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High cost of doing business in Pakistan

Published on 26th May, Edition 21-22, 2014

 

Presently, the cost of operating a business in Pakistan is considerably high because of incompetent and unfriendly socio-economic environment. Consequently, Pakistani businesses are at a comparative demerit in regards of operating costs against their competitors in the region. In spite of continuous representations to the government strategy adepts and top executives, no worthwhile attempt has been made towards declining the high cost of doing business in the country. The key factors of high cost of business in the country are raw material, cost of finance, utilities, technology, human resource, infrastructure and supporting institutions.

The cost competitiveness of commerce units in the country is comparatively feeble and there are no important optimistic signs of development over the years. The cost of doing business is rising on the daily basis and touches an alarming level making Pakistan’s products uncompetitive in the foreign market. In the country, gas and electricity tariff and interest rate are much higher than its competitors in the region. The interest rate in Pakistan is 10 percent, whereas it is 7.25 percent in Bangladesh, 6.50 percent in Sri Lanka and 8.0 percent in India. Similarly per unit electricity tariff in the country is high as against to other regional states. Currently, labor wages/hour in Pakistan is $0.51, $0.22 in Sri Lanka, $0.20 in Bangladesh and $0.30 in Vietnam. The transportation and logistics cost of items exported from Pakistan is as high as 15 percent of the item cost against 8 percent in the developed states.

BUSINESS RANKING OF PAKISTAN
BUSINESSRANKBUSINESSRANK
Starting a business105Dealing with construction permits109
Resolving insolvency71Getting electricity175
Enforcing contracts158Registering property125
Trading across border91Paying taxes166
Getting credit73Protecting investors34

Pakistan where property rights are poorly protected and ill-defined, the agency costs make it very tough to do business. Internationally, it has been revealed that

Pakistan stands at 105 in the ranking of 189 nations on the ease of starting a business. In terms of enforcing contracts, there are only two other states behind Pakistan. In Pakistan, most businesses are either earning abnormal profits or others are economically in loss. On the other hand, moral hazard on part of staffs/employee is a huge challenge in doing business in the country.

For fixed wage employment agreements, administering costs are prohibitively high. Pure incentive-based employment agreements are not popular among employers. In this respect, (NTCIP) (National Trade Corridor Improvement Program) is being implemented in order to decline the cost of trade and transport logistics and bring the services to foreign standards, which will eventually decline the cost of doing business in Pakistan.

Recognizing its key role, the agriculture sector needs to be supported for ensuring food security, creating overall economic development, declining poverty and the transforming towards industrialization. It is the policy of the banks to contribute concerted attempts which would offer the environment necessary for progress and investment to take place in Pakistan.

Furthermore, bank’s focus on improving access of the targeted segments to financial services would be critical to supporting economic transformation and sustainable development.

INTEREST RATES (%)
COUNTRYCURRENT RATEPREVIOUS RATELAST CHANGE
China6.06.31Jul 05 2012
India8.08.50Apr 17 2012
South Africa5.05.50Jul 19 2012
Turkey5.756.25Aug 05 2011
United Kingdom0.501.0Mar 05 2009
United States0.251.0>Dec 16 2008
Inflation

The year-on-year (YoY) CPI has remained volatile during FY2014. It rose till November 2013 then fell for few months before rising again to 9.2 percent during April 2014. The average CPI for July-April, FY2014 is 8.7 percent; higher than the year’s goal of 8.0 percent. The key cause for this volatility is unpredicted movements in food rates and alters in monitored prices. The core inflation, however, has remained quite stable at approximately 8.0 percent over the previous 12-month. However, the SBP adepts predict average CPI to remain around 8 percent during FY2015, barring any exogenous shock.

Deficit financing

Despite a deficit in tax collection compared to the budgeted goal, the Government of Pakistan has been able to contain the fiscal shortfall at 3.1 percent in July-March, FY2014. Consequently, government borrowing for budgetary support from the banking system has declined to Rs276 billion during 1st July-2nd May, FY2014 as against to Rs1,021 billion during the same period of previous year. In particular, government borrowing from SBP explains a net retirement of Rs287 billion as against a rise of Rs393 billion previous year. Furthermore, the government of Pakistan was also able to keep its borrowings from SBP below the IMF target for close-March 2014.

 

Interest rate

Presently, the central bank of Pakistan in a policy declaration proclaimed to maintain the interest rate at 10 percent which is still high in the world. SBP mentioned that the state of the national economy has improved but still there are many issues. It stressed for the requirement of containing the surging inflation.

Conclusion

No doubt, urgent investment is required to eliminate these impediments opening up development opportunities for large and small scale enterprises. Improving transport and logistics facilities is a prerequisite for declining cost of doing business and boosting economic development in Pakistan.

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