KARACHI: Measures taken in the last budget and trade policy to reduce the cost of doing business in the country have failed miserably, as the government was not able to contain inflation which has now moved into double digits. As of today the manufacturing sector in general and textile industry in particular are confronted with an even higher cost of doing business than a year ago.
The question is what triggered the inflation and who is responsible for such a difficult situation at a time when the country on one hand is poised for economic turnaround and on the other is exposed to severe competition globally.
A simple answer is that policymakers failed to assess the situation before hand which allowed much of the money go into non-productive sectors like real estate, speculative trading in commodities and stock markets, resulting in windfall of paper profits.
As per the definition when money supply is higher than the availability of goods and services at a given time it results in inflation and the only way to contain it is through monetary measures or through higher production to match the growing demand.
Unfortunately, the present government failed on both counts. They opted, instead to focus on positive data to show its achievements. Independent analysts and economists consider changed world order post 9/11 the most important factor that supported Pakistan’s economy.
For example the West withdrew all sanctions and allowed free grants and loans which paved the way for flow of foreign assistance. Secondly, the United States in order to check illegal traffic of money through ‘hundi’ or ‘hawala’ put some restrictions that resulted in channelizing of higher remittances through official channels.
Consequently, higher flow of funds from outside the country coupled with money expansion within the economy gave a push to the money supply. Lower interest rates further aggravated the situation.
The question is where things went wrong and who should be held responsible for such a situation because there were opportunities and challenges but we failed to avail the opportunities and face the challenges by framing such policies that could have enabled us to use huge funds in productive and real sectors of the economy.
Now if we look at our largest industrial sector — textile industry — it is perhaps the only sector which grew but the growth remained confined to BMR (balancing, modernization and replacement) activity. There are some scattered cases of expansion as well but they were out of compulsion as the WTO quota-free regime warranted of such adjustments from leading export houses.
However, this sector which earns up to 70 per cent foreign exchange through exports is also confronted with problems, including high cost of production that makes them uncompetitive in the world market. This sector is also the highest job provider in the country.
The recent measures by the State Bank to mop up excess liquidity from the market and to curb inflation took its toll over this sector. The increase in interest rates resulting in higher export refinance rates hit the textile sector hard which was already confronted with high cost of production.
About six months back export refinance rate, which had been linked with T-bills, was at around three per cent but it has risen to eight per cent that means exporters are paying five per cent more for their finances which is one of the biggest components of production cost.
The industry had been complaining that its input cost is the highest in the region which also includes cost of utilities. The condition of infrastructure is also deplorable. The quality of power supply is very poor as voltage fluctuation and load-shedding are not only causing interruption in the production but are also resulting in poor quality of goods.
Large industrial units have gone on self-generation of power but again they have to pay higher cost of every rising POL prices that further push the cost higher. The industry has to purchase water through tankers even after paying all taxes for water and other civic facilities which do not exist at all.
Another factor that has hit the export-oriented industry is the recent SRO 417 which has put a condition that sales tax refund will now be paid after consumption or export of goods. In the past it was given on purchase of raw material.
This would mean that an exporter would get his refund, if given in time, after completing his production cycle of three to four months. In other worlds a huge amount of working capital of an exporter will remain blocked with the government.
In order to meet this situation the exporter will have to depend on bank loan to keep his industry in production which will again mean higher capital cost, as average interest rate has risen between 10 and 12 per cent.
Due to rapid increase in POL prices that determines the cost of every commodity, if may be produced or grown in a farm, the wage earners continue to remain under tremendous pressure. If they manage to get equal or near amount of adjustment against the inflation or rising cost of living they add burden to the industry.
However, if they do not get any adjustment in their wages to meet the rate of inflation or high cost of living their purchasing power declines which again hits the industries that sell lesser units of their goods in the market. This is a vicious circle and a challenge for economic managers the world over.
It would have been prudent for the economic wizards of Islamabad to have framed such economic policies which could have ensured the flow of capital into productive sectors rather than non-productive sectors and such a situation would have been averted in which confront the country today. — PIR
