Businesses in Pakistan have never faced a situation like this in the past. Many have no idea about how to cope with it
he economic outfall of political uncertainty has hit Pakistani businesses at the worst possible time. The businesses are facing global recession; their supply chains have been badly hit by container shortages and highest ever transport charges. Global commodity rates remain high.
On the domestic front, the economy is in a complete mess. The rupee has been declining, the inflation is at a historic high. The bank markups have broken all previous records. The power tariffs are very high, and electricity supplies erratic. The global natural gas prices have gone through the roof and the government lacks the resources to fund the imports.
The foreign exchange reserves are low. The international lenders and friendly countries are hesitant to provide loans as there is no certainty about how long the present regime will survive.
Political instability always creates difficulties for an economy but in an unstable world the difficulties are multiplied. Never before has the threat of a possible default by Pakistan loomed as large as now. In a gloomy global economy each country needs a stable government capable of exerting its writ and capable of taking difficult decisions. A well governed economy deals with the crisis in a better way than an unstable government afraid of taking the right decisions. The present regime and its predecessors have been focusing on their survival rather than reforming the economy.
Businesses in Pakistan have never faced such a situation in the past. Many have no idea about how to cope with it. Take, for instance, the turmoil in the currency market. The rupee has recently traded at 240 against the dollar in the inter-bank market. Only three months ago the parity stood at 200:1. The cost of all imported products and raw materials has shot up by 20 percent in three months.
The car manufacturers have jacked up their prices by an average 18-20 percent over the last 90 days. They have even stopped taking orders as they are not sure of the value the rupee will be traded at in the next three months when the deliveries become due.
If the IMF approves its staff level agreement in two weeks. The decline in the rupee value would halt. In fact, it is hoped that it will start gaining value as the withheld assistance from the World Bank, the Asian Development Bank and some friendly countries will also start flowing. If the inflows are sustained the rupee might gain 20 to 30 points against the dollar.
The raw materials or components of cars and other industries released at the current rates will be used in three months. The consumers will demand a reduction in prices. However, if the IMF approval is delayed or is refused there will be another run on the rupee. Many businessmen are not prepared to operate in such tricky situations. They will likely choose to wait and see.
The exports have registered a 25 percent decline in July. The cement production has dropped by 44 percent. Some car manufacturers have announced a shut-down of factories for up to two weeks in August. The imports have fallen by over 33 percent. In view of the precarious foreign exchange reserves the State Bank of Pakistan has created technical hurdles in the opening of new letters of credit. The shortage of raw materials has started pinching the production lines. This has further intensified pressure on the rupee. Most of the businesses are looking for protection. The political uncertainty has intensified the rot.
The shortage of raw materials has started pinching the production lines. This has further intensified pressure on the rupee. Most of the businesses are looking for protection.
All major trade associations have sent SOS messages to politicians asking for negotiations for a consensus on economic issues. If achieved, this will remove some of the uncertainty. The Lahore Chamber of Commerce and Industry, the Karachi Chamber of Commerce and Industry, and more recently the All-Pakistan Textile Mills Association have asked the rival political parties to sign a charter of economy to ensure continuity of the policies.
Investors will be able to plan long-term industrial projects if they have guarantees that sector-specific or general industrial policies would not change for 10-15 years. Currently, the maximum life of a sector-specific policy is five years. However, policies get changed even by the governments that approved those. Few policies survive a change of governments.
In an unstable political environment, the government in power tends to lose its grip; the hoarders, manipulators, speculators and smugglers have a field day. The exploitation of the poor increases. Prices continue to rise even if there is ample supply and go out of hand if there are shortages. Genuine businessmen suffer and crooks rule the markets. After prolonged suffering even initially honest businesses are forced to adopt unethical practices to survive. This is happening in Pakistan currently. Tax-compliant industries and businesses are in trouble and those practicing tax evasion and unethical practices are in the driving seat.
It is time to show solidarity at the political level and support decisions that are essential for sustained growth. If politicians unite to take a stand against smuggling and support the government in power, smuggling will decline rather quickly. Strict government action can make it impossible for smugglers to dispose of their inventories. For this, raids on outlets selling smuggled goods have to be supported by all political forces. Only eliminating smuggling can give the economy at least a 20 percent boost in revenue and a 10 percent boost in local production. This can only be achieved through political stability.
In testing times like these, there must be a strict check on under invoicing. This menace eats away millions of domestic jobs. The under-invoiced goods are cleared at a very low import price. The import policy in all countries imposes some duties on imported goods to protect the domestic industries. However, the percentage of general sales tax is the same. If an item worth Rs 100 is imported at an under invoiced value of Rs 10 (it usually ranges from 10-25 percent), the duty payment is reduced to Re 1 (from actual Rs 10). The sales tax is levied on duty paid value which in case of under invoiced item would be only Rs 11 instead of Rs 110 (Rs 100 actual value and Rs 10 duty).
The unethical importer will then pay the standard 17 percent sales tax. The actual sales tax should be Rs 18.7. The domestic manufacturers producing the same product at a globally competitive price of Rs 100 for that item would be paying Rs 17 as sales tax. The genuine manufacturers will slowly fade out and only those under reporting production survive. Millions of jobs have moved away from Pakistan and hundreds of billions of rupees are lost every year in revenues as a result. Unstable governments in Pakistan lack the muscle to act against the crooks that have political influence as well.
The writer is a senior economic reporter