Pakistan needs to navigate the situation carefully. Pakistan’s foreign exchange reserves currently stand at around US $4.5 billion which are not enough for even one month’s imports. Receiving pledges worth US $10 billion — more than the targeted US $8 billion — for flood recovery has provided some relief. Though details remain to be ironed out, an influx of even a portion of that aid this year would bolster foreign reserves.
Meanwhile, total external debt and liabilities of Pakistan are US $126.9 billion and expected to rise due to anticipated rollover refinancing and new loans. Though the trade deficit has declined due to restrictions on imports but once the government lifts this ban as per IMF conditionalities, the external deficit will start soaring again.
The gap between the inter-bank dollar-rupee exchange rate and open market rates on foreign currency transactions is over 10 percent. According to the State Bank of Pakistan, foreign remittances also declined by 11.1 percent during the first five months of FY-2023.
This situation calls for an immediate action plan. In the short term, Pakistan does not have options other than recommencement of the IMF programme, rollover financing, debt rescheduling, and more loans. These short term measures are not a permanent solution but will provide some breathing room.
Pakistan needs foreign exchange — in simple words dollars — to pay off our short term debt, import bills, and strengthen domestic currency.
The sustainable way to increase foreign exchange earnings is to reduce the trade deficit and invite more foreign direct investment (FDI), and external remittances which demand consistent long-term policies along with political stability. Attracting FDI requires investment friendly policies, enabling environment, and ease-of-doing business.
Similarly, the trade deficit may be narrowed by either increasing export receipts or decreasing import payments. Presently, the import-export gap is widening over time. Our exports mainly comprise the textile group, which constitutes 59 percent of the total exports, followed by the agro-based food group at 17 percent, and other manufacturing products at 14 percent. The top two groups accounts for 76 percent of the total export receipts, which indicates that our exports comprise of raw material and low value-added intermediate products.
The textile group includes raw cotton, combed cotton, cotton yarn, cotton cloth, knitwear, and readymade garments. Textile is the only manufacturing sector where Pakistan is a part of the Global Value Chain (GVC), but that too at the lower end of GVC of production and manufacturing.
Considering the importance of economic security as a pillar of national security, the existing economic turmoil, coupled with an expected global recession in 2023, calls for a national accord over economic security. This requires political commitment and consensus on a minimum long-term reform agenda with guarantee of continuity irrespective of political affiliation.
However, there are elements of GVCs that go beyond the production process, such as concept and product design, branding, R&D, and marketing. But Pakistan stands nowhere in terms of value addition and the high value elements of GVCs.
The second top export group of food and agricultural produce comprises raw agricultural commodities, predominantly rice, which accounts for 50 percent of the food group. The food group also needs to diversify from commodity exports to value-added products which requires government facilitation to build necessary infrastructure for standardisation, grading, food-processing, branding, packaging, R&D, and innovations.
Other than export promotion and diversification, Pakistan needs to manage the trade deficit by curtailing unnecessary imports. The existing composition of imports consisting of the petroleum group constitutes 27 percent of total imports, followed by the agriculture and chemical group at 15 percent, machinery group at 14 percent, and food group at 11 percent. We cannot reduce the machinery group and chemical group imports due to dependence of the export-based industry on these inputs.
Further, to ensure food security, we need food and agricultural imports. But that can be substituted with domestic production. The petroleum group having a lion’s share in total imports plays a pivotal role in industry, transportation, and energy generation. Managing the petroleum group imports requires a long-term transitioning plan of changing the energy mix to alternate and sustainable sources of energy.
These long-term reforms and structural transformation to implement strategies to boost productivity, value addition, research, and innovation require a national consensus which guarantees the continuity and consistency of economic policies and a reform agenda over the next 20 years.
Considering the importance of economic security as a pillar of national security, the existing economic turmoil, coupled with an expected global recession in 2023, calls for a national accord over economic security. This requires political commitment and consensus on a minimum long-term reform agenda with guarantee of continuity irrespective of political affiliation.
Economic security is a part of Pakistan’s national security vision as outlined in the National Security Policy 2022. The policy provides a solid foundation for it -- by considering economic security as a key pillar of the national security vision.