With no ease of doing business, industry remains a loser in 2019

ISLAMABAD: Industry hit a rock-bottom in terms of performance during the calendar year 2019, as dizzying borrowing cost, devaluation of rupee, disadvantageously high energy tariffs, etc, continued to throw spanners in the works of this sector, crippling its productivity and discouraging new investment.

To qualify for the International Monetary Fund’s (IMF) $6 billion Extended Fund Facility (EFF), the government carried out the aforementioned front-loaded adjustments by way of reckless fiscal as well as monetary tightening and devaluation of currency to boost exports and cut imports.

These instruments were applied to achieve fiscal sustainability and contain balance of payment issues, but their adverse impacts are evident from the poor performance of not industry but other sectors too.

This ultimately weighed heavy on the GDP (gross domestic product) growth, which further squeezed businesses, their incomes, jobs, led to higher inflation, and dragged down all the government revenues on top of everything else.

Although at that time, going to IMF, being a last resort was not a bad decision, yet critics believe the government should have taken these decisions gradually as its railroading these adjustments in too much haste has left almost all the economic sectors under a tremendous stress. Besides, the government also increased the gas and electricity tariffs and another hike is in the pipeline.

Since Pakistan entered into the IMF programme in July 2019, some more steps were taken. Like the SBP’s (State Bank of Pakistan) discount rate was increased to 13.25 percent, rupee was devalued to current Rs155 to the US dollar against Rs140 in January 2019 -a decline of 10.7 percent during this calendar year.

Earlier, in December 2017, the previous government at the twilight of its tenure started devaluing the rupee from Rs105 on December 8, 2017 and brought it down to Rs116 till the last day of its five-year tenure (a decline 10.47pc). Then the caretaker government further devalued it to Rs123.4/dollar -till the day the PTI (Pakistan Tehreek-e-Insaf) government was sworn in (August 18, 2018).

Since then, till date the rupee has further devalued to current Rs155/dollar (almost by 32 rupees) or 26 percent.

Since December 2017, the rupee has been devalued by 47.62 percent, but it did no good to economy and rather increased our debt burden by trillions of rupees amid static exports. The Fund had always asked Pakistan that its rupee was overvalued and should be devaluated for increasing exports and curtailing imports, but despite depreciation, there had been no growth in exports, while imports to some extent reduced but at the cost of slowing down growth of businesses, dependent on import of raw materials.

During last one year, the policy rate has been increased from 8.5 percent to 13.25 pc. The businessmen and industrialists term the higher interest rate as “the mother of all economic evils”. As these companies’ and businesses’ repayments and interest on their debts/liabilities has increased. And they are unable to borrow from commercial banks and this situation has led to contraction of their businesses.

It was the reason the public sector borrowing from banking sector turned negative and instead of borrowing they are now retiring the old debts at a interest high rate. This has drastically disturbed the balance sheets of every company and sector.

These major issues have increased the cost of production, while squeezing the value of assets and capital. Investors have gone into a dormant mode, waiting for stability in currency and ease in interest rates to take future business decisions.

The manufacturing sector is a major source of jobs creation, but its growth remained stagnant during the year under review. Its share in GDP has come down to 13 percent from earlier 13.5 to 13.8 percent, recorded over last 10 years.

Major component of this sector is Large Scale Manufacturing (LSM). Its growth has steeply fallen since December 2018 and since then has been negative every consecutive month.

During previous years, energy shortage was the main impediment in the growth of the sector; however, this issue was resolved during the last government with the addition of 11,000 megawatts (MW) to the system but still power transmission constraints were there. The system was able to transmit only up to 19,000MW. The incumbent government made investment and took it up to around 24,000MW and some other projects are also under construction.

The PBS data showed that in December 2018, the LSM growth started falling by recording negative growth of 11.74 percent, in January 2019 (-1.45 percent ), February (-1.44 percent), March (-11.31 percent), April (-8.09 percent), May (+0.25 percent), June (-5.26 percent), July (-5.88 percent), August (-6.23 percent), September (-5.63 percent) and in October 2019, LSM growth was recorded at negative 7.97 percent. During first four months (July-Oct 2019/20), average LSM growth was negative 6.48 percent due to tight monetary and fiscal policies and devaluation of rupee, while auto, cement, and steel were the most affected sectors.

As far as hydroelectric power generation is concerned, in 2009, a record electricity generated from the cheapest and the most environmental-friendly sources was supplied to the national grid, besides initiating construction work on Mohmand Dam in May this year after five decades.

The hydel power stations, owned and operated by WAPDA (Water and Power Development Authority) provided 34.678 billion units of hydroelectric power - highest-ever contribution- to the system in 2019.

This quantum of generation is 6.321 billion units more compared to that of the last year’s 28.357 billion units. The optimal operation of three hydropower projects, completed last year in a phased manner, proved to be a good omen for hydroelectric generation in the country, since these projects alone generated 9.372 billion units cumulatively during their operation in 2019.

This includes 4.741 billion units from Tarbela 4th Extension Hydropower Project, as many as 4.519 billion units from Neelum-Jhelum Hydropower Project, and 0.111 billion units from Golen Gol Hydropower Project. Rest of generation was contributed by other hydroelectric power stations with Tarbela Hydel Power Stations adding 10.831 billion units, Ghazi Barotha 6.594 billion units, Mangla 4.005 billion units and others 3.986 billion units.

WAPDA also succeeded in achieving vital targets for construction of mega dams to avert looming water crisis in the country. In this regard, the construction of Mohmand Dam commenced on May 2, 2019. Mohmand Dam is the first mega multi-purpose dam undertaken during the last 51 years after Tarbela, construction of which had started way back in 1968.

Similarly, the tedious evaluation of bids for consultancy services as well as construction works of gigantic Diamer Basha Dam is almost complete. Construction of this mega project is likely to start in next two months.

Yet in another significant development, the Prime Minister has also approved Sindh Barrage Project this year to address water-related issues downstream Kotri Barrage.