlying problem, according to World Bank Senior Economist Gonzalo Verela.
A month ago I wrote this 🧵 on why #import duties were not the answer to #Pakistan's Balance of Payments constraints. #ImportBans are certainly not the answer either. Rather, they exacerbate the underlying problem. Five thoughts. 🧵👇https://t.co/TYvUz4EjMy
— Gonzalo Varela (@gonwei) May 20, 2022
Discussing the backdrop of Pakistan’s persistent and large trade deficit on Twitter, the trade and macroeconomic researcher supported his narrative by comparing macro indicators impacting the country’s current account balance and the possible repercussions of the government’s ban on a number of imported goods.
In a series of tweets, Varela explained, “CAD results from a macro imbalance (Saving too low relative to investment, so foreign saving needed (borrowing) (CAD is the mirror image of borrowing from the rest of the world (financial account of BOP)). Fixing the CAD takes increasing saving (cool off demand)”.
According to the WB economist, the import ban in Pakistan reduces imports, but not the CAD because it also reduces exports. He said, “The way this import ban in Pakistan is done in SRO 598-1/2022 for the main items banned (cars, mobiles) looks more like an incentive to domestic producers NOT TO EXPORT than an attempt to save forex. In fact, it gives them a generous monopoly power”.
Simply put, the new ban targets built cars, built mobiles, but not their parts. “Monopoly to the assembler, Pakistan consumer captive. The domestic company will increase demand for import of parts (that come cheap under 5th schedule even w/tariff exemptions) and sell w/supernormal profits,” he added.
Varela continued to explain that imports will not change much, “but the composition will (more imports of parts for mobiles, less of cbu mobiles). Tariff revenue will fall”. He highlighted that “the monopoly power given to domestic firms producing articles under the ban are such that it’ll be difficult to convince them to export! Difficult to find a large enough tax break that compares!”
In his final remarks, the researcher noted that the import ban gives no relief in the short run. It will be more problematic, would give long-run headaches in the form of distortions, offer less competition, and fewer tech transfers, which translates into less productivity. More policy uncertainty means fewer orders, and fewer investments, he concluded.