It is fashionable among Pakistani leaders, Ministers and even senior officials to raise from time to time the slogan of “trade, not aid”. The latest example was the pronouncement by Prime Minister Nawaz Sharif at a ceremony in the Foreign Office on 27th December that his government, as part of its priorities, would focus on “trade, not aid”. One cannot but welcome such declarations provided they are supported by appropriate policy measures to eliminate the nation’s reliance on foreign loans to meet its current and developmental requirements. Unfortunately, that has not been the case in the past. In the absence of effective state policies to translate these declarations of “trade, not aid” into reality, they have remained hollow slogans.
It remains to be seen whether the Nawaz Sharif government finally will be able to rid the country of its heavy dependence on foreign loans. Unfortunately, the signs so far are not very encouraging. As if to administer a dose of reality, President Mamnoon Hussain stated at a conference on 29th December that the begging bowl could not be broken because of the heavy burden of debt. Even more disturbing was the briefing by Finance Minister Ishaq Dar to the cabinet last week, which was long on targets and short on policy measures to achieve them. He confirmed that “Pakistan had no choice but to borrow new money to pay off installments of old debts.” His strategy to build up foreign exchange reserves by the end of 2014 relies heavily on additional loans of $10.095 billion from various sources including the World Bank, the Asian Development Bank, the Islamic Development Bank, and commercial banks. This is certainly not a policy of “trade, not aid” but of “aid and more aid.”
Our leaders and policy makers must learn that the announcement of slogans and targets is not enough to change the economic situation of the country for the better. What is required in addition is a set of policy measures to achieve those targets. The essential condition for eliminating our heavy dependence on external loans is to have a current account surplus so that we can gradually pay off the external debt and build up foreign exchange reserves to the desired level without having to borrow new loans. The reports instead are that so far in the year 2013-14, the current account and trade deficits have widened compared with the corresponding figures of the last year. According to a State Bank of Pakistan report issued at the end of December 2013, Pakistan’s current account deficit in the first five months of 2013-14 increased by 175% as compared with the corresponding figure in the preceding financial year. In absolute figures, it rose to $1.885 billion as against $684 million a year earlier. Within the current account balance, the balance of trade is of crucial importance. Here again, according to the same State Bank report, the deficit in balance of trade during the current financial year has widened compared with the situation a year earlier. The trade deficit increased to $7.7 billion in the first five months of 2013-14 as against $6.6 billion a year earlier. Thus, we are moving towards greater dependence on foreign loans and aid rather than towards breaking the proverbial begging bowl.
The trade balance is a reflection of the balance between the aggregate supply and demand in an economy. If the aggregate demand exceeds aggregate supply, it would result in a deficit in balance of trade. Conversely, the excess of aggregate supply over aggregate demand would lead to a surplus in balance of trade. Therefore, it is essential to restrict our domestic consumption and increase our national saving rate so as to release resources for investment and for moving towards a surplus in balance of trade. Our national savings as a percentage of GDP were as low as 13.5% in the year 2012-13 as against the corresponding figures of over 30% and over 50% for India and China respectively. This low national saving rate was totally inadequate to meet the demands of the national investment required for an adequately high GDP growth rate and to achieve a surplus in balance of trade.
The Finance Minister in his briefing to the cabinet indicated that the investment-to-GDP ratio would be raised from 14.2% in 2012-13 to 20% by 2015-16 to accelerate the GDP growth rate from 3.6% in FY 2013 to over 6% in FY 2016. If this target has to be achieved without further burdening the country with a higher level of external debt, we would have to raise our national saving rate to at least 20% by FY2016. If we want to reduce the burden of external debt, our national saving rate would have to be even higher. The question that arises is whether the government has taken any steps to increase the public and private savings so as to raise the saving-to-GDP ratio to the desired level. The answer to this question is in the negative.
For an increase in private savings at the national level, the government would have to take stringent taxation and other measures to discourage conspicuous consumption by the elite of the society from amongst the politicians, senior echelons of the military establishment and the civilian bureaucracy, business community, agricultural aristocracy, and senior professionals. Our leaders, whether on the civilian or the military side, must set an example of a simple lifestyle to encourage other members of the country’s elite to follow suit. Unfortunately, we do not see any signs of such policy measures or steps on the part of the present PML-N government at the centre.
It seems that the members of our elite class have become addicted to a luxurious lifestyle. We see them squandering the nation’s precious resources on conspicuous consumption while the majority of the people find it difficult to make both ends meet and the vast majority of our children, who are the future of our country, go without necessary health and educational facilities. This state of affairs is unacceptable economically, politically and ethically.
Our public sector is also unfortunately a net dissaver. Obviously, to change this situation for the better, the government would have to widen the tax net, end tax exemptions, and improve the tax collection system while restricting the public expenditure to the minimum essential. It is shameful that as against the tax-to-GDP ratio of 15% in many developing countries and of over 30% in many developed countries, our tax-to-GDP ratio was only 10.9% in 2012-13. The target of the present federal government is to raise this ratio to 13% by 2015-16. But one has not seen any significant steps for achieving even this modest target. Further, the bleeding of the nation’s precious resources through mismanagement and corruption in state owned enterprises continues unabated.
In short, the goal of “trade, not aid” will remain a pipedream as long as the saving-to-GDP ratio remains below the investment-to-GDP ratio required for the desired growth rate of GDP. Since the federal government so far has failed to adopt effective measures to raise the national saving rate to the required level and there are no signs of it doing so even in the future, its declarations of “trade, not aid” will remain hollow lacking any substance or touch of reality. Under the circumstances, the country’s reliance on foreign loans and aid will persist making a mockery of the government’s declarations to the contrary.

 The writer is a retired ambassador and the president of the Lahore Council    for World Affairs.

Email:javid.husain@gmail.com