ONE of the biggest challenges the incoming government will face when it goes about the business of fixing the imbalances of the external sector is to find a way to shrink the trade deficit. The growing gap between imports and exports, which touched a historic high of $37bn in the last fiscal year, is the prime reason why the economy is losing foreign exchange reserves to the point of near depletion. Shoring up the reserves in the short term through a bailout, either bilateral or multilateral, is only the first step. If the trade deficit is not brought under control, the bailout will amount to little more than a short lease of life. And if reserves are to be protected in the face of such a massive deficit, the currency will have to plummet to historic lows that are difficult to forecast. The menu of options for the incoming government is not a good one, and at the heart of it lies the trade deficit.
Perhaps in anticipation of this, the Commerce Division and Customs are reportedly working on a plan that can be presented to the incoming government upon arrival to help curb imports. This is the right approach certainly, since lifting exports will be a longer exercise. Finding a way to compress imports is the first step but here a conundrum arises. The previous government took liberal recourse to regulatory duties as the way to curb ‘nonessential imports’, but this did not work largely because the demand for these ‘nonessential imports’ is largely inelastic to price. Then came a series of currency depreciations that gave a temporary fillip to exports, but did little to curb the growth of the trade deficit. So now bureaucrats in commerce and customs are working on a model to suggest other ways to curb imports, including, according to some reports, outright bans. It is possible that matters may come to this, and if they do, it will signal a real economic emergency. Import quotas were done away with many years ago, and their return will mean that the government is comprehensively out of ideas. More regulatory duties also carry their disadvantage since they induce great distortions in the economy. Whatever road the incoming government chooses, there is little doubt that managing the fallout from the trade deficit is going to be one of the biggest challenges.
Published in Dawn, August 12th, 2018
Source:Â https://www.dawn.com/news/1426519/curbing-trade-deficit
