Critical issues related to industrial revival in Pakistan


The industrial sector has a larger potential to contribute but is on hold due to poor policy initiatives, lack of innovation and diversification in products for meeting the needs of domestic and global consumers

By M. Sharif

A steep dip of 8.49 per cent in industrial production during the first 11 months of the last fiscal year compared to the highest growth of 19.9 per cent during FY 2004-05 and the necessity of boosting industrial production, raises many questions about industrial revival in difficult times of domestic fiscal and monetary constraints, global economic recession and shrinking global trade. The government, at least theoretically, aims at pursuing an export-led economic growth to raise Pakistan’s share in global trade that during the last decade has shrunk from 0.21 to 0.13 per cent, according to WTO data. How can this be translated into something concrete and real? This question has to be at the heart of new industrial policy that the government intends to unveil before the end of the current year.

 Critical issues

Industrial sector, the second largest sector of the economy mainly comprises light and large scale manufacturing and small and medium enterprises (SMEs). It contributed 18.9 per cent towards national GDP during the last fiscal year compared to its share of 19 per cent during FY 2007-08 and 53 per cent share of services sector and 20.6 per cent share of agriculture sector. The textile sector has been earning around 60 per cent of the FX earnings from exports traditionally but during last the fiscal year it earned 54 per cent of total FX earning with a decline of $1 billion in its earnings compared to FX earning during FY 2007-08. The industrial sector has a larger potential to contribute towards national GDP but is on hold due to poor policy initiatives, lack of innovation and diversification in products for meeting the needs of domestic and global consumers, high cost of production and low quality of products.

The other contributory factors in this context are inadequate fiscal and monetary policies, lack of state-of-the-art infrastructure, poor quality of governance and human resource, inefficient use of energy and low productivity. Consequently, over a period of time industrial sector that initially grew under the shadow of state patronage did not prepare itself for global market competitiveness.

The government and stakeholders in public and private sector need to resolve the following issues on priority basis:

(1) Establishing stable political and security environment and pro-business fiscal and monetary policies.

(2) Setting clear objectives of industrial revival and growth strategy.

(3) Infrastructure deficit that includes road and rail net work, sea ports and power supply.

(4) Implementing research, development and good governance.

(5) High cost of capital required to boost investment and low FDI input.

(6) Improving on productivity, quality and lack of innovation.

(7) Attracting huge domestic and foreign investment that is required to modernise textile sector and streamline SMEs.

These issues are inter-related and can’t be addressed in isolation. They can be addressed only through a comprehensive strategy. Forthcoming industrial policy needs to address them on priority basis.

The countries that registered phenomenal industrial and economic growth in recent history or in the past had stable governments stretched over longer duration and stable political systems. Pakistan met the first prerequisite between 2000 and 2007, a long stable stretch of around seven years during which industrial growth peaked to around 19 per cent in financial year 2004-05. It is yet to fulfill the second prerequisite. Since peaking of industrial growth, it has been steadily declining because of lack of depth and resilience in fiscal, monetary and trade policies and economic growth imbalances among different sectors of the economy and regions of the country.

Development of the industrial sector focused on meeting domestic requirements of food, construction, transportation, home appliances and other needs but it hardly ventured to establish a strong base for export-oriented industries. Instead, the government encouraged increase in domestic consumption and resorted to indiscrete imports that met the needs of a few selected segments of society. As exports started stagnating during the last three years and domestic consumption also became sluggish due to erosion of purchasing power of the middle class because of the high rate of inflation and the slow down in global trade, industrial production started taking downward slide. In the mean time fiscal and monetary policies and shortage of power started taking their toll on the growth of industrial sector also. Last fiscal year proved worst for industry because of these multiple factors.

According to SBP monetary aggregated for last fiscal year, private sector lending by the scheduled banks declined by 95.58 per cent, from Rs408.4 billion for FY2007-08 to Rs18.863 billion with a massive shortfall of Rs390 billion. On the contrary public sector companies saw a substantial increase of Rs119 billion during last fiscal year but their borrowing was not meant to boost industrial sector. It was meant to finance oil marketing required for state-run major power utilities. The short fall in private sector credit was attributed to high interest rate, energy constraints and contraction in trade volume due to global recession. The business community presently eagerly waits for monetary policy effective for first quarter of current fiscal year. It is on hold and is likely to be announced by mid-August. Interest rate is likely to be decreased by around 1 per cent. It would hardly make credit from the commercial banks cheap and would still be expensive for the business community.

Industrial policy is in doldrums and is still to see the light of the day. The strategic trade policy framework for 2009-12 did not touch the textile sector. Its policy is yet to be announced. The textile sector needs a huge investment to move up from producing low tech and quality products to high quality products that have to be competitive in price in regional and international market. The new textile policy should clearly focus on value addition, competitiveness, modernisation and resource generation within reasonable time frame.

The issue of cost of electricity is likely to loom larger on industry when the government would withdraw 17.7 per cent subsidy that amounts to Rs66 billion for first six months of current fiscal year as agreed between the government and IMF. High production cost of products for domestic consumption and exports is one of the key factors to determine competitiveness of exports.

Textile is one of the examples under consideration. Textile products produced by Pakistan are less competitive than the products produced by the regional competitors. Bangladesh, a non-cotton producing country and late entrant in export market had cut prices of their products by 20 per cent to survive in global recessionary environment with the result that exports jumped by 15.5 per cent to a hit record of $12.35 billion. All other regional players of textile products such as India, China and Vietnam have witnessed decline in their exports.

The ongoing power projects, it is being feared could make electricity more expensive than at present. How would Pakistan compete in the regional or global market? This point has to be addressed in the forthcoming industrial policy. Industrial sector needs cheap electricity to bring down cost of production.

The solution lies in addressing following important areas:

(a) Reduction in cost of production by increasing tax-to-GDP ratio that should enable the government to reduce the burden of indirect taxes and subsidise electricity for industrial use.

(b) Tight monetary policy has lost its efficacy as an instrument of reducing inflation. The supply side of economy needs to be strengthened to reduce inflation. Interest rates should be brought down by at least 2 per cent to make way for greater investment in industrial sector.

(c) Development of infrastructure particularly with respect to creating more electricity and augmenting transport facilities for domestic trading and exports.

(d) Big projects of human resource development and upgrading skill level of work force in the country should be taken up with adequate foreign assistance, domestic and foreign investment to meet requirements of research and development and international standards in production of value-added products.

(e) Ongoing insurgency and militancy should be addressed at a faster pace to build investor’s confidence.

Conclusion

Revival of industrial sector is a big challenge for public and private sectors. The government should come up with the industrial policy without any further delay. The fiscal, monetary and trade policies should have one direction of giving impetus to export-led economic growth. It is possible to gain momentum in industrial growth by learning from the experience of international and regional players.

Courtesy: The News

http://jang.com.pk/thenews/aug2009-weekly/busrev-10-08-2009/index.html

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