Going by the conventional wisdom, monetary and fiscal stimulus is required to shore up a sagging economy. These can be in the form of tax and interest rate cuts and increased government spending.

But to secure the balance of payments support, fiscal deficit is being reduced sharply, the State Bank discount rate has moved up to abnormally high 15 per cent, and there is some thinking about withdrawing tax exemptions and widening the tax net. The first priority is to restore macro-economic stability apparently putting production-led growth strategy on the back burner, barring some stress on boosting farm production.

Sustained economic growth would remain as illusive as it has been over the past six decades, if the policy of heavy dependence of foreign money is not reduced. Uninterrupted growth cannot be driven by debt or capital and financial flows as proved in the development decade of 1960s and also now after half a decade of high growth.

The buoyancy of the external sector witnessed in recent years did not help domestic economy in standing on its feet. It depressed the rate of domestic savings that could put the country on the road to self-reliance. In fact, it increased foreign dependency. Exports that once financed 70-80 per cent of the imports have fallen to 50 per cent of the imports despite the focus on development of export-oriented industrialisation. Then privatisation diverted foreign investment from new industries to existing capacities. The external sector can only be improved on a sustained basis by laying sound economic foundations.

The exchange rate of the rupee has been allowed to fall sharply to boost exports and curb imports, but not with much success so far. There are suggestions from a panel of economists appointed by the Planning Commission. that rupee should be allowed to fall till such time the current account gap is closed. It is hoped that exports would go up in the global economic slump and imports would come down even when commodity prices (including oil )are coming down.

Will the global economic slump create so much space for Pakistani exports?

The export volume will depend on how fast export-oriented production picks up in terms of innovation in quality, price and value-addition and how globally competitive the products would be with rising cost of energy, transportation, interest rates and imported raw materials. Devaluation has provided short-term relief to exporters at the cost of promoting industrial inefficiency.

Many believe that with the IMF hopefully coming on board, foreign investment inflows will follow. With the economy in distress, not many would eye investment potentials, more so because of the global liquidity crunch.. There may be some portfolio investment, trading and some consultancy contracts. The government may resort to distress sale of strategic assets like Qadirpur oil field . But for Chinese andArab investments, Pakistan may not turn into a destination for direct foreign investment for traditional western sources suffering from credit crunch. Foreign investment is attracted by a fast growing economy and not a sluggish one. And when an economy is in distress and seeks an IMF “bailout” ,foreign investment can only be tempted by juicy offers.

It is time to focus on massive domestic private investment in agriculture and manufacturing to realise the production-led growth potential of the national economy. The sharp depreciation in the exchange rate and hike in interest rate would make cost of investment on imported technology prohibitive and perhaps make the use of local technology more widespread. The option is to maximise the use of indigenous capital and local technology.

If China have been able to absorb much of the impact of global financial crisis, it is because of its high domestic savings rate and its focus on commodity producing sectors. China did not go for financial sector reforms. Perhaps, the salvation lies in bringing a turnaround in agriculture while macro-economicstabilisation is achieved in the next two years under the IMF programme.