Thread by @gonwei

#Pakistan is going thru a complex #macro situation. At its heart is one symptom: the #CAD. Because the CAD has been perennial, this long-standing symptom translated into large foreign liabilities. Short 🧵👇

a) The #CAD shows that #Pakistan has been consuming beyond what it produces. At its heart, there’s another perennial deficit: the fiscal deficit.

b) To fix the #CAD, compressing #imports is futile (e.g. with the flood levy). You need either to reduce the fiscal deficit, or increase private saving well beyond investment. 👇

c) To pay for the accumulated #CADs, in turn, #Pakistan will need genuine resources (forex), that inevitably need to come from #exports growing. Here’s the challenge b/c #Pakistan has an #export (not an #import) problem. 👇

d) How to grow #exports? My take is you need action in 4 fronts: #trade policy (do away with #import substitution), #exchange rate (let it be market driven), #FDI (promote, retain), #credit (stop crowding out, fix insolvency law).

1) Trade policy for export growth. If your policies give supernormal profits for selling domestically, firms will sell domestically (they won’t exports). See details here: profit.pakistantoday.com.pk/2022/05/01/imp…

2) #Export surges follow real depreciations. Everywhere. The "lack of #export surplus" is endogenous to the ER! In the LT, it’s #productivity driving #exports, yes, but to jumpstart them: a competitive exchange rate. Floating. See #Taiwan’s example. tradetalkspodcast.com/podcast/169-ta…

3) #FDI is another catalyzer of #export surges (and of #productivity). Think #Vietnam or #Poland.
For details, see here:

https://twitter.com/gonwei/status/1498181514617569280

or here:

https://twitter.com/gonwei/status/1613846853262393345?s=20&t=y2DkGbU0nz-_HnD1DDjrkw

4) #Credit – a key enabler of export growth iff (1) thru (3) above are done. For more credit to flow to #exporters, the #fiscal deficit needs to be contained (b/c it crowds out pvt sector), and #insolvency law fixed. See details in ch5 here: openknowledge.worldbank.org/handle/10986/3…

Final point: likely 1-3 are additive. Either done will help #Pakistan's #exports grow (of course do the 3 and effect adds up). 4 is multiplicative: More #credit w/o 1-3 will do very little. It’ll go elsewhere. /end