AT present, the economy is growing at a very slow pace with a high rate of inflation and a deteriorating balance of payment situation.

On the external front, the country is trapped in an average annual foreign trade deficit of the order of about $11bn, a deficit in the services and income account of about $5bn and, in spite of the inflow of foreign remittances of about $11bn, in an annual current account deficit of around $5bn.

The neglect of agriculture and absence of mineral exploration have meant heavy reliance on imports of food and energy items. Emphasis on consumer-goods industries has promoted consumption at the cost of savings. The low and volatile growth of agricultural production, and import substituting industrialisation have not helped export expansion.

This, in combination with rising external interest payments and profit transfers, has generated a large perpetual current account deficit, financed mostly by external borrowings which stood at $61.8bn at end-September 2011. This included a short-term IMF loan of $8.7bn that was supposed to make it easy to undertake structural reforms but in reality is being used to delay them.

Unless the country can increase exports and reduce imports to sharply lower its deficit in the trade account which, in combination with remittance inflows, can lead towards a balanced current account position, the foreign exchange shortage will continue to act as a major constraint on economic policies or reliance on additional foreign borrowing will remain. A significant amount of FDI in industries with export potential, which should be the preferred course, is difficult in the present environment.

The overall balance of payment situation can improve only if the rate of growth of exports becomes far in excess of the rate of growth of imports which, in turn, requires a change in the development strategy towards domestic savings-based investment in commodity-producing sectors that would generate exportable surpluses.

At the same time, there should be a reorientation of fiscal and monetary policies to promote domestic savings and lower the inflation rate. There is a general misperception that stability of the nominal exchange rate in any circumstances is good for the economy. In fact, an active exchange rate policy is necessary to accelerate exports and curtail imports. In brief, a total recast of the macroeconomic policy framework is in order to accelerate export-led growth.

Unfortunately, the government has failed to develop a broad-based, progressive taxation system to generate enough revenue to meet its expenditure and also promote domestic private saving. The finance ministry is unable to put its own fiscal house in order and has used money creation as a means to finance the budget deficit at the cost of the private sector.

This myopic approach has been reinforced by the subordination of the interest rate and exchange rate policies to budgetary requirements. Accumulation of internal public debt prompted the finance ministry to keep the interest rates low in spite of a high rate of inflation. Rising foreign-debt liabilities have made the authorities keep the nominal exchange rate overvalued for long periods in spite of loss of competitiveness of exports. The interest rate and exchange rate policies have thus been misused as instruments of public debt management.

Fiscal policy needs to be completely revamped to generate budgetary savings to finance development expenditure through the expansion of the tax base, better tax administration and control on current expenditure. At the same time, it should curb consumption and promote private savings. The monetary policy needs to be freed from control of the fiscal agencies and allowed to function independently to mobilise financial savings and channel bank credit towards productive activities in the private sector while at the same time ensuring that inflation comes down to a low single-digit figure.

As regards the exchange rate policy, there is no doubt that the nominal exchange rate has depreciated substantially since the 1990s, but not as a leading instrument of export promotion. It represented a slow and inadequate response to the relatively fast rise in the production cost reflecting a high rate of domestic inflation. The past exchange rate adjustments, rapid as they may have been, were in reality an attempt to catch up — with a time lag— with domestic price and cost inflation. Accordingly, one would find little correlation between the timing and amount of past devaluations and subsequent export growth and trade balance.

Instead of taking the bull by the horns by either adopting tight fiscal and monetary policies to lessen the rate of inflation and/or by depreciating the exchange rate ahead of the inflation rate to keep exports competitive, we have always looked for a third option. The Export Bonus Scheme, subsidised interest rates for exports, control on input prices and other concessions to exporters have frequently been used as a substitute for exchange rate adjustment/tight fiscal and monetary policies. With inflation at a very high level and with an overvalued exchange rate over long periods, such gimmicks did not work. If a higher export-led growth rate is to be achieved, Pakistan has to follow a less expansionary fiscal policy, adopt an anti-inflationary and pro-private sector monetary policy and an export-oriented, active exchange rate policy and blend them judiciously to create a policy framework to promote the growth of commodity-producing sectors and generate an exportable surplus that is aggressively marketed abroad.

With such a macroeconomic framework in place, export expansion can be facilitated further with aggressive marketing, product standardisation and other micro policy measures. In the absence of an export-oriented macro-economic framework nothing else will work.

The writer is a former governor of the State Bank of Pakistan.