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Born of heavy industries in Pakistan – lack of capital a major obstacle

Published on 11th Aug, Edition 32, 2014

 

Textile sector hit hard due to high interest rate, electricity, gas outages

High interest rate, political instability, deteriorating law and order situation, frequent power and gas outages and high power and gas tariffs are not only hindering growth of investment but also putting an additional burden on the country’s industrial sector apart from squeezing the gross margins of industries.

In Pakistan lack of capital is a major obstacle in the way of establishment of heavy industries. The Pakistani society is mostly consumer-oriented so the savings rate is hardly 13 to 14 percent, which is very low. On the other hand, banks follow stern conditions and tiresome procedures while advancing loans to consumers. Mostly bank loans are granted to affluent persons while the smaller businessmen are dejected in a number of ways, for example, by charging higher interest rates.

Pakistan is one of the few countries in the Asian region where the interest rates are high. The country lags behind its neighbors in economic development and exports due to high interest rates and energy crisis. As compared to the current 10 percent interest rate in Pakistan, India’s current interest rate is at 4.7 percent, Japan 0.1 percent and China 5.31 percent, thus one can clearly see the difference.

Cost of doing business in Pakistan has been increased further by poor infrastructure. Transport depends on CNG and oil; both prices have recently risen to a higher level. Pakistan is producing about 20 percent of its oil requirement. But due to failing efforts to find new reserves and its lavish consumption, this percentage seems to fall in the coming years.

Experts told PAGE that interest rate is the cost of borrowing money. When interest rate increases the overall investment is reduces. Most of the businesses invest partially or wholly is credited. When there is increase in the interest rate companies have to put more resources to payoff this investment cost. Income is the monetary worth of the entire goods and services produced generally within a year in an economy. This income is as well the earning of all factors of production of the economy.

According to them, high interest rate might lower investment because it turns out to be extra expensive to have a loan of money, while a raise in income promotes high investment. Still if a firm decides to employ its personal finance in an investment, the interest rate in this stands for an opportunity cost of investing those finances rather than providing out that quantity of money for interest rate. A continually declining trend in investment and economic growth rate are the key problems that adversely affect economy of Pakistan for the last decade.

 

The Pakistan textile industry contributes more than 60 percent of total export and largest manufacturing sector of Pakistan’s industry. But this sector faces crises of electricity and interest rate due to which its growth decreases. Due to this reason, true potential of this sector cannot be tapped. It may be noted that the total export of Pakistan textile industry is around US$9.6 billion. The textile sector contributes approximately 8.5 percent of the gross domestic product (GDP) or 46 percent to the total manufacturing. In Asia, Pakistan is the 8th largest exporter of textile products. Textile industry provides the employment to 38 percent of the total work force in the country.

Mian Faraz Alam, a textile industrialist talking to this scribe said that electricity is very important in any industrial activity. However, its availability is not unlimited in Punjab. Electricity crisis, as well as high cost of fuels disturbs the proper supply of electricity. The textile industry uses the 38 percent of electricity in chemical processing 34 percent in spinning, 23 percent in weaving, and 5 percent for other miscellaneous purposes.

According to him, the textile industry currently faces the problem of shortage of electricity and high interest rate. Due to the shortage of electricity and high interest rate, the cost of production of textile industry increases because the production of the textile industry is decreases and fixed cost of the industry remains the same. The factories operate less time due to electricity shortage and production is also less. If the factories generate private electricity than the cost of electricity is high. A huge amount of money is required for the purpose of generating the electricity. In this way there is a problem, that amount invest in the generation of electricity or operations of the production of textile.

In the face of narrow tax base, a declining tax-to-GDP ratio, the businessmen are facing pressure due to high interest rate coupled with high cost of doing business in the country. Rising interest rates, spurred by DR hikes, translate into high cost of doing business, turning industrial output, commercial operations and exports more expensive and less competitive. At the same time, the consumer, who is supposed to get its benefit, if and when inflation declines are losers.

The enabling environment for private sector development needs to be further strengthened within an improved policy and regulatory framework that consists of a defined industrial policy, competitive policy, an investment strategy, and stronger and capacitated regulatory institutions in key sectors of the economy. The government needs to redress the problems faced by the private sector included energy shortage, high utility tariffs, regressive taxation, high interest rate and surging inflation, which are the major impediments in expanding business activities.

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