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IN spite of strenuous effort to ease mounting pressure on the external sector, the Pakistan Muslim League-Nawaz’s(PML-N) policy stance has been frustrated.

Firstly, there has been a lack of any indication that the rupee depreciation will spur enough substitution of imports by local production to reduce the heavy dependence on foreign goods.

Second, the pronounced efforts to speed upcapital formation, that could perhaps encourage investment in import substitution, came at the fag end of PML-N’s tenure, and that, too, at a time when investment in fixed assets is stated to be declining.

In this phase of global protectionism an export-oriented industrialisation has limited potential. It needs to be supplemented by import substitution to reduce dependence onthe vulnerableexternal sector

As usual, risk-averse banks arecautious about financing long-term projects.Increased production, bigger trade surpluses, subsidies, sharp devaluation, moderate increase in workers’ remittances, and regulatory duties to curb imports, have all proved inadequate to reduce the trade gap.

In the ten months of fiscal year 2018, exports of merchandise earned $19.2 billion, which was dwarfed by ballooning imports of $49.4bn, creating a trade imbalanceof around $30bn. According to the Monetary Policy Statement issued by the central bank on May 25, “thegrowing imports... have pushed the current account deficit to a high-level.”

Conventional ways of tackling the twin deficits havecreated an import-oriented economy, and have yet to produce an export-oriented thrust to balance the widening gap between exports and imports.

We buy more than we sell. We consume more than we produce. With obligingforeign lenders we are able to spend more than we earn. Successive governmentshave somehow managed not to default by fresh borrowing to repay old debts and getting outstanding loans rescheduled or written off during debt crises.

No durable solution is in sight for thesurging imbalance in bilateral trade with China. Instead, the Chinese are providing loans to ease the balance-of-payments crisis in Pakistan. A loan of $1bn wasobtained on April 18 from a commercial bank,andanother $2bn is expected soon.

The sustainability of the Chinese financial loans is, however, in doubt. Global Times, which reflects China’s official policy, recently wrotethat, “China will not be stingy in offering help to Pakistan to strengthen its infrastructure, but...the main point is Pakistan’s debt repayment ability.”

Apart from a deteriorating external sector position, it is quite possible that it was China’s financial loan policy that promptedpolicymakers in Islamabad to allow last year’s sharp devaluationof the rupee, which had declined by 9.3 per cent up to May 24.

And historical record shows, to quote from the book ‘Safeguarding Sovereignty’ written by Yusuf H. Shirazi that, “the devaluation led to unprecedented continued inflation on the one hand and economic stagnation on the other.”

The rupee-yuan swap agreement may cut a part of the transactional costs and provide a small cushion in terms of the State Bank of Pakistan’s yuan borrowings from its counterpart in China, and vice versa, to finance bilateral trade.

In view of the mounting bilateral trade gap, Federal Secretary Commerce Mohammad Younus Dagha has stressed the need for a short-term package that envisages a relocation of the Chinese industry and investment into export-oriented or import-substitution industries here.

In an article published in Dawn he proposed that the inflow of foreign direct investment per annum from China should beno less than the yearly repayments of Chinese loans and repatriation of profits by its firms.

The commerce secretary hasidentified different items such as telecom, including mobile phones, solar panels, and electronicsfor which the Chinese already have a good market in Pakistan and just need to relocate their industries.

He says that the Chinese investors could also benefit from a well-established demandfor refined petroleum and petrochemicals. Some other areas identified by him includedmanufacturing of copper cathodes,steel-making, aluminium sheets and foils.

Dagha also suggested that joint venturescan be set up for production of consumer electronics, integrated circuits manufacturing, automotive electronics, and electricity equipment.Trade bodies have also recently called for an import substitution policy that would encourage local production in priority areas.

A $53bn market (estimates for fiscal year 2017) for foreign goods offers an opportunity for investment, particularly to those foreigncompanies which have created a good market for themselves here.

In the field of agriculture, importsof palm and soybean oil well over $2bn, and pulses worthnearly a billion dollars, could be eliminated quickly by incentivisingthe production of these crops to meetdomestic needs.

It isthe current account deficit that is inducing the United States to opt for protectionism. And it is not the US alone that is hit by external sector deficits. In this phase of global protectionism an export-oriented industrialisation has limited potential. It needs to be supplemented by import substitution to reduce dependence onthe vulnerableexternal sector.

Published in Dawn, The Business and Finance Weekly, June 11th, 2018