Customs revenue to increase; inflation to ease further as borders with Iran, Afghanistan closed

KARACHI: Pakistan has closed its borders with Iran and Afghanistan. This will help the country in organizing its trade and avoid the disadvantages of smuggling. The government revenues that are collected at import stage would not be affected despite considerable decline in imports.

With the detection of first corona virus victim in Pakistan, the authorities decided to close the borders with neighboring Afghanistan and Iran. The pandemic has gained momentum in Iran, hence, the border is expected to remain closed for at least over a month. Afghanistan border might remain closed for an even a longer period.

Officials and Customs agents believe smuggled goods meet around 40 percent of the overall market demand. A large quantity of consumer goods, auto parts, electronics, cigarettes, steel goods, cloth, betel nut, spices and diesel etc. are smuggled into the country from Afghanistan and Iran.

Since the borders are now closed and movement of smuggled goods is reduced to minimum, the demand would be met through legal imports. Moreover, since imports from China have also been paused, traders will have to opt for other destinations. Pakistan’s total annual imports from China hover around $12 billion.

Authorities have tightened vigilance on smuggling through green channel, mis-declaration and under-invoicing; therefore Customs revenue is expected to increase.

On the other hand, export orders from China re diverting to Pakistan and other countries providing the country’s business community to capitalize on this opportunity. The government must facilitate the industrial sector and keep cost of production low to enable local exporters increase share in the world market.

Analysts believe that prices of luxury items and imported goods could increase significantly in the short run, as cheap and low quality Chinese imports would be substituted with comparatively expensive goods arriving from other destinations.

At the same time, this scenario gives an opening for the local industry to develop itself, expand and grow. The steel sector can benefit with this opportunity the most. Large steel complexes such as Pakistan Steel and Al-Tawairqi Steel can regain the local market share.  Pharmaceutical sector can also upgrade itself towards research based business.

On the other hand prices of daily use items such as sugar, wheat flour, vegetables, fruits, livestock and meat would fall as the smuggling of these goods to neighboring countries has almost stopped.

The frightening inflation figure for Jan-2020 left government policies open to serious criticism which was defended through promises. In line with these promises, the figures for Feb-2020 of 12.4% did indeed exceed market expectations.

Of the 1.04% MoM decline in headline inflation in Feb-2020, 0.7% was a result of declining food inflation (down 1.99% MoM).

Going forward, one should keep an eye out for (1) how the government and IMF’s views on power tariff determination for the remainder of FY20 play out and (2) the inflationary impact of the upcoming Ramadan season.

After the inflation number for Jan-2020, monetary easing in 1HCY20 seemed a far-fetched dream. However, the latest CPI figure has rekindled some of that lost hope and a cut in the policy rate in May (if not March) seems plausible.

The China-origin pandemic is a cause of concern, but with the right strategies Pakistan can capitalize on this global scenario while keeping its population safe against the Corona virus.

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