Tackling an economic crisis

Impact of the recent inflation has raised serious concerns for the manufacturing sector.

Tackling an economic crisis

Inflation can be caused by many factors. Pakistan’s annual inflation rate has shot up to nine percent by the end of September (from 8.4 percent in the previous month). According to economists, the chief causes behind the crippling inflation seen recently include devaluation of currency, increased money supply, pandemic, energy prices, low exports and high imports, and policies and regulations introduced by the current government.

The impact of inflation on the manufacturing sector has raised serious concerns for the industry – which plays an important role in the economic development of a country, as improvement in the manufacturing sector leads to an increase in income and reduction in poverty.

In the current scenario, the combination of devaluation and cost-push inflation is creating serious challenges for the industry, which has to now focus not only on increasing exports but also on keeping prices of goods in the competitive bracket at both local and international levels.

Costs of business have increased so much that investors are now considering either taking their investments out of the country or shutting down entirely, former vice president and regional chairman of the Federation of Pakistan Chambers of Commerce and Industry (FPCCI), Manzoor-ul-Haq Malik tells The News on Sunday (TNS).

“Devaluation has had a devastating impact on the cost of machinery, technical services, and raw material”, says Malik. “More than 70 percent of the industrial raw material is imported. The remaining 30 percent too is affected by energy and transportation costs. Consequently, we have only a ten percent margin for local raw material. This ten percent cannot save any country’s economy if you let the open market mechanism decide the fate of your exchange rate,” he adds.

While criticising the government’s open market approach in fixing the exchange rate, Malik says that this policy has had a huge impact on foreign investments. “We have been witnessing tremendous depletion in foreign investment over the last few months”, Malik claims.

Economists and industrialists believe that certain policies of the government can also result in inflation. Sometimes governments are comfortable with a price hike as it means an increased tax collection.

The Federal Board of Revenue (FBR) collected Rs 4.725 trillion in taxes during the 2020-21 fiscal year with an 18 percent growth, which is better than what was expected. For the current fiscal year, the FBR has set a target of 23.4 percent growth in tax collection.

“The government is not bothered by the tremendous rise in inflation. It gets to collect more in sales tax and withholding tax when the prices rise,” says Manzoor-ul-Haq Malik.

“The government is not bothered by the tremendous rise in inflation. It collects more in sales tax and withholding tax when the prices rise,” Malik explains.

Some investors say that investing money is also an effective tactic to beat inflation. A large number of industrialists have been investing in real estate which has resulted in a boom in this sector during the last few months, states real estate developer and economist Gohar Majeed.

Considering market trends, investors are of the opinion that real estate is a reliable sector to invest in right now, especially to cover rising prices, according to Majeed. “Investors are pulling their investments out of formal industrial units to invest in real estate; this shows that the circumstances are not favourable for manufacturing,” he adds.

Nevertheless, the current boom in real estate seems temporary and might disappear soon because of FATF’s (Financial Action Task Force) latest instructions to regularise this sector as soon as possible, according to Majeed. Consequently, “real estate is also going to face a sharp decline in investment soon”.

Meanwhile, Pakistan’s trade deficit widened by 100.6 percent in the first quarter of 2021-21 fiscal year. The provisional data released by the Pakistan Bureau of Statistics shows that the trade deficit has swelled to $11.66 billion between July and September, 2021 – compared to $5.81 billion in the same quarter last year.

Only a considerable surge in exports can make the rapidly deteriorating economic situation of the country better, according to Lahore Chamber of Commerce and Industries (LCCI) president Mian Nauman Kabir. “The government has to introduce a solid economic plan to do so. It’s time the government helped manufacturers invest in unconventional products to increase exports and reduce imports”, he tells TNS.

Depending on one or two sectors like textile cannot strengthen a feeble economy like ours, he adds. In addition, the government must take steps to contain the free fall of rupee, Kabir suggests.

Industrialists like Malik believe that the Taliban government in Kabul has also brought serious challenges for our economy. “Both local and foreign investors are reluctant to invest during uncertain times as it is very difficult to predict when and how the regional security situation is going to get settled,” he adds.

Apart from this, a bill moved by 22 Republican senators in the United States Senate has also raised serious concerns for the Pakistani business community. Through this bill, the US senators have demanded a probe into Pakistan’s alleged role in the Taliban’s takeover of Kabul and proposed sanctions accordingly. The very next day Pakistan stocks fell by nearly three percent and rupee reached a historic low.

“It will be an irreparable blow to our sluggish economy if the US Senate imposes any sanctions on Pakistan,” Mian Nauman Kabir says. “The Pakistan government must chalk out a comprehensive plan, in advance, to deal with any unwanted political and economic crises”, he states.

The writer is a staff member. He can be reached at [email protected]

Tackling an economic crisis