High cost of doing business and the energy crisis has crippled the industry over the years
There are many examples where countries have achieved growth through large-scale industrialisation. In Pakistan, state-led industrialisation was started during President Ayub’s era in the 1960s but later on the sector predominantly came under the control of the private sector.
Asad Sayeed, senior economist, who researched on industrialisation during Ayub’s era as part of his Ph.D thesis, says it could not sustain for the reason that the politics of the time could not sustain it. "It generated vertical and horizontal inequalities. Horizontally, between East and West Pakistan and vertically wage growth was low or stagnant and profits were very high. This created a reaction at a time when the left was in the ascendant."
The few State Owned Enterprises (SOEs) that exist at the moment are deep into debt. The private sector does not want the state to make unnecessary interventions but it always demands long-term industrial policies.
The industry wants the state to protect its interests, make it competitive, save it from the negative effects of smuggling and dumping of goods by different countries, keep the prices of industrial inputs, including fuel and electricity, under control, etc.
The last Economic Survey reveals that the contribution of the manufacturing sector in Gross Domestic Product (GDP) is 13 percent which is far less than the desired level. The manufacturing sector has suffered over the years due to various reasons that include shifting of money to the real estate sector, stock market, increase in the cost of doing business, the prolonged energy crisis and non-availability of easy loans for expansion of industry and up-gradation of machinery.
The spokesman of Pakistan Business Council (PBC), a business policy advocacy platform, says Pakistan needs a fresh industrial policy to promote employment, value-added exports and favour local production over foreign imports without which a turnaround is not possible.
Many industries, he says, could not develop due to dependence on imports and lack of an effort to develop local products that can replace them. Pakistan’s domestic market of over 200 million consumers provides an opportunity to the industry to develop scale and competitiveness. "When you produce in large quantities, the unit price comes down and you can export excess produce due to competitive cost," he adds.
As per the Economic Survey of Pakistan, import growth came down dramatically and exports grew faster than imports in all four quarters of 2018. Regulatory duties imposed on luxury items, combined with the imposition of a ban on import of furnace oil were among the policy responses to curb imports in Pakistan. Beside, the Supplementary Finance Act 2018, passed in October last year, adjusted regulatory duties on selected luxury goods to reduce the trade deficit. For example, a flat rate of USD 75 on imported mobile phones valued between USD 350 and USD 500 has been introduced.
Anis ul Haq, Secretary All Pakistan Textile Mills Association (APTMA), terms the absence of long-term industrial policy a major cause for hampered growth of the industrial sector."There are no industrial parks on the pattern of highly industrialised countries. The infrastructural development has focused mainly on roads and coal-based power plants."
Haq says the high cost of doing business and the energy crisis has crippled the industry over the years, giving way to cheap imports from countries like China or influx of smuggled goods. "The rupee devaluation should have increased exports but the issue here is that our raw material, furnace oil, and LNG are imported in dollars."
He points out that many industries have shut down because they could not compete with Chinese goods in price. "For this very reason, there is an increasing demand for revising terms of Free Trade Agreement (FTA) with China because it has benefitted the most from it and Pakistani exports have remained limited."
Lahore Chamber of Commerce and Industry (LCCI) President, Almas Haider, points out that industrial growth can give boost to country’s exports which are presently limited to four to five sectors only. "Growth and development of other industries will definitely improve country’s product base both for domestic consumption and exports," he adds. Pakistan’s large-scale manufacturing sectors include textiles, pharmaceuticals, engineering, iron & steel, ceramics, footwear, tyres manufacturing and mining.
A 2018 study, Contours of a New Industrial Policy by Pakistan Business Council sums up the perennial issues harming the industry. "Disproportionate burden of taxes on industry, rampant under-invoicing, misdeclaration of imports, blatant availability of smuggled goods, a fiscal policy that relies on imports for revenue and fails to encourage capital formation and consolidation, together with knee-jerk measures to meet tax revenue shortfall have thwarted the growth of industry," it states.
"Our exports are basic and not value added. This is mainly because we do not have an industrial policy that would diversify the industrial base and create industries with the aim of becoming exporters in the future," says Sayeed. Apart from a few areas, Pakistan’s export profile has remained stagnant for a very long time and is dominated by textiles and garments, he says. "This textile industry it seems has lost market share to Bangladesh, Cambodia, Laos, Vietnam, etc. And once you lose market share it is very difficult to regain it," he adds.
Anis ul Haq adds that lack of credit facility for the industrial sector is another cause for the mess. "In the past, there were financial institutions like Pakistan Industrial Credit and Investment Corporation (PICIC) and National Development Finance Corporation (NDFC) but now these are extinct and the government has become the biggest donor of loans."
One of the main reasons investment in manufacturing is low is because of the real estate market. "Anyone and everyone with capital is interested in investing in land and they make a handsome return on investment in the short to medium run," Sayeed points out, adding, "to run a manufacturing concern which is competitive requires hard work. And when you have other avenues for profit making, why invest in industry?
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There was a time, Haq says, when the share of the manufacturing sector in the credit available in the market was 30 percent and that of the government was 27 percent. "Today the share of the manufacturing sector has shrunk to 16 percent and the share of the government has increased to 60 percent. Credit is important as the industry is always in need of modernisation and upgradation to stay competitive."
Another important issue to Sayeed is that Pakistan’s financial markets do not support industrialisation. "There are virtually no long-term lending instruments. In the past there were specialised institutions, such as NDFC, PICIC, Industrial Development Bank (IDBP), and BEL that facilitated long-term financing for industry and infrastructure. They were all privatised and merged with banks that concentrate on lending to government or for short-term financing. The baby was thrown out with the bath water. To industrialise once again, deep rooted structural changes are needed. And unfortunately none are on the anvil."