Losing the forest for the cheese

OPINION

Ammar H. Khan

Losing the forest 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 for the cheese 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 Staying true to the tradition of groundhog day, the first material step that the incumbent government took to stall a depreciating PKR was an arbitrary ban on import of goods considered ‘non-essential, or luxury. It is estimated that the arbitrary ban would save US$ 100 million of foreign exchange reserves on a monthly basis. However, there is little to no stopped. A government can always impose tax and create an enabling environment, but outright bans are rarely successful. Another alternative would be import of more assembly kits of mobile phones, which can be assembled locally, that will also require FX outflow – but will distort the market completely as in absence of competition local assemblers would have mention of how the value chains of many of the imported commodities the bargaining power to set prices resulting in destruction of would be disrupted, and neither is there any plan on how a deficit that consumer surplus, and a declining choice set. If the same kind would emerge due to reduction in collection of import duties and taxes of policy options are perpetuated for a few more years, we may collected would be bridged. The previous government took similar see creation of a perpetually infant industry akin to the likes of actions during their first few weeks in office, and the current adminis- the automobile industry, which has had protection for decades, tration isn’t much different either. resulting in tremendous welfare loss for consumers. The most significant import that is being banned is that of Another US$ 250 million of foreign exchange is expected completely built units of automobiles, and justifiably so. The market is to be saved annually from an assortment of consumer goods & flooded with automobiles, which act more like an inflation hedge, rather edibles, ranging from dry fruits, jams, jellies, footwear, to pet than a depreciating asset. In addition to fixed income, and equities, au- food, and musical instruments. All of this makes up less than 1 tomobiles have emerged as an asset class now, with its prices acting as percent of total imports. A lot of edibles available in the market a proxy to an appreciating US$ against PKR. Any more import of such were already being smuggled into the country. As the new cars would have been tantamount to creating more liquidity for an asset rules are put into place, the smuggling is only going to increase class, rather than serving any genuine economic need. Nevertheless, the more, either through transit trade, or through mules carrying local automobile manufacturers would continue to closely track US$ by frequent flyer cards. The expansion of the grey market would increasing prices without a lag, or delay. The foreign exchange savings result in decline in tax collected, and further expand the size of accrued from this segment are certainly welcome. the informal market, while making it difficult for entities in the Another major item in the list is import of completely built units formal sphere to operate. of mobile phones, which is expected to save roughly US$ 1.2 billion. A simple test for the same is to checking out the closest 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 The writer is an formally, and hence are smuggled. Just scanning your supermarket to see whether any imported edibles have independent labeling in Urdu or not can give one an idea of the prevalence of smuggling that exists, and that will continue macroeconomist and to grow in future. energy analyst. A gradual phase-out of fuel subsidies would have sent the right signal, and would have contributed considerably 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.