While the foreign exchange reserves have surged on $3.1 billion IMF credit, the pressure on the rupee is not likely to ease if the trade deficit continues to widen. The sliding exchange rate has made export cheaper for foreign buyers and import costlier for domestic consumers. It raises hopes that a weaker rupee would curb unbridled domestic consumption and create more trade surplus for exports, narrowing the trade gap.

But this has not happened so far. The current account deficit has jumped up to $6.8 billion during July-November 2008 against $4.7 billion over the same period last year, mainly because of yawning foreign trade gap.

Normally, in short to medium- term period, devaluation may help boost exports until costlier imported inputs neutralise the gain from falling exchange rate for export of manufactured goods.

It is not industrial efficiency, value-added or innovative products that boosts exports, but for every dollar earned, the exporter gets more local currency.. And while the trade imbalance may be reduced for a while, the basic structural problems do not go away. Short-term palliatives do not provide long- term solutions.

In fact, the exchange rate mechanism alone cannot help correct the trade imbalances as past record would show. Import substitution and export-oriented industrialisation require right focus to move towards a balanced trade. It is only by opting this two-pronged strategy that trade imbalance can be radically reduced and the economy could begin to stand on its feet.

And no less important, foreign trade should serve the needs of manufacturing and agricultural growth. Neither export-oriented nor import substitution policy alone can help.

It has to be a harmonious blend of both. The trade deficit during five months of current fiscal is an all time high and the imports continue to outpace exports by a wide margin.. In the current global scenario, the traditional western markets for exports are shrinking because of recession there, while the situation in emerging economies is also not very encouraging.

No doubt, efforts were made by the previous government to boost exports with some success but that was not enough. Currently, imports at about $40 billion (last fiscal) are twice the export earnings and moving at a faster pace than foreign sales of merchandise. Even when the country had benefited from the recent excess liquidity in the international market and a high global growth, the five years of high economic growth was primarily driven by domestic demand, not by exports. In fact much of the domestic needs were met by fast rising imports while agricultural production increased at a sluggish pace and manufacturing, at best saw consolidation rather than expansion.

While a depreciating rupee may help curb import growth, it raises the cost of investment based on sophisticated import technology while inducing import substitution.

But continuous depreciation of the rupee widens the gap between exchange rate and the purchasing power parity of the national currency. The Economist’s The World Report 2009 estimates the size of Pakistan’s economy at $152 billion on the basis of exchange rate and at $470 billion on the basis of rupee’s purchasing power parity. The exchange rate does not reflect the real value of the rupee.

The IMF bailout will provide a short-term breather but structural imbalances are unlikely to disappear quickly or significantly. Take the example of tax revenue.

Financial Advisor Shaukat Tarin says that tax on agriculture incomes would effectively be enforced after the farmers start making enough money.

While in some ways, economic crisis makes it easier to bring about reforms by softening the resistance to structural changes, the process is far more painful in times of stress. With stock markets in trouble, taxing capital gains may send wrong signals to the capital market. In the existing situation , business sentiment is of paramount importance to arrest the downturn in the economy.

The best time for bringing about tax or any other reforms is in a period of high economic growth, something that is indicated by Shaukat Tarin’s position on taxing farm incomes.

There are so many items in the $40 billion trade that can be produced with comparative advantage within the country, both for import substitution and exports. Not only the food imports running into billions of dollars can be cut down but surplus grains and livestock production, dairy farming etc can also earn precious foreign exchange.

By placing agriculture at the centre of the development strategy and encouraging massive investment in farming, livestock and processing of food products , the economy can be pulled out of the current downturn. In 2-3 years. The Middle East is acquiring lands in third world countries to grow food for its own consumption. This indicates the potential for export of food grains and products in the country’s neighbourhood A boost in production of cotton, edible oil seeds and tea cultivation can reduce reliance on imported stuff. The country has already paid a heavy price for the neglect of agriculture that could reinforce the foundation for manufacturing and sustained economic growth.

Imports make no contribution to the Gross Domestic Product (GDP) and provide employment in foreign countries supplying goods and services to Pakistan. Given the current global, regional and domestic environment, it is not possible to access foreign capital from the stressed international financial markets.

Globally, official assistance is petering out. Even friends like China and Saudi Arabia would like Pakistan to manage its affairs more prudently to reduce fiscal and trade deficits. Islamabad had no option but to come under IMF discipline.

Given the current scenario, it may not be possible to come out of the woodsand another IMF bailout may follow unless production-led growth is pursued vigorously. And agriculture holds the key to economic progress. And the first priority should be to develop a self-sustaining economy, that is not heavily dependent on foreign debt.