As on quite a few other important issues, the opinion at the national level on how to reduce trade and current account deficits is sharply divided.

Some argue that import substitution should precede export-oriented growth as it is relatively a less difficult job than increasing exports at a marginal pace in the current global environment. For example, it is stated that 95 per cent of our edible oil needs are imported and boosting production in agriculture, if incentivised, is not as difficult as in some other sectors.

There is also a growing view that the country should opt for both export-oriented production and import substitution, taking advantage of its natural and abundant human resources. Some experts believe that exporters’ income should be improved in the case of value-added exports and diversification of goods and markets, while the incomes of importers should be reduced. It is also necessary that imports of non-essential items be completely removed from the import list.

Finally, looking at the success stories of many countries and their export-oriented or export-led growth strategies, and notwithstanding the current fears of a global recession, others still strongly believe that the solution lies in export-oriented growth. That is, of course, also necessary to repay accumulating foreign debts that finance imports.

The production by foreign companies is not export-oriented and adds little or no value to the economy

The policymakers are focused on curbing imports through regulatory measures to reduce current account deficits, which, along with other factors, is contributing to partial cuts in production by automobile and tractor assemblers, the textile industry, etc, with fears that others may follow suit.

In a joint press conference on January 9, representatives of textile-related industries complained that export-oriented textile factories are being denied necessary raw materials and accessories. Letters of credit worth as low as $5,000 are being refused. This has caused disruption and led to the cancellation of export orders.

On the same day, pledges exceeding $10 billion were made by bilateral and multilateral donors for the next three years to help Pakistan recover from devastations caused by floods.

According to market perception, these funds, as and when disbursed, would provide a short breather and strengthen the depleting foreign exchange reserves for a while but will not change the fundamental of the economy.

Some Western delegates at the donors’ conference impressed upon Pakistan the need to implement macroeconomic reforms to create fiscal space for its own contribution to flood recovery cost and ensure confidence among the international partners and investors. As these delegates have significant clout over International Monetary Fund (IMF) decisions, some analysts believe that the inflows of most multilateral and bilateral funds will depend on the resumption of the IMF programme. Others suggest that policymakers should use the ‘breather’ provided by the donors to carry out structural reforms.

No measures have been taken to promote quality and competition within the national market

Prime Minister Shahbaz Sharif has, however, asked the IMF for a pause in its demand for economic reforms as the country tries to rebuild after the catastrophic floods.

Before the pledges of assistance by donors were announced, Bloomberg reported that Pakistan may dodge debt default for the next six months, but the troubles were not over. While not ruling out the possibility of IMF withholding the remaining loan tranches, the report added, “it is unlikely given the country’s desperate need in the wake of last summer’s floods.”

Based on the understanding of historical episodes of economic development, a study by a researcher of the State Bank suggests that Pakistan should pursue dynamic comparative advantage wherein ‘successful import substitution precedes export-oriented growth.’

The recommendation was made by researcher Bilal Reza in February 2021 in a working paper on ‘Balance of Payments Constraints on Growth in Pakistan-Implications for Development Policy.’ It then noted that high imports are ‘exerting tremendous pressure on the current account balance.’

Stressing the need for the nation to live within its means, former chairman of the Federal Board of Revenue Syed Shabbar Zaidi sees an immediate solution in import substitution as it takes time to marginally increase exports.

In the past, there was a move to integrate the domestic market by removing hurdles in internal trade. But nothing of the kind has happened that could promote free competition within the national market and improve the quality of products and make them globally competitive.

To balance the books of the external sector account, finance ministers agreed to anything [foreign direct investment] that was coming without realising that it has to be repaid without any meaningful value addition to the economy, says Mr Zaidi.

And now, the global economic environment, coupled with fears of the economic downturn, is being viewed by analysts as a likely impediment to capital inflows in emerging markets.

Pakistan is pinning hopes on attracting investments from Saudi Arabia, UAE and Qatar. And on January 10, Saudi Arabia announced it was studying to augment its investment in Pakistan to reach $10bn and increase deposits with the State Bank of Pakistan by another $3bn to $5bn.

There is also a view that the decision will follow when IMF is on board. For a long time, the net FDI inflows have been less than the outflows of dividends we pay on past investments. And no dividend was remitted by foreign companies after March 2022, says former FBR chairman, and adds that it is not expected in the near future. In his view, the result would be gradual disinvestment of foreign investment concentrated in the consumer industry.

The production of consumer items by foreign companies, it may be pointed out, is not export-oriented and contributes, as does consumer lending by banks, to consumer-led, import-oriented economic growth. In Mr Zaidi’s view, only those industries should be preferably allowed to invest where there is a real transfer of technology. If there is no transfer of technology, a 100pc return should not be allowed, as in the case of the consumer items.

Published in Dawn, The Business and Finance Weekly, January 16th, 2023