The free fall of the rupee is a wake up call for policymakers to take urgent remedial steps first to stabilise the national currency and then concentrate on resolving the underlying chronic balance of payments problems.

The currency’s depreciation can be attributed to multiple factors, including the current speculative attack on the rupee, shrinking foreign capital inflows and the trade gap.

But the new factors responsible for the decline in the rupee are the staggered and inadequate IMF installments fixed under the Extended Fund Facility and its conditionality of prior actions for disbursements, including that the State Bank of Pakistan buy greenback from a falling market to build dollar reserves. This has eroded the confidence of the exchange market, prompting some calls for revisiting the agreement with the IMF signed by Finance Minister Dar and the State Bank Governor Yaseen Anwar.

While the rupee is currently a victim of market volatility, the fundamental issue is the imbalance in stagnant exports and the rising imports, which need to be minimised by a vigorous two-legged policy of import-substitution and export-oriented industrialisation.

But for an effective policy of import-substitution during President Ayub’s ‘development decade’ that initiated an industrial revolution, subsequent rulers were primarily focused on export-led/export-oriented industrialisation supported by an on-going devaluation of the rupee and ‘perverse’ subsidies.

By and large, exports were not driven by value-addition, productivity, quality and the competitive pricing of exportable products.

The very fact that major traditional segments of the manufacturing sector are resisting the opening of the domestic market to Indian goods indicates that their products are not globally competitive.

The bulk of the exports are low priced, low value-added goods, which are, however, in some demand in recession-hit countries with high unemployment and falling wages.

The outcome has been stagnant exports and deindustrialisation. For exporters, the going is now becoming more difficult in the current fragile recovery of the global market.

Also, the country does not have enough trade surplus, and the diversification of products and foreign markets would not be so easy. So the option, at least for the time being, is to work for an investment and consumer-led economic growth.

The focus should shift to the domestic market, and only the trade surplus thus produced should be exported. Probably the best way to go about would be to identify items from the import list that could be produced locally with domestic advantage and which have a ready domestic market. These items could be incorporated in a revived annual investment schedule that may be announced with the fiscal package and a one-window facility. Agribusiness —manufacturing of agriculture — should be on the priority list. Energy is already the top priority of the Nawaz Sharif government.

With the demise of the development financial institutions and the subsequent policy to let commercial banks finance long-term projects, the investment schedule was also done away with by the government. Since then, development spending has been put on the back burner because of the widening budgetary deficits and banks’ reluctance to finance long-term fixed investments.

Prolonged spells of the State Bank’s tight monetary policy have suppressed domestic demand to create artificial trade surpluses for export, and discouraged investment in import-substitution industries.

And the central bank’s net sales of foreign exchange spot market totaled $3.35 billion during fiscal year 2012-13, an amount that should have gone into development rather than spent on keeping the rupee stable. Last week, an estimated $50-60 million were used to restore some sanity into the currency market.

Back to imports. No doubt temporary ad-hoc steps have been taken to curb imports through regulatory duties and frequent market-driven rupee depreciation. But this has not helped curb imports or reduce the import-export gap on a durable basis. It has resulted in more adverse terms of trade.

It is time for the policymakers to develop an import-substitution policy for industrialisation in areas where the country has a domestic advantage, particularly in the manufacturing of agriculture. It should be recognised that it is industry that promotes self-reliance and creates jobs. The current phase of deindustrialisation must come to an end.

Policymakers have to get back to the basics and get out of the trap of the Anglo-Saxon financial model — initiated in the early 1970s — which has outlived its utility. The rarest of rare ideas works for 40-50 years.

The monetary policy has to be reviewed to find better ways to manage the economy. Economic growth should be a high priority on the central bank agenda For the first few decades of its existence, the State Bank had governors representing top stalwarts of bureaucracy, like Mr A.S. Hasnie, Mr Ghullam Ishaq and Mr A. G. N Kazi who were dedicated to socio-economic goals.

With the exception of Mr Hanafi (a central banker), they were replaced by senior commercial bankers or experts who had served international financial institutions and who strongly subscribed to the creed of shareholders’ value of banks.

In the whole process, lopsidedness has developed in the formulation of monetary policy, helping to perpetuate imbalances in the economy.