There is general perception that Pakistan imports mostly luxurious items and products from different countries. But closer look at the Pakistani imports will reveal that this perception is wrong and misplaced. Pakistan imports mostly necessities and daily use products and raw material for its industries. Pakistan does import luxury items but it is not the major chunk of imports.
The ballooning trade gap between imports and exports in recent years has generated the debate on imports. Many economists suggest imposing higher duties and taxes on certain imported items to discourage the import and to bring down the widening trade deficit. Our imports are increasing and exports are stagnant in recent years. The increased imports and stagnant exports have widened the trade gap to unsustainable level. Pakistan cannot sustain this level of trade deficit.
Now let’s see what Pakistan imports and how it can be reduced? From raw material to final products, from the USA to Indonesia, Pakistan imports a whole host of goods from a wide range of countries. While imports of raw material such as oil, chemicals and rubber, have risen significantly since the economic liberalisation of the 1990s, so have imports of intermediate and final goods, such as machines and vehicles.
In 2017, Pakistan’s total import bill was $55.6 billion. China was the largest source of imported goods followed by the UAE, Saudi Arabia, Indonesia, and Japan.
A major component of the country import basket is oil. Since 2006, Pakistan has imported more refined than crude oil. A massive uptick in the last decade has placed substantive pressure on the balance of payments. Oil is nearly 30% of its import bill. We import oil of nearly $16 billion every year because our domestic production is not enough to meet its needs and demand. The significant increase in the domestic production will decrease the oil import bill. Oil is not the luxury but a basic necessity in the modern economy.
China accounted for 27% of Pakistan’s imports in 2017 providing critical industrial items such as broadcasting equipment, semiconductors, electric transformers, pumps, cranes and turbines worth approximately US$6.5B in nominal terms. This is a field in which Pakistan lacks significant comparative advantage, and as these items are critical to the country’s infrastructure and therefore, growth, this machinery must be imported.
Pakistan has no significant engineering and heavy industry. So it left with no other option than to import industrial and construction machinery. Our electrical and electronics industries are basically assembling industries. Even in manufacturing we need imported motors, semiconductors and other materials. So we import machinery to meet our consumer and industrial needs.
Pakistan import metal products like iron and steel, copper, and aluminum including $ 464 million worth of flat-rolled steel from China in 2017. While Pakistan Steel Mills, (PSM), a potential industrial powerhouse, has been in tatters and closed down. There are larger macro-economic challenges at play behind Pakistan’s enormous metal imports bill than just the mismanagement of PSM. We never invested in Steel mills to modernise it and to increase its capacity to meet the ever increasing demand of steel products. Now we are forced to import steel to meet the demands.
A quick glance at the agricultural industry, (which accounts for a third of Pakistan’s exports), reveals a similarly complex situation. Crucial chemical inputs for farming including nitrogen and sulfate compounds as well as acids are imported, as are expensive final products such as fertilizers ($425 million) and pesticides ($73 million). Again, a low exchange rate reduces some costs of production; unfortunately, it also strangles domestic production at the low end of the supply chain and makes Pakistan’s exports uncompetitive at the higher end.
Pakistan’s next two biggest import partners after China are UAE and Saudi Arabia accounting for 12% and 4.5% of imports respectively. The bulk of imports from these two countries are petroleum products that Pakistan has to, axiomatically, import. The primary consumers are the transportation and power industries. However, it is clear that these resources are not being used optimally. The power generation industry suffers from under investment and gross inefficiencies ranging from poor infrastructure and insufficient supply of natural gas to power theft and distortionary subsidies all of which lead to sub-optimal allocation of a scarce resource.
As mentioned above, the demand for fuel is partly driven by the transportation industry, in turn underpinned by a growing demand for, mainly imported, cars. Thus, in 2017, Japan accounted for 4.3% or $2.4 billion of Pakistan’s imports, 51% of which related to the transportation industry. Cars accounted for $665 million; trucks, tractors and buses made up $318 million, while vehicle spare parts worth $100 million rounded off the rest.
Pakistan’s imports from Indonesia accounted for 4.4% of its import bill with palm oil accounting for almost two-thirds of this Palm oil, used primarily in food processing, is not an intermediate good for a high value-added, export-oriented product. Instead, it is part of the local consumption bundle and hence not as economically productive as importing looms and centrifuges. Alarmingly, Pakistan’s annual palm oil imports from Indonesia, have reached $1.5 billion. Could the underlying cause be an overvalued rupee that has made ready-to-use imported palm oil so cheap that importing oil seeds and producing palm oil in Pakistan or investing in local refining is more expensive than importing it from Indonesia or Malaysia?
US goods account for 4.2% or US$2.3B worth of Pakistan’s annual imports. Of those, almost 20% are vegetable products and 20% are machines. The former include soybeans, chickpeas, corn, other dried legumes as well as almonds and walnuts. The latter consists of hi-tech equipment such as computer data storage units, CPUs and crucial machinery such as air and gas compressors, gas turbine engines and parts for boring machines all of which are essential building blocks for economic growth.
A quick analysis of Pakistan’s imports by industrial sector reveals critical drivers of economic growth account for a significant proportion of these. Mineral products (including crude and refined oil, coal, gas) and machinery make up 43% of the basket; 23% and 20% respectively; followed by chemical products (including fertilizers, pesticides, and antibiotics) at 11% and metals at 9%. Textiles, vegetable products, and transportation goods contribute a total of almost 20%. It is painfully clear that Pakistan’s domestic economy is cripplingly dependent on raw material imports.
Just take the example of local tea companies. All the tea companies import tea from Kenya, Vietnam, Sri Lanka and couple of other countries. They just packed the imported tea and sale in the local market. All the local and multinational tea brands used imported tea worth billions of dollars every year. Tea is the major drink of our country and almost every house hold consumes tea. The only way Pakistan can reduce import of tea is to produce local tea. Pakistan has never seriously considered focusing on tea plantation in some mountainous regions.
We import a lot because we have failed to increase and expand our productive capacity in last decades. We preferred imports rather to increase our productive capacity to meet the increasing demand. We failed to protect our industry and to modernise it to compete in the international market.
Let’s take another example, Pakistan import mobile phones worth millions of dollars every year. There are millions of mobile phone consumers in the country. But strangely there is not a single mobile phone manufacturing industry in Pakistan. Same is the case with computers and laptops. There is no single manufacturing unit in Pakistan. So we have no other option but to import mobile phones, laptops and accessories.
We need to change this policy and approach. We need to increase our own productive capacity to reduce the import bill. Otherwise, we will hurt our economic growth to reduce the imports. That is what PTI government is doing at the moment.
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16 November, 2019