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Manufacturing goods for domestic markets

Updated October 07, 2013
- File Photo
- File Photo

The Board of Investment is working on a proposal to identify areas for investment in manufacturing, which can cater to domestic needs that are currently being met by imports.

This is part of a policy to reduce external vulnerability that is resulting in a chronic balance of payments crisis.

The import bill has soared following trade liberalisation, and this calls for investment in import substitution industries in areas where the country has a domestic advantage.

In the early 1980s, the import substitution policy was replaced by export-led growth and industrialisation. But this policy has miserably failed to promote exports (to correct chronic trade imbalances), and instead created an imported-oriented economy.

The chairman of the Board of Investment (BoI), Muhammad Zubair, says the government has evolved a three-year strategy to encourage investment in commodities that can be easily manufactured in the domestic market. More investment will be lured into the dairy sector and other food items that are currently being imported.

The investment policy will be unveiled very soon, as a three-member committee headed by planning and development minister Ahsan Iqbal is giving final touches to the policy recommendations, he added.

To implement this policy, Zubair said the BoI was restructured on the basis of sectors and regions. For example, a separate desk was established to promote investment from Japan in all areas. Similar desks have been established for other regions, which can be potential areas for attracting foreign investment.

At the moment, the investment-to-GDP ratio is very low, and the BoI plans to increase it to 23 per cent over the next three years, for which foreign direct investment (FDI) amounting to $24 billion is being targeted.

But such a huge FDI inflow appears to be unlikely. While going by the past experience of the PML-N government, it seems likely that much of the foreign investment may go into the privatisation of state-owned enterprises.

If this is the case, and FDI inflows land in privatisation deals, it will have the least impact on development. Only investment that goes into new greenfield projects can create additional employment and generate new economic activity.

Therefore, FDI inflows into greenfield projects, especially into those products that are currently being imported and which have a ready domestic market, will be deemed a success.

Mr Zubair claims that the government plans to increase FDI flows from the current $1.4 billion to $6 billion per annum.

But this would be a serious challenge for the government, with the current state of ‘ease’ of doing business in the country. Pakistan stands at 107 in terms of ease of doing business. “We want to bring it down to 50 or 60 per cent,” Mr Zubair claimed, adding this will improve investors’ confidence as well.

To achieve this target, the government will have to undertake some effective reforms. Pakistan has to do away with statutory regulatory orders and simplify tariff rates.

And to encourage manufacturing, it would have to give sufficient support to nascent industries in order to reduce reliance on imported goods.

According to the recent World Economic Report, the burden of government regulation in the country deteriorated from 62 to 82 in 2013. The efficiency of the legal framework in challenging regulations — or how easy it is for private businesses to challenge government actions and/or regulations through the legal system — has fallen 11 points since last year to reach 108 this year.

There are 17 categories of imports, of which POL is the single largest item and accounts for over one quarter of the import bill. The break-up of the total import bill puts chemicals over 10 per cent, machinery and non-electrical items at over 15 per cent, transport equipment over five per cent, and others at over 15 per cent. Edible oil imports are less than five per cent of the total import bill, while iron and steel products are close to five per cent.

The products whose share in the total import bill stands between 2-4 per cent are drugs and medicines, dyes and colours, chemical fertilisers, electrical goods, paper, board and stationery, tea, sugar, art, silk yarn, non-ferrous metals, grains, pulses and flour.

These are the potential areas where the Board of Investment can work and offer incentives to lure investment to reduce reliance on imports. It can also look for opportunities to divert these imports to regional countries to reduce costs.

Meanwhile, Dr Kaiser Bengali points out that high speed diesel (HSD), used primarily by trucks alone, accounts for about 55 per cent of total oil bill, because over 90 per cent of long distance goods transportation occurs through roads.

To reduce HSD consumption, Dr Bengali suggests shifting long distance movement of goods transport from road to rail, and to this end, creating a holding company comprising Pakistan Railways and the National Logistics Cell. He also suggested creating an integrated good transport network where container trains would move long distance cargo, while trucks would move items for shorter distances.

The second big component of the oil import bill is furnace oil. Dr Bengali suggests switching thermal electricity generation from furnace oil to locally extracted coal, and raising natural gas prices by three to four times, while providing power subsidies to industrial estates.