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Is there any incentive for investment?

Published on 16th June, Edition 24, 2014


Even a cursory look at the budget proposals suggest that the entire focus of the government is on revenue mobilization rather than enhancing size of GDP and accelerating growth rate. Though, the incumbent government aims to achieve a double digit growth the necessary impetus are missing, the most obvious being the proposed allocation for the public sector development program (PSDP). Historically, the successive governments in Pakistan have been making huge allocations but actual spending have remained paltry. Experts attribute this dismal performance to: 1) the governments have been prompt in curtailing PSDP spending to overcome budget deficit but hardly making any attempt to curtail the extravaganzas and 2) those responsible for executing PSDP neither have the vision nor the capacity to undertake right plans, as the entire focus remains on achieving political mileage.

Those in power may term this ‘a punch below the belt’ but their acts talk louder than their words. The top of the agenda item should have been overcoming energy crisis, going worse from bad but the focus has been on building motorways, metro bus for the residents of Lahore, distribution of lap tops and even taxi scheme. The PML-N leadership claims that the first thing they did was payment of nearly half a trillion rupees to clear circular debt. The move may be adorable but around the same quantum of debt has swelled in one year, simply because no corrective measures were taken to curtail electricity and gas theft and improve recovery. On the contrary electricity and gas tariffs have been increased in the name of ‘recovery of full cost’. Policy planners have failed in ensuring uninterrupted supply of electricity and gas, despite having ample electricity generation capacity and gas production in the country. As long as unabated theft of electricity and gas continues, cash flow of utilities can’t be improved.

Around the world countries cut down lending rates to usher new investment for increasing productive facilities and creation of job opportunities. As against this the successive governments, including present PML-N government, prefer to keep lending rates high to curb inflation in the country. They seem to be completely ignorant of the fact that Pakistan suffers from cost pushed inflation. Therefore, the focus should not be on keeping interest rate high but bringing down cost of doing business. Pakistan enjoyed competitive advantage in certain sectors, but lost this over the years because of bad policies followed by the economic managers. In Pakistani manufacturers can’t compete in the global market simply if capacity utilization continues to hover around 50%. Two of the most obvious examples are textiles and clothing and sugar industries. Poor capacity utilization of spinning sector is partly due to prolonged outages but mainly because failure of the sponsors in undertaking BMR. Most of the spinners are still involved in producing coarse counts of yarn, which is worst use of superior quality cotton produced in the country.


In Federal Budget for 2014-15 there is a proposal to establish an Rs80 billion Textile Fund. Prima face this seems to be a good move but one could comment on it only when details are made public. The move can be attributed to a perception that textiles and clothing industry is the backbone of this country that also has the largest share in total exports of the country. However, many critics believe that the industry has thrived on the crutches of government support and textile quota regime. Pakistan is among the top five largest producers of cotton but its share in global textile trade is negligible. The country is classified as producer of low prices and low quality products, bulk of textile exports fall in the category of raw material/intermediate goods and unit price realization is the lowest. Pakistan’s textile export is even less than Bangladesh, a country that does not produce cotton. While Bangladesh has thrived by exploiting its ‘made up industry’ that is labor intensive, Pakistani policy planners still suffer from a perception that spinning and weaving is the forte and completely ignoring made-ups manufacturers, who may be small in size but the real earners of foreign exchange.

It is also necessary to remind the policy planners that the country will not be able to get any significant benefit from GSP Plus status granted by the European Union. It is obvious that at the best this can help Pakistan earn one billion dollars, mainly be making additional exports of textiles and clothing. However, no one takes into account that Pakistani manufacturers just can’t compete in the global markets because of high cost of production and by exporting intermediate products like yarn and coarse counts of yarn. However, the recent interest of Chinese entrepreneurs in forming joint ventures or buying out the existing units suggest that they have a grand plan and find credible reason to invest in Pakistan’s textile and clothing industry.

In these pages it has been highlighted again and again that sugar industry is the driving engine of the rural economy. It also has the potential to produce around 3,000MW electricity. Discouraging export of molasses and production of ethanol can yield two benefits: 1) containing use of natural gas in vehicles by switching over to E-10 (motor gasoline containing 10% ethanol) and also bringing down country’s oil import bill. However, capacity utilization of sugar mills has to be improved as it currently hovers around 50 percent.

Fertilizer units have to be supplied the required quantity of gas to enable these to operate at optimum capacity utilization and produce 1.2 million tons surplus urea that can help in earning additional US$600 million annually, on top of that the country will also be able to save around the same amount currently being spent on import of urea, in fact the country will get a net impact of US$1.2 billion. This additional foreign exchange can use used to pay the difference in cost of furnace oil and gas. Conversion of power plants to indigenous coal will also help in containing energy import bill.


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