The shallow reforms carried out over the past few decades have not helped improve deep-seated structural weaknesses, but evolving economic trends hold out the promise for a transformational change in the course of the economy.

Though reflecting a positive trend in the external sector, the overall volume of exports and workers’ remittances would not close the trade and current account gaps without an effective import substitution policy.

What is encouraging is that exports and remittances have increased without rupee devaluation and with a stable exchange rate, but with selected subsidies and enhanced productivity.

The imperatives of rebalancing of the economy for sustained growth have prompted the government to return to the basics of some economic theories abandoned under the sway of financial market orthodoxy and in the pursuit of debt-driven and heavily subsidised globalisation.

In case of Pakistan, the heavy debt burden and its servicing cost have emerged as a deterrent to exchange rate depreciation.

The UNCTAD, earlier this month, called for a new global deal that included a proposal for ‘taming finance’ to address the challenges faced by the world economy which is ‘unbalanced in many ways.’

A stable national currency is narrowing the gap between the speculative global market exchange rate and the purchasing power parity of the rupee (real exchange rate) in relation to the dollar and other international currencies.

The current growth is primarily domestic demand-driven and any devaluation of the national currency will reduce the purchasing power of the consumers, shrinking the domestic market

This also stems the transfer of resources abroad caused by an artificially weakened currency and adverse terms of trade so created.

Before the financialisation of the global economy, a stable currency was seen as a symbol of a strong economy. Now weak and fragile developed economies have strong currencies because of a skewed global financial system.

More and more countries are realising that the volatility of exchange and interest rates has been a major cause for the downturn in economic growth, both at the national and global levels, over the past few decades. It has finally adversely affected international trade.

Thus a number of countries, including Pakistan, are now trying to stabilise their exchange rates. According to a recent news report, Malaysia and Indonesia have successfully quashed currency volatility by cracking down on speculators

Islamabad is apparently convinced that the current growth trajectory requires a stable currency and interest rate for businesses and economic activity to expand. Exchange rate depreciation raises cost of capital goods, and financial charges surge resulting in an increasing interest rate that erodes the viability of long-term projects.

The fluctuating exchange rate is probably one reason for international lenders’ practice to have a provision for cost over- runs in projects funded by them.

Helped by the monetary policy and the opportunities offered by the growth environment, the credit off-take by the private sector has increased.

The SBP governor told a delegation of the Pakistan Business Council recently that 40pc of the credit to the private sector amounting to Rs747.9 billion in FY 2016-17 was utilised for fixed investment.

The low level of investment is a source of national concern. The investment GDP ratio in Pakistan, just at over 15pc, is close to half of that of Sri Lanka and gross capital formation at 50pc compared to that of India.

In the neighbouring country private consumption contributes close to 60pc of the GDP against 80pc in case of Pakistan. These imbalances have to be addressed to sustain growth for the long-term.

The current growth is primarily domestic demand-driven and any devaluation of the national currency will reduce the purchasing power of the consumers, shrinking the domestic market. This is how trade surpluses have been created in the past in order to boost exports of low value-added products.

Costlier imports, bulk of which are for industrial inputs, very soon raise cost of production in export-oriented sector and make exports uncompetitive hence making competitive currency depreciation a continuous process.

With the windfalls thus provided to exporters, enhanced productivity required for global competitiveness is discouraged. While costly imports are not curbed.

Over the long- term the liberal foreign trade policy has not worked; rather it has proved counterproductive. It ignores the fact that the producer is also a consumer whose affluence increases domestic demand and makes the economy work better as evident at this point of time from the moderate economic growth rate.

The UNCTAD has just reminded policymakers of all countries that they should design competition policy with explicit (income etc) distribution objective.

On the import side, the most important thing is that imports make a negative contribution to the GDP. Yet the country’s export-oriented industries, fed by imported inputs, have created an import-oriented economy under the garb of export-led growth.

The mounting trade and current account deficits are now inducing policymakers to cut non-essential imports but still no effective import substitution policy is in place. The only silver lining is that a powerful business lobby is advocating the need for it.

Going by the latest global protectionist trend, it is time to develop and implement an import substitution policy while building a competitive and inclusive domestic economy.

Without moving towards self-sufficiency in strategic areas, foreign dependence cannot be reduced and there will no escape from periodical recourse to IMF bailouts.

Published in Dawn, The Business and Finance Weekly, October 3rd, 2017

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