Treat your Ferrero Roche rs like you would import oil. Let them import indiscriminately and forget this categorization of essential imports and non-essential imports. The current decision to limit some import categories has been taken because there are not enough dollars to go around them, so we cannot import even the bare essentials. This would not be a problem if the foreign exchange market remained unfettered and the rupee was allowed to slide to its true value against the US dollar.
That was the gist of renowned economist Atif M IAN in a recent twitter thread, where he publicly opposed the government's decision to ban non-essential imports. The reasons he gave were prudent, not because he favors Ferrero Roche rs (he doesn't even live here, nor has he taken over the name of the Italian confectionary), but because if governments started classifying imports, he would soon be faced with the task of deciding the fate of things that they weren't as obviously inconsequential as the aforementioned chocolates. This would lead to arbitrary decisions and gatekeeping and, as is almost always the case in this strait, immense corruption as industry lobbyists try to grease the upper bureaucratic palms to move their particular product from one column to another. Even if there was no corruption, there would be "honest" lobbying, as we will see when anchor GHA reed a Farooq I's tweet about the difficulty of getting imported dog food for her pet prompted PML(N) heir Maryam N AWA z to apparently tweet to the then finance minister M IFTA h Ismail, to "look" at it.
Even if one had absolutely principled mandarins who are not subject to bribes or personal influence, they can still make bad decisions. Many of these non-essential items are key inputs for exporters; this will limit exports. And even at the other end of the trade deficit, what about restricting imports? Some critical equipment for the Thar coal-fired power project has been declared non-essential. This is ironic because as soon as the projects are said to start generating electricity, Pakistan will import less fuel for its thermal power plants.
At if M IAN then goes on to extrapolate from these starting points and paints a rather grim picture of the times to come, leading to lower tax revenue, a much higher fiscal deficit (since government fees are supposed to remain the same) and a vicious negative feedback loop which could be hard to break out of.
All good points. And in principle I agree.
But I have some problems with his thesis. You see, Atif combined two issues: rupee devaluation and import restrictions. That the government had to do the latter because it was fixated on the former. This reasoning has some merit; are closely related. But they are not quite the same. Personally, I am also in favor of leaving the rupee alone. But temporarily curtailing (some, carefully selected non-essential) imports and letting the rupee slide is not an either-or choice.
After all, didn't the responsible M IFTA h also employ a somewhat similar strategy? Letting the rupee breathe a little while writing a list of items that were off the table for import? He agreed that his list was more concise, but then the forex reserve situation was not so dire either.
Let's play out a counterfactual situation. An Atif approved finance minister is letting the dollar rise to its presumably natural value. Imports are now significantly more expensive and exports more competitive. Therefore, imports should decrease and exports should increase. So there is no need to limit imports, and we do not have a balance of payments crisis on our hands. Right?
But things are not entirely clean. Imports would be more expensive immediately, while export volumes would take some time. Since devaluation would make imports more expensive in the Pakistani context, it would lead to much higher inflation during this adjustment period. The SBP would manage this with the only trick it knows: raising interest rates. This would further slow economic activity and bring lower taxes for the government. This, combined with the need to pay even higher subsidies for the most affected (and recently unemployed), would lead to an even higher fiscal deficit.
Meanwhile, all previous government spending is still where it is.
And let's be realistic, the improved current account situation won't even generate enough dollars to pay off foreign debt obligations.
Pretending that letting the rupee slip is some silver bullet that will take care of the bigger rut we're in is reductive and simplistic. If we let the rupee go, but if we couple it with selective import restrictions, we can put less pressure on the dollar so that the decline in the rupee will not be as sharp as it would be in what Atif M IAN suggests.
Now let's turn our attention to someone who does not hold either Atif M IAN view or the M IFTA h strategy I have held above, And that is the man in the hot seat himself, the Finance Minister.
In the larger economic commentary, there is an attempt to paint I sh a q DAR as an unshaded stick figure who has an almost Freudian obsession with the value of the rupee and sees any devaluation as some kind of affront to his honor. And that this is the sum of his economic considerations. The fact that people seriously believe this is funnier than the caricature The Gift is presented to us.
Economics is a science, yes, based on Karl Popper's scientific method. But then there are also differences of opinion in science. But that's not the economy we're talking about, either. That's public policy. Just as a broken clock is right twice a day, even seemingly ridiculous policy guidelines can at least have some redeeming features. And even the best of them can have some unintended consequences that can metastasize into something pretty awful.
All policies have their costs. As Harry Truman said, give me a one-armed economist. All my economists say 'on the hand...' then 'but on the other hand...' There is no single correct policy.
Let's evaluate the Gift from this angle:
We are a democracy and politicians do not play to the gallery of politicians on Twitter. They don't even play the rest of twitter. They look at the Average Joe, whose ends are getting harder every day. If there is a government in place that has significant political capital, that party can carry some difficult but necessary decisions, but only to a certain extent. Then the nuances of international trade, LC and foreign exchange reserves cannot be explained when it comes to people having difficulty buying fuel and food. If there is to be a deal with the IMF, and we hear it might, if DAR finally releases the rupee, it would lead to a much smaller drop than it would have if it was released without economic confidence which the IMF program brings with it.
The problem with DAR's strategy is that it took too long for the IMF to arrive and resolve the current limbo.
Yes, I sh a q DAR's particular brand of management led things to this approval, but Atif M IAN prescription would certainly lead to more inflation. And between the two of them, we know who the inflation hawk is: a politician, not an academic.
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