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Increasing exports a way out to avoid debts

Published on 16th Nov, Edition 46, 2015

 

Pakistan is presently going through process of rapid economic development, which includes privatization of major government corporations, aimed at attracting foreign investment and lessening budget deficit.

In 2014, foreign currency reserves crossed $15 billion mark, which has led to steady lookout on the long-term rating. External debt in Pakistan remained unchanged at $64,338 million in the fourth quarter of 2014. External debt in Pakistan averaged $49,246.37 million from 2002 until 2014, reaching an all-time high of $66,490 million in the third quarter of 2011 and a record low of $33,172 million in the third quarter of 2004.

In order minimize the dependence on the external debt, Pakistan needs to set its economy on the stable basis for growth, reduce the imports and balance of payments and diversifying resources for the export promotion. Thus the economy will be stable and reduce the possibility of foreign debt.

The government spends a lot in the functioning of the country. There is the need of reducing government expenditure so that government runs smoothly. The government should reduce its expenditure and must follow the footsteps of Quaid-e-Azam Muhammad Ali Jinnah, the founder of the nation, who received only one rupee as his salary being the first Governor General of Pakistan.

Stability pre-requisite

Pakistan economy is heavily dependent on its political stability and calm law and order situation like foreign investor protection. Pakistan has been a victim of political instability and is subject to extremism and terrorism. In this context the stability of Pakistan is a pre-requisite for economic growth. Balance of payment depends on the export and imports of Pakistan. It should try to increase its exports to lessen its negative balance of payment by reducing imports.

Pakistan is very weak in the collection mechanism and utilization of taxes. An effective tax collection mechanism should be developed and implemented to increase public revenue. It should be ensured that the revenue is being utilized in a productive manner.

Pakistani products, which are of international standards, needs to be penetrated aggressively to foreign markets where they can compete with other countries products. This will increase exports, improve the balance of payment. Pakistan after getting the GSP Plus status must utilize to its fullest extent to increase exports.

There is the need for promotion of free trade with the neighbouring and friendly countries. All hurdles of borders for trade between neighbouring countries should be reduced to increase the area of economic activity.

Foreign investors and companies should be encouraged and attracted towards Pakistan’s large market. This can be done by providing investor protection in legal and security terms.

The natural resources of our country which are the gift from Allah should be exploited. These can be used in accelerating the economy by reducing the dependence on other countries from whom the similar resources are being purchased.

It must counter energy crisis. This will ensure stable economic growth. The rapid and constant increase in energy crisis is deteriorating the economy of our country.

The importance of international trade and economic growth has been debated over several years. The suitability of trade policy, import substitution or export promotion for growth and development has been also debated.

In 1950s and 1960s, most of the developing countries followed import substitution policy for their economic growth. Since mid-1970s, in most developing countries, there has been considerable shift towards export promotion strategy.

 

Future measures

It is fact that in the process of economic growth, imports play a vital role through different channels. Imports of raw material increase the value added products and import of necessary technology increase the productive capacity and productivity, which further enhances the growth rate of the economy. Imports generate employment especially in the handling and transportation sectors directly and indirectly in the wholesale and retail sectors, which positively effects the growth of the economy.

The unhindered access to imports also supports by reducing the prices of essential production inputs. Pakistan may continue with the imports of necessary raw material for value addition and needed technology to expand capacity and improve productivity and give full attention to boost up the exports.

Increasing exports is the only way traders can bring revenue to the heavily indebted country. The government always promised that it is ready to help it in whatever way possible to increase the exports and can even subsidise some export commodities. Traders cite the increasing production cost as the biggest hurdle in the increase of country’s exports.

The impositions of a number of surcharges on electricity prices is the biggest factor in ever increasing production cost thereby leaving the country’s industrial products noncompetitive in the global market.

The industrialist community was of the view that if their complaints are not addressed timely, more and more production houses will move to neighbouring Bangladesh and China, who offer more favourable work conditions.

Unless the Pakistan government takes steps to settles an issue of continuous depreciation of Pakistani rupee, it will be left on the edge of an unprecedented external debt default. On average 66 percent of the total increase in external debt is caused by unfavourable movement of exchange rate since 2007-08.

Pakistan badly needs fresh foreign money for boosting foreign exchange reserves and to ease down pressure on Pak rupee. In current scenario, total foreign debt of the country stood at $59.5 billion and depreciation of one rupee per dollar would increase the debt by Rs59.5 billion.

Since the Pak rupee had depreciated between six rupees and seven rupees over the last few weeks, national debt would have increased by around Rs357 billion and spiked inflation.

According to the IMF, Pakistan’s current level of foreign reserves is very much low at $5.4 billion, whereas the IMF’s adequacy metric suggests a level of $14 billion for countries with a floating exchange rate and $23 billion for countries with a fixed exchange rate. The low level of reserves leaves the economy vulnerable to a number of triggers that could result in a balance of payment crisis, similar to in 2008.

Seeing the heavy amount of external debt payable, the current continuous currency depreciation will put heavy burden on the country’s economy. Therefore, Pakistan should adopt policy of stabilising the exchange rate, in order to protect the country against the increase in debt.

If Pakistan could manage to earn current account surplus over a number of years, the supply of foreign exchange would increase in the free and inter-bank markets.

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