Manufacturing deficit pulling down growth, investment

LAHORE: Directionless economic policies have forced domestic investors to look for avenues outside the manufacturing sector to earn profits that have almost dried up in most of the industries.

The investors point to year 2007 as the cut off year, after which productivity has remained range bound in almost all sectors. If we look at passenger cars, the peak was reached that year at 275,000 units.

In the last ten years, we have been moving in a band of 125,000 units to 275,000 units. The growth during the past ten years has almost been zero; since we evaluate growth on the basis of last fiscal year the car manufacturing growth has been positive in some years and negative in others.

We exported more yarn, more fabric; more garments and more knitwear in quantity terms in 2007 and since then have never achieved that peak. The increase in unit value does not mean that a country lose its quantitative share in the global markets.

The situation is almost the same in most of the other sectors, except perhaps cement and motorcycles, where there has been quantitative growth as well. With this range bound productivity, we cannot expect any entrepreneur to build further capacities.

Every sharp decline in national productivity in any sector brings some causalities wiping out weaker players from the market. This also scares prospective investors.

Some industries have gone sick because of incompetence, but most were victims of circumstances.  The first wave of large closures occurred in 2007 when Benazir was assassinated.

Most of their export containers were burnt, looted or destroyed in rural Sindh. Most of the export consignments were then withheld upcountry and were time barred when normalcy in the country returned.

The importers refused to accept delayed deliveries. This wiped out most exporters with weak financials. There was no mechanism in place to facilitate them.

In fact, the banks pounced on these affected exporters and stopped providing further working capital. This ensured their immediate demise.

One top exporter, the Chenab Group was victim of this policy as it lost 130 containers loaded with home textiles, besides paying a penalty of 2.8 million Euros as its bank guarantee for that amount was cashed by the foreign buyer.

The second wave of closures started after 2008 and continues till now. The present and the previous governments remained busy in fighting on the political front while ignoring the problems faced by the manufacturing sector.

The gloom in manufacturing is widespread across the country and in most of the sectors. It is not limited to Punjab only where the energy rates are higher.

Similar industries have closed down in Sindh, Punjab, and Khyber Pakhtunkhwa because of the inability of the manufacturers to compete both outside and inside Pakistan.

The issues are same; rate refunds, corrupt bureaucracy, heavy under-invoicing, skewed labour wages, undocumented economy, and high taxation rates. The high energy rates are an additional issue, faced by Punjab industries only.

Investment in second wave of closure remained zero; but many entrepreneurs that managed to grow during this period went ahead to buy the machines installed in closed capacities. This way they increased their capacities in order to achieve economies of scale.

However, they soon realised that it was a folly to buy used machines in an era of rapid growth in high technologies that produced highly efficient and speedy machines. They are now stuck with obsolete technologies. They need to upgrade or go out of production.

This brought the third wave of closure for the industries. These industries find no buyers for their obsolete technologies.

Instead investors with tons of cash have moved to real estate, retail or stocks. Retail or real estate does not create as many jobs as running industries could create. The current investment trend in Pakistan is creating wealth for investors but without job creation.