Posts Tagged ‘Impacts of political instability in Pakistan’

High cost of doing business discouraging investment

February 27, 2010 Leave a comment

The recent increase in power and gas tariffs is likely to put an additional burden
on the industrial sector and squeeze the gross margins of industries. The local manufacturers forecast more industrial closures and job losses over the next one year

By Mian Aqeeluddin

Before the global recession took place, there was considerable amount of investment in Pakistan as it had a liberal investment policy. However, nowadays the investment scenario has drastically changed with Pakistan losing its attraction to foreign, as well as domestic investors, due to the rising costs of doing business. There are a number of factors due to which investors hesitate to invest in Pakistan, global recession being one of them. The other main reasons consist of political instability, deteriorating law and order situation, high interest rates, and frequent power and gas outages. The recent increase in power and gas tariffs is likely to put an additional burden on the country’s industrial sector and squeeze the gross margins of industries. The local manufacturers forecast more job losses over the next one year.

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 per cent, 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 perhaps one of the few countries in the Asian region where the interest rates are very high. The country lags behind its neighbours in economic development and exports due to high interest rates and energy crisis. As compared to the 12.5 per cent interest rate in Pakistan, India’s current interest rate is at 4.7 per cent, Japan 0.1 per cent and China 5.31 per cent, thus one can clearly see the difference.

The State Bank of Pakistan (SBP)’s high policy rate has not only added to the rising business costs, but has also enlarged the size of non- performing loans (NPS) to almost Rs13,448 million (as recorded on 30th October 2009). The effect of the high interest rates resulted in losses for a number of industrial units.

Terrorism is yet another reason causing huge losses to the industrialised and trading sectors. The army is attacking the northwestern strongholds of the militants, who have responded with suicide bombings in towns and cities. The marble industry in the Frontier province and the tribal areas is severely hit by the ongoing militancy. All Pakistan Marble Mining Processing Industry and Exporters Association (APMMPIEA) revealed that 300 marble units have closed down and 250 more are on the verge of closure. The industry is said to have shed over 50,000 jobs already.

The rising political obstacles in the country are having a negative impact on the economy and stock business. President Asif Ali Zardari is under criticism from opposition parties after the Supreme Court struck down a reprieve that had protected the increasingly unpopular leader and several of his political allies from corruption charges. The ambiguity regarding corruption cases against some sitting ministers, advisors and members of parliament has created uncertainty among the businessmen. Pakistan witnessed many obstacles since the February 18th polls that took place in the year 2008, including restoration of deposed Supreme Court judges and the frequent clashes that occurred between the coalition government and former President Pervez Musharraf. After Musharraf’s exit in August 2008, the differences between Pakistan Peoples Party (PPP) and Pakistan Muslim League-Nawaz (PML-N), the two major political parties of the nation widened.

Under the IMF demand, the government decided to increase the power tariff by 18 per cent in two phases this year, i.e. 12 per cent in January and six per cent in April. The move will bring the already poor performing industries to suffer more. The high tariff and excessive power shortages have enhanced the cost of doing business and badly affected the industrial production and trading activities in the country. The country’s export oriented industry is unable to ensure timely deliveries to its foreign buyers. The loss of export orders has now become a routine, and a large number of importers from US and European Union countries have switched their orders to other regional countries.

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 per cent 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.

The trivial viewpoint that a higher tax rate will generate more tax revenue holds not much logic in the age of diversified business environment. Prevailing business tax rate of 35 per cent is excessively high. A high tax rate essentially gives a way to tax evasion and contracts business activities in the country. Tax exemption provided to the elite section of the society is unfair and needs to be removed or scaled down.

In Pakistan, practices such as red tapism and the long awaited departmental procedures are big barriers in doing business. Licenses, NICs, gas, electricity and water connections etc cannot be achieved easily. The investors have to face the insulting behaviour of the bureaucrats. Red-Tapism, corruption and malpractices have been successful in preventing easy entry of foreign investors, and those succeeding, their effective participation in economic activities. In fact, retaining investors has never been observed as an area deserving attention of the concerned departments’ officials. Many hurdles have been linked with five broad groups ranging from purchasing of land and site development to financial and executive regulations, along with taxation related matters. Investors, who are able to start up their businesses in less than eighteen months time period are considered ‘lucky’ and termed as ‘enterprising’ or having the ‘right’ connections. But, in any case they also have to live up with administrative procedures taking up about fifteen per cent of their revenues.

Our country is being governed for the last 10 years by bankers with supreme authority and they take measures which are only beneficial to the banking industry. The banking spread in the country (highest in the world) is 7.8 per cent and needs to be cut down by two per cent atleast. This will save us from the control of financial institutions like the IMF, World Bank and the Asian Development Bank (ADB). The interest rate should be brought down to a single digit. The gross domestic product (GDP) growth has declined due to an economic slowdown following the tight monetary policy. The high interest rates is the main reason behind the fall in the country’s industrial output. The downfall in auto, textile, electronic, petroleum, and other key sectors adversely affected the performance of large scale manufacturing (LSM) in the country. We have no competitive edge, as our exporters are facing a lot of difficulties due to high cost of production. Cutting interest rates to a single digit will produce multiple benefits for the economy, as it will lower the cost of doing business, give a strong boost to business and industrial activities, provide easy credit and loaning facilities to trade and industry, promote better investment and exports, and generate more tax revenue for the government. Sadly, studies highlighting the major problems and suggesting corrective measures have been falling on deaf ears.

courtesy:The News