ISLAMABAD: The Ministry of Planning said on Friday that the measures taken by the central bank to impose cash margins on more than 500 items and that an exchange rate depreciation to curb imports and the increase in the current account deficit are unlikely to impede demand.

“The real effective exchange rate (REER) has historically shown to be ineffective in curbing imports in the past. The import substitution strategy has also failed in the past, ”the ministry said in its first quarterly report (July-September). “The cash margin requirement was also used in 2008, but could not make a significant contribution to flange imports.”

The report states that the country’s economy has a strong correlation between increased economic activity and increased imports.

He said the post-pandemic recovery in economic activity has once again fueled demand for imports and an imperative to anticipate any balance of payments crisis in the near term. “In this regard, two major policy decisions are the improvement of the cash margin for more than 500 items and the market determined exchange rate policy. These two measures have failed to reduce imports into Pakistan.

The ministry further stated that world commodity prices have a very strong correlation with fluctuation in imports and the main determining factor in addition to domestic demand generated by economic activity. Global commodity prices and import growth moved in tandem between January 2000 and September 2021, he argued.

“A lesson can be learned (from the analysis of data from 2007-8 to 2021) that four-fifths of imports are essential and could not be avoided. Looking ahead, a broad political direction is needed to focus on increasing exports rather than reducing imports, ”the report added.

The ministry also conceded that inflationary pressures would continue to persist mainly due to imported petroleum products and foodstuffs.

“Global commodity prices are expected to remain bullish over the next few months and, therefore, its spillover to domestic inflation will keep the inflationary picture complex. The improved domestic supply situation of essential items is likely to offset further build-up of inflation, albeit at high levels of the 8.5% target for FY22. “

The report says the State Bank of Pakistan has anchored core inflation expectations well so far, despite some upward pressure from supply management issues and soaring international commodity prices. as well as the upward adjustment of utility tariffs.

The key rate has remained generally favorable; however, a case could be put forward for upward adjustments. On the fiscal side, improving tax revenue collection is likely to become a major challenge, mainly due to the loss of import duties and sales tax levied on POL products and margin requirements. cash on non-essential imports.

The report says world commodity prices, driven by energy, have remained high, and effective import prices of essential commodities such as POL and palm oil have therefore reached new highs.

Food and palm oil prices edged down in September 2021, however, the energy index more than doubled from a year ago.

The cotton price index rose 46.4% in September 2021, which will worsen the trade deficit, as the textile industry is also expected to import raw cotton this year to fill the domestic supply gap.