For the country’s macro-economic imbalances, conventional wisdom has had a single prescription for an over extended period of time: increased access to foreign capital and financial inflows including foreign debt.

This recipe — external positive shock therapy — did help stimulate the economy but did not cure chronic economic ills apart from subduing the ailments for a while. In fact some macro-economic imbalances have become more deep-seated than ever and the changing global environment is posing serious challenges in overcoming them. Some positive external ‘shocks’ are also turning negative.

The economy is afflicted with stubborn multi-structural problems. The core issue in this context is the savings and investment gap which came about due to low productivity of capital and labour and slower than the required pace of capital accumulation; slower even by South Asian standards.

This is a handicap in putting abundant, yet largely unskilled, manpower and rich natural resources into productive pursuits.

Then as expected, foreign cash and capital have not helped, integrated, organic and self-sustaining domestic economic development which could lead to long-term macro-economic stability. In fact external resources have nurtured imbalances and helped sustain crony capitalism.

Foreign cash and capital have not helped integrated, organic and self-sustaining domestic economic development which could lead to long-term macro-economic stability

No doubt the trend is now somewhat changing. Industrial consolidation and business diversification is being primarily self-financed by the corporate sector. On its part, to make the economy competitive, the government has also undertaken a phased withdrawal of subsidies given to trade or industry.

Low productivity has made exports uncompetitive in international market and has hampered exports from growing to their full potential while the import bill continues to far exceed the export earnings from merchandise. The current account deficit has jumped by 90pc in seven months of this fiscal year compared to the same period last year.

Some improvement in exports is expected from the reduction of infrastructural gaps and in narrowing the energy demand and supply the deficit and also from a further expected pickup in regional trade in Asia.

But what is no less important is improving labour productivity at factories and farms as well as business management practices. While the latest technology is helping achieve efficiency and economy, the focus needs to shift to the quality of human skills and expertise that add value to goods and services produced from the fixed assets. Low capacity utilisation is a major problem.

Yet another macro-economic imbalance — fiscal deficit has risen to a four-year high of 2.4pc in the first half of this fiscal year despite the inclusion of cash balances with state enterprises in the fiscal consolidation count.

And the rupee depreciation has been managed to keep foreign debt servicing within ‘manageable’ limits as foreign debts are already high at 24.5pc of the country’s GDP. When the domestic debt is accounted for, the overall debt rises to 68pc of the GDP.

Quoting these debt figures, a working paper by the State Bank researchers observes that external debt tends to be ‘expensive in bad economic times’. And to add to that Islamabad goes to the IMF for a bailout when confronted with a potential default on foreign debt.

The paper deals with the country’s heavy dependence on workers’ remittances, now falling, which ‘renders Pakistan’s economy vulnerable to external shocks.’ Remittances help finance the trade deficit while the demand for domestic as well foreign goods goes up due to increasing house disposable incomes. This results in investment spending and labour demand as a result of higher consumption.

Workers’ remittances for families have also helped to reduce, to some extent, income disparities between household and regional incomes. With the current high unemployment rate, the country may find it an enormous challenge to absorb the ‘potentially laid- off workers’ now working overseas, the report adds.

It is time for Pakistan to opt for a strategy to achieve full employment in the shortest possible time.

No doubt any sharp decline in home remittances poses a risk ‘on so many macro-economic fronts. ‘ Similarly, the rising protectionism is not likely to subside any time soon.

With uncertainty surrounding the global flows of capital and goods, the external sector, already under mounting pressure, will be more difficult to manage. In 2016, global trade grew more slowly than the world economy.

However, the economy’s appetite for more diversified sources of debts continues to grow. The government is reported to be seeking two loans of $300m each from Chinese banks. And seeing the difficult road ahead, the State Bank ‘verbally’ advised commercial banks to start mulling floatation of bonds to finance Letter of Credit.

Published in Dawn, Economic & Business, February 27th, 2017