In a move to cut trade the State Bank, in the last week of February, directed banks to hike cash margin for the import of non essential items to 100 per cent. This move would not be an unmixed blessing.

It is an attempt to ease pressure on the country’s trade deficit in the wake of dwindling exports and the expected spike in the import bill on account of the CPEC- induced capital goods demand.

A 100pc cash margin for imports of 404 items will moderate imports of non-essential items, but it may soak up excess liquidity from the market, sideline retail investors from international trading, increase the price of notified goods and depress the custom duty collection component in revenue collection.

Read more: Curbs on non-essential imports

Explaining the logic and timeframe behind this move the SBP mailed the following response:

“The cash margin requirements are aimed at containing the burgeoning trade deficit and to accommodate the growing import of productive goods. To understand the context, it should be noted that despite substantial reduction in oil import payments in FY14-FY16, Pakistan’s overall import bill largely remained unchanged.

“It shows that the non-oil imports have been rising sharply, which jumped from $30.2bn in FY14 to $36.3bn in FY16, a growth of over 20pc. The pace has continued in the current year as well.

“The growing imports, coupled with lower exports, have led to an increase in the overall trade deficit. Importantly, the growth in import of machinery and industrial raw materials is expected to continue, as the activities under the CPEC are steadily gathering pace.

“The cash margin requirements are imposed for a short period to accommodate the import of products essential to support a growing economy” — SBP

“Moreover, it should be kept in mind that cash margin requirements on the import of non-essential and luxury consumer items do not discriminate among countries or regions.

“The cash margin requirements are imposed for a short period to accommodate the import of machinery and other productive goods, which are essential to support growing economic activity”.

On the issue of taking stakeholders on board the SBP said, “There is no single private association which could be consulted on such a policy action. Moreover, a large number of items subject to cash margins are related to various sectors of the economy”.

Experts believe that abrupt policy moves, no matter how sound, upset businesses which see policy consistency as a necessary prerequisite to work their plans. They thought that the government’s insistence to keep the rupee over valued necessitated administrative intervention to reign in the widening import-export gap.

“Had the rupee been freed of artificial support the market would have taken care of the issue by supporting exports and suppressing imports. However, as a weaker rupee would increase the debt burden instantly the government sternly opposes downward exchange rate adjustments”, an insider in Islamabad told Dawn.

The quality of the feedback from economic ministries on the implication of the policy change left much to be desired. Officials of economic ministries said they were caught unaware.

“Give us some time to monitor trade trends post high cash margin regime and assess its impact on revenue collection to articulate our position on the SBP decision. Offhand my sense is that there will be no dent to duty collection”, Dr Mohammad Iqbal, spokesperson of the FBR said over phone.

The collective import bill of items identified in the list, that also includes mobile sets, is about $12bn. The country spent $6bn on auto and food item import that are in the said list. It means goods worth about one fourth of the import bill will be directly impacted. It is hard to justify the FBR’s preference to wait and not to project the probable impact immediately.

An analysis of possible impact indicates that the high cash margin on non-essential items would improve the profile of the country’s imports. The spending on machinery and raw materials would yield better returns for the economy by promoting investment activity leading to capital formation at a faster pace as opposed to facilitating wasteful consumerism.

The policy is also expected to provide some protection to local businesses by making import of consumer items less competitive because of a price increase. The demand for local beverages and processed food items, like others covered in the list, may spike in months ahead.

Ehsan Malik, CEO of the Pakistan Business Council, was a bit disappointed. “It seems that the government has given up on export maximisation and is focusing instead on containing imports”. He did not see local industry capitalising on the protection aspect because of the temporary nature of the move.

Many businessmen were still in the process of digesting the change. Automakers and mobile phone importers resented the policy. The Federation of Pakistan Chamber of Commerce and Industry (FPCCI) supported the SBP on the issue.

Zubair Tufail, President FPCCI, brushed aside the opposition. In a message from London he said, “We support higher cash margin for imports of consumer products. Automakers take 50-100pc advance on booking orders and deliver vehicles after 6-8 months”.

The retail investors’ capital that enters the cross boarder trading pool for quick returns may divert to other avenues as time lag may expand and profit margins depress. The flow of capital to local commodity trading, start up financing, property and the capital market may increase.

It might drive small importers out of the ring by rendering their business model unviable. With free flow of information and better accessibility to overseas suppliers many people with limited cash entered the trading foray as 25 to 50pc cash margin allowed them space to cycle their capital to achieve viability.

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