THE external sector of the economy has improved with a reduction in the current account deficit as a result of the drop in oil prices, external borrowings, sales of national assets and higher workers’ remittances.

And helped along by the State Bank of Pakistan’s (SBP) foreign currency purchases and inflows from the Coalition Support Programme, the net foreign exchange reserves have gone up to a fresh high of about $19bn.

However, according to the latest quarterly report of the SBP, foreign direct investment during the first nine months of fiscal year 2015 not only declined over the same period of previous fiscal year, but the amount was also “much smaller than the repatriation of profits/dividends on existing foreign direct investment” The full year’s SBP’s figures show that the repatriated amount on account of foreign direct investment at Rs$1.327bn was almost double the FDI inflow of $709m. Including the returns on portfolio investment sent abroad , the overall repatriated amount jumps to $1.636bn.

The path to higher economic growth lies in self-reliance to the maximum possible extent, without which structural imbalances in the external sector would persist and the economic recovery would remain fragile

Barring Chinese capital spending in telecom, renewable energy and the motorcycle sectors, no significant foreign investment was made. Even portfolio investment recorded a decline in the period under review.

Yet another issue of no less concern to the central bank is the 6pc yearly drop in exports during the three quarters. The decline was broad-based but more significant in products like cotton fabrics, rice, jewellery and naphtha. In the case of cotton yarn, quantum in exports remained at last year’s level but lower unit prices have pushed down the value of exports.

In the case of debts, even the committed loans were not fully disbursed. In the third quarter of FY15, debt repayments exceeded the total loan disbursement. In the first three quarters, the external debt servicing reached $4.1bn — or more than 23pc of the country’s exports. This, the SBP says, calls for raising the debt-repaying capacity, particularly through exports.

Hopes are being pinned on foreign investors buying stakes in eight state enterprises — including the PIA and Pakistan Steel Mills — by this December, as agreed with the IMF.

Going by these trends in the external sector, it becomes clear that the improvement is of a fragile nature, as has happened so many times in the past. It cannot be sustained on a durable basis unless an effective import-substitution policy for stimulating domestic and foreign investment is actively pursued in areas where the country enjoys a domestic advantage.

For the time being, the international markets do not offer much room for significantly boosting, exports leaving no other viable alternative but to go for an effective import-substitution programme. Enhanced regional trade may also help. The developed markets are currently at a saturation point.

As evident from the Greece episode, painful reforms are enforced on the borrower while the lender is not penalised for taking reckless credit risks.

And finally, the way the external sector has improved — a worn out mode — just provides the country a breathing space before it moves from one crisis to another. A more durable macroeconomic stability comes from balanced socioeconomic development.

While discouraging unnecessary imports (especially of processed food and luxury items), the SBP has stressed that the government should “actively pursue all possibilities to reduce its dependence on imported energy”. It has also identified items for import-substitution in such sectors as edible oil, chemicals, low-tech electronics, value-added plastics and the rubber industry.

No time should be lost in formulating an enabling environment to vigorously promote import-substitution if the external sector has to be put on a sound footing.

The 11-member ministerial committee set up recently under the chairmanship of Finance Minister Ishaq Dar to evolve economic policies through coordinated efforts of various ministries would be the right forum to take up the import-substitution issue.

And no less important is the fact that the policies, once approved, are vigorously implemented to ultimately reduce the gap between imports and exports to a manageable level.

The ministerial coordination committee can also draw up a programme and policy to encourage a harmonious and synchronised development of various segments of the economy so that the imbalances are minimised.

The path to higher economic growth lies in self-reliance to the maximum possible extent, without which structural imbalances in the external sector would persist and the economic recovery would remain fragile.

As for boosting exports, the central bank stresses that it has become critical to design an industrial policy keeping in mind the country’s strategic objectives. Areas that need special attention include the resource base, productivity and efficiency, energy supplies and effective supply chains, it says.

Here, it may be pointed out that productivity and efficiency in the export-oriented sector has suffered in the past due to the heavy reliance on a continuing depreciation of the exchange rate and subsidies provided for exports. This has created a rent-seeking culture at the cost of productivity.

It is time to focus on developing a robust private sector that can compete in the international market by offering quality goods and services at globally competitive prices. That can be best done by organic corporate growth and not by external props designed for all seasons.

And the government institutions responsible for promoting foreign trade and investment should be more active as enablers and facilitators to help develop robust businesses.

Published in Dawn, Economic & Business, August 3rd, 2015

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