The roots of rising external sector vulnerabilities can be traced to the long persisting pattern of import-led economic growth funded by increasing unsustainable foreign debts which have now culminated in the risk of loan default.

To quote an analyst, 95 per cent of the imports help in production and fuel the economy. Financing of imports is however getting more and more difficult for want of sufficient dollar earnings.

Over decades, import-driven growth, with a recurring balance of payment crisis, has not allowed enough space for export-oriented industrial growth because of the frequent boom and bust cycles it creates.

Our export-oriented production is also heavily dependent on imported raw materials, intermediate goods, plants and machinery, equipment etc. We have created powerful vested interests — with stakes in an import-oriented economy — that are averse to import substitution. And we also have a powerful privileged group that manages to prosper in the worst of crises.

For decades we have tried to manage macroeconomic imbalances arising out of excessive imports without addressing the core issue itself — unsustainable imports

The situation has been aptly summed up by Prime Minister Shahbaz Sharif: our real goal is (achieving) self-reliance which, he points out, is easier said than done.

On June 17, the foreign exchange reserves with the State Bank of Pakistan were $8.238 billion, which could finance five weeks of import of goods. Analysts explain that reserves are considered inadequate if they can not cover three months of import bills.

During the 11 months of this fiscal year, the import bill shot up to $75.75bn from $55.56bn in the same period last year. That pushed the current account deficit for the corresponding period to $15.2bn from $1.183bn. The mounting external vulnerabilities are pointing to a slower growth rate than achieved in the current year.

The current account deficits, the free fall of the rupee, abnormally high rates of interest, unaffordable debt servicing costs and unsustainable balance of payments all flow from an enormous imbalance in trade created by the massive imports of goods. The import bill is double the export earnings in dollar terms.

For decades we have tried to manage macroeconomic imbalances arising out of excessive imports without addressing the core issue itself — unsustainable imports. While a nation may face multiple challenges the real solution often lies in resolving an over-arching crisis that breeds and is responsible for a number of other lingering ailments.

It is often the central idea (solution) whose time has come that successfully addresses the core chronic issue that also holds the key to the resolution of related, linked problems. We have not been able to develop a home-grown economic model to exploit indigenous resources to their full potential and maximise the employment of idle surplus labour by imparting required skills. And an analyst suggests that the slogan of ‘Make in Pakistan’ should be substituted with ‘Made by Pakistan’.

While recognising certain positive developments, analyst Farukh Saleem observes that we are not out of the woods. The International Monetary Fund (IMF) has estimated that our gross external financing needs will hit a high of $41bn. That’s unsustainable.

Critics say the historical record shows that more foreign debts temporarily finance unsustainable imports, delivering a brief spell of fragile stability but eventually leading to more severe crises.

As it is evident from the budget proposals for the current fiscal year, foreign borrowing continues to be the key policy for managing macroeconomic imbalances with no move to reduce external dependence.

However, Prime Minister Shahbaz Sharif has decided to buy cheaper but quality coal from Afghanistan instead of South Africa in rupees which would save precious $2.2bn annually and help generate cheaper electricity.

To move towards self-reliance the widening mismatch between government revenues and expenditures need to be significantly reduced. “We cannot continue to lose half a trillion rupees a year in our power sector. State-owned enterprises cannot continue to lose a trillion rupees a year. Cartels cannot be allowed to keep Pakistan uncompetitive in the global marketplace. And trillion-rupee leakage in public procurements must be made a thing of the past,” says Mr Saleem.

Import substitution policy remains only on paper even in the case of increasing production of crops to achieve food security and do away with growing imports of foodstuff. Nearly 37pc of our population is facing food insecurity and 18pc of them are severely food insecure, says Dr Ali M. Mir, a public health specialist. In the 2021 Global Hunger Index, Pakistan ranked 92 out of 116 countries.

Modernisation of agriculture needs to be stepped up by investment of revenues, raised by effective taxation of big farm incomes, to improve crop productivity on a long-lasting basis. Distribution of all state farmlands among landless peasants — backed by a package of credit and enabling facilities to bring the land under cultivation — should be resumed.

There are initial signs that the international situation may soon begin to change at least in some respect for emerging markets such as Pakistan.

On June 26, the leaders of a group of seven developed nations (G-7) pledged to raise $600bn in private and public funds over five years to finance needed infrastructure projects in developing countries. US President Biden says it is an investment, not aid or charity.

The move is aimed at countering China’s multibillion-dollar Belt and Road project. However, IMF Managing Director Kristalina Georgieva says it is by working together that we can meet the unprecedented challenges facing the world today. And efforts to punish Russia through sanctions collides with the fear of creating famine elsewhere, says Emma Ashford, the author of the book titled ‘Oil, the State, and War’.

In the above backdrop, Pakistan’s economic and trade cooperation should be directed to reduce foreign dependence by promoting investment for export promotion or import substitution.

Governance must improve to ensure efficient implementation of foreign-funded projects to avoid cost escalations that also affect their financial viability and debt repaying capacity.

Pakistan needs to evolve a ‘trade-not-aid’ policy with a strong focus on achieving balanced bilateral trade as far as possible, convincing trading partners that Pakistan must sell in order to buy.

Setting aside geopolitical considerations, Pakistan needs to buy from the cheapest source to save foreign exchange spending. Export-oriented production should be aggressively diversified to meet changing international export demand.

Published in Dawn, The Business and Finance Weekly, July 4th, 2022