THE external account has been the perennial soft underbelly of the economy. Its situation today is precarious with foreign exchange reserves barely sufficient to finance three months’ imports, having been run down by $4.6 billion in one year. The vulnerability of our balance of payments has been structural in character, requiring financing from the rest of the world. Historically these inflows have come because of fortuitous global events like the Cold War, the Afghan War, 9/11, ‘war on terror’, etc. that worked to our advantage.

However, now with the increase in short-term borrowings at high interest rates (the net addition in overall external debt last year was a colossal $9.1bn) urgent financing is required to pay the import bill and service debt obligations. Currently, export earnings and remittances combined are falling short of our import bill by an unsustainable $1bn a month.

Official efforts continue to focus merely on financing this deficit, rather than on reducing its size, because of political compulsions to address immediate or short-term crises issues. But these flows have only provided ‘temporary’ relief. The narrowing of the deficit on a sustainable basis requires tough, broad-based reforms.

This requires a shift in the current policy bias away from import substitution to exports through a realistic exchange rate, improvement in productivity through better access to technology (supported by adequate public and private investment in high-quality education, technical and vocational skills). Pakistan must focus on becoming part of the global intra-industry value chains and on markets of dynamic young and middle-income consumers in the East.

If strong actions are not taken immediately, reserves could fall significantly below safe levels.

However, in view of the emergency and to avoid going back to the IMF for yet another bailout, several measures need to be brought into play urgently, so that the current account deficit is brought below two per cent of GDP — a gap that can be financed from normal and regular capital flows. Some of these transitional interventions will have to be phased out in the medium to long term to address structural issues affecting our competitiveness.

The exchange rate’s role will always be much more important than incentives in the form of cheap credit etc. to check the size of deficit on the trade account. Research shows that the latter steps do not do much to promote exports.

The rupee is distinctly overvalued, by as much as 23pc according to the State Bank. Hence, a major downward adjustment is required in its value. This adjustment should be adequate in terms of curbing current speculation in the form of a building up of inventories of imported goods, rush to conversion to foreign currency, larger repatriation of profits, exit of portfolio funds and possible holding back of export receipts abroad.

Further, to incentivise exports the withdrawal of the 1pc presumptive income tax on export receipts for the next two to three years should be considered. Instead, the presumptive income tax on imports should be enhanced by two percentage points. This could yield net additional revenues of up to Rs50bn.

Our exports have slowly lost ground also because of higher input costs due to relatively large energy tariffs and transportation costs, owing to heavy reliance on taxes on petroleum products for tax revenues. This is the consequence of complex and high rates of import duties on raw materials and intermediate goods used in manufacturing and a dysfunctional system for GST and customs duty.

The overvalued rupee and low interest rates combined have incentivised imports, even of daily consumables. Whereas they grew by under 12pc in the first nine months of 2016-17, in the last three they climbed 30pc. Therefore, we’ll have to bring into play two to three instruments to minimise the inflationary shock of this rectification in the rupee’s value. The first step is the dismantling of the structure of very high regulatory duties that we have established (covering about 10pc of imports), which is promoting smuggling and under-invoicing.

A portion of the increased rupee cost of servicing external debt, because of the revision in the value of the rupee, can be recovered through a less rapid increase in external debt over the next few years and some needed upward adjustment in import tariffs through a move to three slabs of 5pc, 15pc and 30pc respectively.

This move should be under a clearly laid-out publicly shared three- to four-year year plan to return to the import tariff regime that exists currently. The inflationary impact will also be manageable because of subdued prices globally.

Also, if necessary, the duty drawbacks can be enhanced somewhat to eliminate the effect on exports. In the case of textiles, most of the inputs have already been exempted from import duties. Further, the duty drawbacks scheme may be extended to emerging exports and markets at higher rates.

The combined moves of rupee depreciation and some enhancement in import tariffs will also enable a mopping up of additional revenues by almost Rs80bn. The overall effect of the revenue proposals is Rs130bn, which can be used to reduce taxes elsewhere, especially on petroleum products as described below.

The import bill could also be controlled by a wider system of cash margins for various categories of imported items. The cash margin could range from 10pc to 100pc, depending on the nature of the goods imported.

One measure to bring down the cost of doing business with respect to energy input is reduction in the import duty on furnace oil from the present 11pc (plus a regulatory duty of 2pc)and a GST of 20pc. Three years ago, the import duty was only 1pc and the sales tax rate 17pc. In addition, there is a need for a reduction in the rate of GST on diesel oil (currently running 30pc) combined with a revenue-neutral enhancement in the sales tax rate on motor spirit. Also, the gas infrastructure development cess on the input of gas to independent power producers and captive power should be withdrawn.

To improve the liquidity of exporters, another major measure may be considered. Ie to reduce the cost of doing business by opting for an Indian-type instrument (Merchandise Exports from India Scheme) whereby duty credit scrips are issued automatically against actual export receipts (as a percentage of export receipts), which can then be used for paying customs duties and GST, instead of the present system of processing these claims through long-winded procedures lacking transparency.

Alternatively, a cash incentive type scheme followed by Bangladesh may be adopted. This will require payment of the export rebate/ duty drawback along with the export receipts by commercial banks and reimbursement by the State Bank.

The bottom line is that we face an emergency with regard to the state of our balance of payments. If strong multiple actions are not taken immediately on both the export and import fronts the reserves could fall significantly below safe levels in the next seven to eight months. At all costs, recourse to the IMF must be avoided if an attempt to constrain CPEC and/ or the imposition of tough economic and possibly non-economic conditionalities is to be avoided.

Hafiz A. Pasha is a former commerce minister. Shahid Kardar is a former State Bank governor.

Published in Dawn, September 26th, 2017