In spite of all claims about economic policy-making being tuned to reducing external dependence, the one distortion that is routinely regretted by the policy-makers, without finding ways of containing, it is the trade deficit. For unexplained reasons, all policies are geared to increasing exports, although Pakistan's real problem is its increasing dependence on imports that was deliberately ignored by the previous regime.
What we got used to admiring under that regime was the illogically low pace of depreciation of the Rupee, although the trade deficit rose year-after-year. Ignoring this lethal trend encouraged the import of virtually everything, shockingly, at one time even chicken egg. Our Far Eastern friends, all in a mad race to bring down the price of everything they were manufacturing, made sure that we dropped the idea of manufacturing anything at all.
Quite unwittingly, they brought to a grinding halt even the basic industries in the second and third world; Pakistan is a country that suffered heavily from this trend. This is portrayed by the rapid pace at which (well before the oil price rise) the trade deficit rose between FY05 and FY07. Once the oil price skyrocketed, the deficit crossed all previous records-in FY08 it exceeded the figure of that year's exports. Some achievement!
The actual trade deficit is much larger than its officially recorded figure for each year, because the import figures don't include payments for smuggled goods. The bulk of the smuggling is facilitated by the Afghan Transit Trade Agreement, wherein duty-free imports, via Pakistan, don't bear any relationship with Afghanistan's population - the logical basis that could justify Afghan imports.
The people you expect to worry about this entire mess, which is becoming a way of life, are the players in the industrial sectors - particularly those who had to close shop because their produce could not compete with imported substitutes. Either this group doesn't have a powerful lobby in the scores of Pakistan's chambers of commerce and industry, or, more likely, it has opted to become the importer of what it was producing.
Due to a policy-making mindset that survived all regime changes in the past two decades, 'export promotion' remains the buzzword. That's the main reason why import substitute manufacturing sectors don't have many friends in the state bureaucracy. State Bank of Pakistan (SBP) too is primarily concerned about export growth. It has yet to come out with policies that prioritise development of the import-substitution sectors.
Although SBP is only indirectly involved in designing the trade and investment policies, it suffers from their fallout in terms of managing the balance of payment and current account deficits, and the resulting depreciation of the Rupee. That being so, it was expected that the SBP - an autonomous organ of the state-would insist upon the policy-makers to prioritise all measures that progressively made Pakistan less import-dependent.
But little of that concern is exhibited in SBP policies and the provision of incentives for banks and financial institutions to encourage expansion of import substitution industries. When I pointed out to a senior banker the build-up of external debt while imports weren't falling because domestic production capacity had eroded over the years, he said "don't expect us to worry about these imbalances; that's the policy-makers' job, not ours."
Apparently, most bankers think along the same lines; had that not been the case, imports would not have been facilitated and financed as was the case in the past five years. So much for the sense of responsibility of the bankers! But the media too didn't do as much as it could, to highlight this growing distortion. Seemingly, what we have is a mix of unconcerned commentators, businessmen, bankers, regulators and policy-makers.
Not surprisingly therefore, you don't notice enough concern for reviving the import-substitution sectors. No one realises that, like the rest of the world that learnt a harsh lesson from relying excessively on exports, Pakistan must urgently start reviving the import substitute manufacturing sectors of its economy. The rising external debt makes it imperative that we start doing all that is necessary to bolster our repayment capacity.
The only indication of concern over the rising trade deficit was the investment policy, but it was also focused on attracting investment without specifying added tax and tariff incentives for inflows in sectors that can produce import substitutes, preferably using domestic input and resources. It did not prioritise clearly the preferred fields of industrialisation aimed at cutting the trade deficit, and avoiding further external borrowings.
That's not all; we have as brilliant foreign advisors. The latest World Bank report recommending remedies for the flaws in Pakistan's taxation policies and systems also prescribes a three-tier duty slab of zero percent on raw materials and capital goods, 5 percent on intermediary goods and 10 percent on finished goods (on which the maximum now is 25 percent). It isn't hard to imagine what havoc will be caused by following this advice.
It will destroy the incentive for setting up import-substitution industries and expand Pakistan's already high trade, balance of payment and current account deficits making Pakistan evermore dependent on external debt. Amazingly, 'scholars' from the Andrew Young School of Policy Studies didn't see the build-up of these trends although, and interestingly enough, they based their recommendations on the economic trends since FY05.
There are several sectors (now partly or wholly inactive) that were producing a number of import substitutes, even if low-priced. In the past five years had they been strengthened and supported like the export sector, instead of being forced to confront fierce competition from abroad, they would have enhanced their capacity from mere assembly to full manufacture of goods that are now being imported (and financed by external debt).
Instead, in the name of paying for efficiency, we wrapped up these sectors not realising that even the assembly units were performing an important function: importing only inputs and components and saving the dollar denominated value-addition cost, which was being incurred in Rupees and was creating employment. With support, these sectors could undertake faster deletion and indigenize the entire manufacturing process.
Although precious time has been lost, it is never too late to begin making amends. With intense dialogue with the chambers of commerce, import-substitution industries could be revived. Like the export sector, this sector needs support via cheaper credit and lower tariffs on import of inputs, and sector-specific import deletion schedules for strict compliance. Low exports are not Pakistan's big problem; it is the inability to cut imports.

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All figures in US$ millions
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YEARS  IMPORTS      EXPORTS    DEFICIT
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03-04     15,592     12,313      2,877
04-05     20,598     14,391      6,183
05-06     28,581     16,451     12,011
06-07     30,539     16,976     13,706
07-08     39,966     19,052     20,914
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