October 02, 2006	Monday	Ramazan 8, 1427

THE nation consumes more than it produces. Thus the most critical imbalance in the economy is the widening gap between the domestic demand and supply of goods and services.

It is the root cause of market abuse, high inflation rate and other ailments like trade and current account deficits.

And since the country spends more than it saves, the low rate of domestic savings and investments are major impediments in boosting domestic production that could narrow the yawning gap between demand and supply.

In any strategy for economic development, savings, investment and production are linked together and made to move in tandem.

The current shortage of goods and services is met by massive imports estimated at over $28 billion for fiscal 2006. With imports rising fast and export growth falling, the surging trade gap is being bridged by foreign money and investment apart from workers remittance currently at $4.6 billion per annum.

A buoyant but not a robust external sector carries risks for economic development that can only be removed by boosting domestic production to reduce imports. The economy is moving on a path that leads to debt trap.

Somehow, the seven per cent economic growth over the past four years is not closing the mounting trade deficit. In fact, it is widening, going by foreign trade figures for the first two months of the current year. Foreign trade liberalisation has provided a strong import-bias to the national economy despite the official focus on export-oriented industrialisation in recent years.

President Pervez Mushrraf says the demand-supply gap offers fast-track industrialisation and has invited American investors to look at the opportunity. But trading helps businesses to make quick money, whereas manufacturing is still a big hassle in this country.

The tight monetary policy pursued by the State Bank has not been able to restrict imports. The supply side problem of a fast growing developing economy cannot be effectively tackled by interest rate hike or depreciation of exchange rate. And this tends to raise cost of investments and retards economic growth.

The alternative is to boost production in areas where the economy has domestic advantage. Any deviation from the objective of sustained economic development would involve social costs because cyclic unemployment is turning into a stable global unemployment trend, not a good option in a country with massive poverty.

In the developing economies, the monetary policy cannot be as effective as in industrialised countries. Despite interest rate hike, credit to private sector has risen. The slower credit growth can perhaps be explained by lack of brisk trading in real estate over a year and recent slackening of export growth.

Policy-makers need to review the import list and identify items which can be produced locally. Apparently, the three critical areas for boosting domestic production are energy, engineering and foodstuff.

While the share of agriculture to GDP is a hefty 22 per cent, the import of foodstuff is rising at a rapid pace. In the 11 months of fiscal 2006, the food group imports soared to $1.715 billion compared with $1.2 billion for the previous year’s corresponding period.

Eight different imported items are milk and milk cream, wheat, dry fruits, tea , spices, edible oil ( soya bean and palm), sugar and pulses. Barring items like tea and spices, other items should not be so difficult to produce locally.

The indigenous production of canola and sunflower can be a substitute for soya bean and palm oil. With abundance of livestock, the potential for development of dairy products is considerable, both for domestic and foreign markers.

Similarly, fertiliser imports are showing an upward trend with domestic production not rising fast enough.

The situation is no better in capital goods industry. The imports in machinery group include $1.4 billion of road motor vehicles and little known items classified as “others” whose value totals up to over $3 billion against the group’s overall figure of $6.8 billion.

According to a SPB working paper, only 37 per cent of the imports are of industrial inputs for producing export goods. The rest are goods for domestic consumption that include inputs for automobile and household electronic goods.

While the growth in engineering industry is not picking up fast as it should, automobile assemblers also get spare parts and components from sources such as Malaysia and Thailand. The surge in imports indicates that the domestic demand for goods and services is being met substantially by liberalised imports, perhaps at the cost of retarding the growth of indigenous production. Imports of capital goods and industrial raw materials need to be substituted by development of indigenous engineering and chemical industries.

The import of energy is also a major drain on foreign exchange resources. Imports of petroleum group accounted for $4616 billion in the first nine months of last fiscal despite putting many industries on indigenous gas. There are a number of reports about what the government intends to do to develop alternative sources of energy, like harnessing wind power, solar energy, coal-fired plants etc.

But finally, it has decided to set up power plants on furnace oil on an emergency basis which could increase the import bill. The official energy policy is shaped by ad hoc decisions.

Imports develop industries and create jobs in exporting countries. Imports make negative contribution to the Gross Domestic Product. An almost exclusive focus on export-oriented industries in the recent past has led to the neglect of import substitution industries and a record trade deficit of $12.13 billion. The trend is continuing.

The present phase of economic growth is driven by domestic demand (also consumer-led) and is not export-led. It is time to exchange trade surplus in the international market after the domestic demand have been met and not to depend on subsidised exports that divert resources from social sector or make socially sustainable economic development more difficult.

Subsidised exports cannot make industry globally competitive. In the past, frequent devaluation of the rupee has only promoted industrial inefficiency.

Foreign trade must help develop a self-reliant national economy in an inter-dependent international market.

No doubt, imbalances in the economy are a common occurrence, both in times of boom and bust. As markets lack self-discipline, the governments are expected to intervene to tackle imbalances before they become unmanageable.

Currently, the economy is buoyant but it is definitely not robust. The deviation from the basics, the foremost being self-reliance that guarantees national sovereignty and independent path of rapid economic development, is not sustainable in the long-term.