PAKISTAN’S external sector is under growing pressure. High dependence on imports and falling foreign direct investment point to a lack of quick response to the changing dynamics of the global economy.

Independent economists blame fault lines in trade policies for these persisting problems and stress the need to assess the situation realistically and reset the direction to reverse this trend.

Evidently, the export promotion strategy pursued so far has not helped minimise the external sector’s vulnerability. Policymakers are focused on the export of low value-added products ignoring the need for effective import substitution.

It is time the government addressed issues in import substitution, at least in those areas where Pakistan has a domestic advantage. One may ask what wisdom is there, in allowing imports of dairy products — cheese and milk-based confectioneries or fruit juices — that tend to widen the trade gap?

Analysts believe, if the non-oil trade deficit continues to widen, exports keep falling and remittances stagnating, foreign exchange reserves will shrink in no time.

Several industries have closed down because of the high cost of production and stiff competition from cheaper imports, economist Dr Qaiser Bengali told Dawn. He said high tax rates and the high cost of energy have compelled manufacturers to shut down their factories.

In some cases, he said, manufacturers are importing goods and selling them in the local market with their own brand name. Through unrealistic policies, Mr Bengali believes, a comparative disadvantage has been created for the local manufacturers.

The import of consumer items has increased over the past few years. According to the State Bank of Pakistan data, Pakistan spends

Evidently, the export promotion strategy pursued so far has not helped minimise the external sector’s vulnerability... It is time the government addressed issues in import substitution, at least in those areas where Pakistan has a domestic advantage

millions of dollars every year on import of consumer items like value added food products, personal care, home appliances and other household items.

The import of selected consumer goods surged from $1.283bn in FY 2013 to $1.749bn in FY 2015. Pakistan spent $109.6m on the import of spices, followed by $74.5m on baby carriages/toys, $722.9m on cellphones, $99m on bulbs, $160.8m on essential oils/perfumes, $34m on shampoo, $41m on hair preparations and $190.6m on soap during the FY 2015.

The import value of other commodities like pasta, biscuits, tomato paste, juices, kitchenware, grinders, mixers, juices, TVs, air-conditioners, refrigerators, electronic fans, ceramic

tiles, sanitary fixtures, cosmetics, and after shave lotion ranges between $7-40m.

According to the central bank, these items stand first in line when import compression policies are to be exerted. Pakistan does not import these products via official sources alone. They also enter Pakistan via the Afghan Transit Trade, sea routes from Dubai and khepias who carry these goods as personal baggage.

Most of these product require low-technology for production and could have a fair degree of substitution between local and imported ranges. The central bank identifies factors which don’t allow local substitution to happen.

The under-invoicing and smuggling of foreign goods give an unwarranted competitive edge to local products. Investors are discouraged to set up local manufacturing units or expand their businesses. Additional demand has to be met through imports. Electronic appliances, rubber tyres, and many pharmaceutical items are few examples.

Local products lack variety and range. Local manufacturing units are mainly smaller in size and find it hard to compete with low-cost mass produced Chinese goods especially, under the free trade agreement with Beijing.

Low technology items — plastic toys, tupperware, earphone, bulbs, handbags, stationary — are being imported from China in bulk.

It is may be recalled here that many local industries facing stiff competition from the influx of low-cost Chinese products, after the Pak-China Free Trade Agreement, had closed down.

But the most essential step for the future strategy is the formulation of an all-encompassing import substitution policy.

The first essential part of the strategy is to identify areas for investment in manufacturing, which can cater to domestic needs that are currently being met by imports.

This is necessary to reduce external vulnerability that is resulting in a chronic balance-of-payments crisis.

In the early 1980s, the import substitution policy was replaced by export-led industrialisation. But this policy has miserably failed to promote exports and correct chronic foreign trade imbalances, and has instead created an import-oriented economy.

More investment needs to be lured into the dairy sector and other food items that are currently being imported.

But to encourage manufacturing, the government will have to give the required support to nascent industries.

The break-up of the total import bill shows that there are 17 categories of imports, of which petroleum products are largest and account for over a quarter of the import bill. Chemicals claim over 10pc of the bill, machinery and non-electrical items over 15pc, transport equipment over 5pc, and others over 15pc. Edible oil imports and iron and steel products, each, are close to 5pc of the total import bill.

The products whose share in the total import bill stands between 2-4pc are drugs and medicines, dyes and colours, chemical fertilisers, electrical goods, paper, board and stationery, tea, sugar, art, silk yarn, non-ferrous metals, grains, pulses and flour. These are the potential areas where the Board of Investment can work to reduce reliance on imports.

Import substitution requires domestic investment and appropriate local technology.

An integrated food imports substitution policy is still missing. Some attempts have been made to boost oilseed production; plantation of olive is being promoted and production of packaged milk has been increased. But it is not enough.

Published in Dawn, Business & Finance weekly, August 29th, 2016