PERPETUAL trade deficits have increased the national economy’s dependence on foreign capital inflows owing to the lack of an effective state policy of import-substitution.

While serious efforts have been made to boost exports — though not very successfully — import-substitution has not simultaneously received the priority needed for reducing the foreign trade gap, but for the decade of 1960s.

The only major device to narrow trade gap has been the almost continuous devaluation of the rupee, with the objective to make exports cheaper and imports costlier. The repeated depreciation of the national currency over time did bring short-term ‘windfalls’ to exporters, with no improvement in productivity, quality and the pricing of goods and services.

And as Pakistan currently enjoys the status of a frontier market, its private sector has not yet developed the kind of capacity required to undertake a meaningful import-substitution programme in areas where the country has a domestic advantage — apart from traditional industries like textiles and sugar. In the absence of any effective government policy to spur import-substitution, costlier imports have encouraged smuggling to meet the demand of goods in the domestic economy.

According to the State Bank of Pakistan’s annual report 2013-14, the share of imports in the total domestic demand over the past four years has declined from around 20.1 5pc in FY2006 to 14.5pc in FY2014. Similarly, “the share of national income spent on imports of goods and services has also declined in the last couple of years”.

While conceding that the trend could partially be explained by ‘industrial expansion’ and ‘some improvement in the energy supply’ in FY 2014, the central bank argues that the appreciation of the real effective exchange rate of the rupee by nearly 14pc over the last decade “implies that imported goods have become cheaper compared to the locally produced goods”.

The central bank has advised the government to “rationalise its import policy keeping in view the factors that facilitate long-run economic activity”

The report tries to substantiate its contention by stating that “the informal trade is growing and a large number of consumer goods and raw materials are being smuggled into the country”.

As in its previous annual reports, the State Bank has pointed out that “there exists a strong demand for a number of products that are not manufactured locally”. It also lists a wide range of items that provide local manufacturers an opportunity to expand their operations, upgrade their manufacturing units and sell their products in the domestic market.

The report notes that there is a need to use domestic resources in the energy sector, since oil imports constitute about 35pc of the total import bill. Import-substitution can also be considered in the case of palm oil, about $2bn worth of which is consumed annually. Pakistan spends a large amount of foreign exchange to import food products like juices, cereals, seasonings, processed milk etc.

Other areas identified by the central bank for initiation of local production to cut imports include cellular phones and accessories, energy saving bulbs, rechargeable fans, moulds and dies and low-tech electrical appliances.

The central bank advises the government to “rationalise its import policy keeping in view the factors that facilitate long-run economic activity”. And once the policy is formulated, it needs to be effectively enforced.

Changes in interest and exchange rates or tinkering with fiscal anomalies have proved inadequate over time. It is time to stimulate investment in import-substitution under a comprehensive policy framework, evolved with the active participation of the private sector and representatives of small and medium-sized enterprises.

While centralised planning may have lost its relevance because of the withering away of the ‘command economy’ segment, it is still needed to guide and enable individual investors in a frontier market like Pakistan. Since the doing away with of the industrial investment schedule by the government, the country has witnessed de-industrialisation.

To fulfil its role as the engine of growth, the private sector needs an enabling environment and the necessary facilities to venture into more diversified economic activities. For this, it is imperative that the policymakers compile a list of products that can be easily made locally and offer a policy package to help import-substitution. And all relevant institutions, including commercial banks, should be put to work and given targets.

However, legitimate support should not be confused with patronage to perpetuate a rent-seeking culture.

Published in Dawn, Economic & Business, December 22th , 2014