After a blockbuster year in FY20, mobile phone imports continue to soar in the new fiscal. Recall that these imports had grown 84 percent year-on-year to reach $1.1 billion last fiscal, as per data from the State Bank of Pakistan. Now, in the first quarter of FY21, these imports clocked $527 million, a yearly growth of 135 percent. The quarterly imports are over 3 times the five-year average in the same period (see the bar chart).
At this rate, annual handset imports will likely exceed $2.5 billion. Similar projection can be made using the shipment-based PBS dataset, which has shown, on average, 18 percent higher annual mobile phone imports compared to the receipt/payment-based SBP dataset over past five years. If the $2.5 billion import figure materialized, it would be equivalent to Pakistan’s combined handset imports between FY16 and FY19. Is there cause for concern?
Indeed, losing this fiscal an extra $1.5 billion in precious dollars (which would be about 12% of SBP’s current tally of net liquid forex reserves) on account of imports of those machines isn’t exactly a comforting thought, especially during a raging pandemic that continues to cast uncertainty over non-debt-creating forex inflows. However, there are a few balancing aspects that may provide benefit in the years to come.
On the positive side, regulatory measures over last few years have indeed helped in the “formalization” of handset imports. Credit goes to the PTA’s Device Identification Registration and Blocking System (DIRBS) in curbing what had become a thriving grey market of duty-evading imported mobile phone sellers. The tightening of passenger baggage rule annoyed a lot of folks, but there was no way out to plug leakages. Higher imports have also helped the FBR grow its mobile import-related taxes last fiscal.
More important, formalized imports provide a level-playing field those players who are looking to establish or expand mobile assembly plants under the current government’s Mobile Device Manufacturing Policy (MDMP) announced earlier in the summer. Now the caveat, of course: if local assembly didn’t pick up pace fast enough or if it did not churn quality devices, import bill will keep going up and up. It is high time to attract a big-name smartphone maker, who will be in a position to set high standards and improve the ecosystem.
The grey market has been a hindrance for some time. As the line chart shows, there is a visible mismatch in annual growth of cellular subscriptions and mobile phone imports, especially in the past decade. Of course there are other factors impacting mobile phone imports than mere increase in annual subscriptions. These factors include consumer preferences, growth in mobile broadband subscriptions, device replacement cycle, multiple-device phenomenon, taxes and duties, device prices, etc.
But there is a pattern when one analyses the past 17 years of reported data from SBP and PTA. Between FY04 and FY07, a time when the cellular market took Pakistan by storm and racked big numbers, the correlation between handset imports (based on SBP data) and cellular subscriptions (based on PTA data) was the strongest (r=0.92). Since then, the correlation first dropped to 0.54 between FY08 and FY13, a period of policy inactivity and likely emergence of grey market when the imported devices started getting taxed increasingly by the FBR.
Later, between FY14 and FY19, the correlation coefficient dipped to a very weak 0.1, indicating no direct relationship where increase or decrease in one variable could correspond with the changes in other variable. This was a period of booming smartphone sales post-3G/4G mega auction in April 2014 and awarding of licenses and network rollouts a few months after. If there was no grey market, or if there was a smaller grey market, the correlation in this period should not have been so frail.
Correlation isn’t necessarily a manifestation of causation, and the above finding should be interpreted with care. But it does suggest that while the grey market started developing post 2008, it was inly from 2014 and onwards when the market apparently really flourished, buoyed perhaps by the high demand of high-priced smartphones to run on 3G/4G networks. It is in FY20, where one saw abrupt rise in formal handset imports that the grey market appears to have been largely neutralized.
This should provide some food for thought for policymakers, because there is likelihood that the grey market may stage a comeback through other novel means. Let’s wait and see how rest of FY21 brings forth. And as for the surging import bill, the earlier the entirety of fiscal incentives announced under the MDMP are operationalized, the better.
