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Industrial development in Pakistan: issues and challenges

Published on 11th May, Edition 19, 2015

 

With a population of 180 million, a geo-strategic location, the required human resources and natural endowments, Pakistan has all the potential to grow as a developed industrial national. Unfortunately, it is still a developing nation even after lapse of more than six decades since it appeared on the world map as a sovereign and independent nation. Having rich in natural resources, the country has been going through major challenges and issues hitting the industrialization include growing power crisis, chronic energy shortage, high interest rate, administrative bottlenecks, bad governance, lack of institutional framework, political wrangling and worsening law and order situation.

Energy crisis

Industry has virtually held hostage by the energy crisis. The country faces an energy emergency. Gas load shedding has become a routine in major industrial cities of the country. The officials have projected a gas shortfall of 10.34 billion cubic feet per day by financial year 2015. The country’s demand for energy, according to one estimate, is expected to rise at the rate of 10-12 percent annually in the foreseeable future, which means that if this rate of increase continues, demand for energy may well double before 2015. The acute energy crisis has virtually suffocated the industry, causing widespread discontentment in the business circles. This could result in closure of more industrial units and increase in the unemployment rate in the war-torn country. The country is losing at least 2 percent of the GDP growth annually due to the power shortages.

The liabilities to the entire energy chain or circular debt continued to increase in the absence of any plan for power sector reforms. The circular debt has now reached Rs400 billion mark. The circular debt problem emerged due to difference between production cost of electricity and the tariff charged from consumers, which forced the government to provide subsidy. The government failed to bridge the gap in power production costs and the money paid by utility consumers. Higher cost of furnace oil forced the government to raise power tariff, but the consumer tariff is still believed to be less than the cost of power. The expensive power particularly for commercial and industrial sectors will further fuel the inflation pushing more people into extreme poverty in the country.

Interest rate

Under IMF pressure, the government maintained one of the world’s highest benchmark interest rates, in an economy hurt by terrorism and falling foreign investment. The high interest rate has been one of the major reasons behind the fall in the country’s industrial output. During the five-year tenure of the former government of Pakistan People’s Party (PPP), the real gross domestic product (GDP) growth averaged at 3 percent against the required rate of 7 percent, according to the Economic Survey of Pakistan for the fiscal year 2013-14.

The reduction in discount rate to single digit could provide some relief to the ailing industry.

Private sector can play a supreme role in the industrialization of the country. The execution of any industrial program depends on investment of foreign capital, coupled with technical skill. The central bank’s tight monetary policy has not allowed the private sector to play its key part as engine of growth. The increased interest rate has not only made doing business increasingly expensive but also marginalized the private sector. High borrowing costs discouraged the demand for private sector credit, which in turn decreased private investment adversely affecting the prospects of economic growth.

 

Poor governance

The quality of governance is essential for the development of human resources for industrial growth. The good governance ensures the transparency, efficiency and rationality in the utilization of public funds and national resources, encourages growth of the private sector, promotes effective delivery of public services and helps establish the rule of law. There is a strong correlation between per capita income and indicators of human development such as adult literacy, life expectancy, infant mortality, political and civil rights.

Security concerns

Today, security is No.1 issue and the primary reason raising concern among the foreign firms that have already invested in the country. The country direly needs overseas investment to bolster industrialization process. The rising violence would not only hamper the Islamabad’s efforts to attract foreign investment but also hit industrialization in the country. It will also force the foreign firms to quit their operations in the country.

The country’s industry and exports are worst hit by the unsatisfactory security situation in Karachi, the country’s industrial hub. Extortionists, target killers and dacoits have turned the country’s business hub into a crime hub. The law and order problem in Karachi has affected the business and industrial activities causing a slump in overall economic growth. The local businessmen have to pay money to the extortionists to run their businesses in Karachi. Many businessmen and industrialists have been killed for not paying the extortion money and many have moved their manufacturing units abroad. But recently there are some positive outcome as the law enforcement agencies have come out new tactics to tackle the situation and had number of culprits killed and arrested. One can still hope and look forward to normalcy.

Suggestions

The government’s industrial policy must focus on improving industrial competitiveness, especially with regard to industrial enterprises including small, medium or large. The industrial policy should be directed towards increasing the share of the manufacturing sector in the total economy. An effective Industrialization Policy should be formulated giving a vision for the industrial economy for both the short-medium and medium-long term.

The government should not try to control industrial development but it must formulate policies in consultation with the private sector, which must be considered as engine of growth. What should the government do is to improve the operating environment for private investments and sustainable industrial development. It should encourage new investments, particularly the foreign direct investments (FDI). It should improve competitiveness and enhance productivity through macro-economic management and industrial governance.

The government must ensure that the basic physical infrastructure, capital resources, human resources and knowledge resources are adequately developed with special focus on the country’s industrial growth and competitiveness. The government should formulate policies to promote the diversification of industrial production. It must remove all the impediments to industrial development, which include such government services, red tape, tax administration, commercial laws, labor issues. It must ensure optimum utilization of existing industrial capacities and bring about revival of sick and closed industrial units in the country. The country’s industrial policy should be based on the principal aim of self-reliance. The government should encourage close collaboration between public and private sectors in setting up some of the large industrial ventures in the country.

 

 

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