OPINION
Ammar H. Khan
However, these may never be saved. It may actually lead to an explosion in growth of the grey market, as more units are brought in the country in personal baggage, or through other means. A cottage industry for the same already exists, so much so that vendors are even willing to accept cryptocurrency as a form of payment. The flow of goods and payments cannot be stopped. A government can always impose tax and create an taying true to the tradition of groundhog day, the first enabling environment, but outright bans are rarely successful. material step that the incumbent government took to stall a Another alternative would be import of more assembly depreciating PKR was an arbitrary ban on import of goods kits of mobile phones, which can be assembled locally, that will considered ‘non-essential, or luxury. It is estimated that the also require FX outflow – but will distort the market completearbitrary ban would save US$ 100 million of foreign exchange ly as in absence of competition local assemblers would have reserves on a monthly basis. However, there is little to no the bargaining power to set prices resulting in destruction of mention of how the value chains of many of the imported commodities consumer surplus, and a declining choice set. If the same kind would be disrupted, and neither is there any plan on how a deficit that of policy options are perpetuated for a few more years, we may would emerge due to reduction in collection of import duties and taxes see creation of a perpetually infant industry akin to the likes of collected would be bridged. The previous government took similar the automobile industry, which has had protection for decades, actions during their first few weeks in office, and the current adminisresulting in tremendous welfare loss for consumers. tration isn’t much different either. Another US$ 250 million of foreign exchange is expected The most significant import that is being banned is that of to be saved annually from an assortment of consumer goods & completely built units of automobiles, and justifiably so. The market is edibles, ranging from dry fruits, jams, jellies, footwear, to pet flooded with automobiles, which act more like an inflation hedge, rather food, and musical instruments. All of this makes up less than 1 than a depreciating asset. In addition to fixed income, and equities, aupercent of total imports. A lot of edibles available in the market tomobiles have emerged as an asset class now, with its prices acting as were already being smuggled into the country. As the new a proxy to an appreciating US$ against PKR. Any more import of such rules are put into place, the smuggling is only going to increase cars would have been tantamount to creating more liquidity for an asset more, either through transit trade, or through mules carrying class, rather than serving any genuine economic need. Nevertheless, the frequent flyer cards. The expansion of the grey market would local automobile manufacturers would continue to closely track US$ by result in decline in tax collected, and further expand the size of increasing prices without a lag, or delay. The foreign exchange savings the informal market, while making it difficult for entities in the accrued from this segment are certainly welcome. formal sphere to operate. Another major item in the list is import of completely built units A simple test for the same is to checking out the closest of mobile phones, which is expected to save roughly US$ 1.2 billion. supermarket in your neighborhood. A non-tariff barrier was enacted a few years back which made it mandatory to have labeling of edibles in Urdu. In-effect, edibles which do not have labeling done in Urdu cannot be imported in the country formally, and hence are smuggled. Just scanning your supermarket to see whether any imported edibles have The writer is an labeling in Urdu or not can give one an idea of the prevalence of smuggling that exists, and that will continue independent to grow in future. macroeconomist and A gradual phase-out of fuel subsidies would have sent the right signal, and would have contributed conenergy analyst. siderably more in reducing foreign exchange outflow through rectification of a distortionary pricing structure that exists. Policy actions which create a grey market or erode consumer surplus may provide a band-aid in the short term but do tremendous harm in the mid-to-long term. A policy decision should be supportive of a formal economy, rather than encouraging a grey market drivien informal economy.
Losing the forest for the cheese
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COMMENT
25
