Slack in productivity

Published January 23, 2017

The private sector believes that the high cost of production in Pakistan is one of the key factors rendering businesses uncompetitive and slowly eroding the country’s manufacturing base, both in domestic and export markets.

The government blames the myopic mindset of many risk-averse businessmen who failed to think ahead, capitalise on Pakistan’s comparative advantage, innovate and invest in improving the standard and quality of merchandise.

Experts identify the problems as follows: short-sightedness, tendency to opt for easy and instant solutions, lack of trust between the government and the corporate sector, not enough appreciation of the capacity/capability of the country’s resource base — both in the government and the private sector.

“The deal is loaded against us from the word go. It is not an accident that all major business houses have branched out into trading and services. Circumstances forced them towards that direction. You need the buffer of trading to cope with the challenges of manufacturing”, said a businessman with interests spread across a range of sectors.

“In Pakistan, the business class did not go through the grind. They leaned too much on the government that accommodated them to a level where, instead of focusing on market demands, they relied more on their links to high placed officials to succeed in business. The outcome is for everyone to see.

“The manufacturers in Pakistan produce sub-standard merchandise at a high cost and then blame everyone but themselves for not faring well in domestic and global markets. Look at cars. Do you think the quality justifies the price?” said an official who headed the commerce ministry at one point and championed free competition through liberalisation to force locals towards improving their production and management practices.


“You need the buffer of trading to cope with the challenges of manufacturing”, said a businessman with interests spread across a range of sectors


Recently the Pakistan Business Council (PBC) made a case to press the government to make policy adjustments to bring the cost of production at par with other regional countries. The council developed a comparative table that contained major heads that jack up the cost. They also identified the currency policy as a stumbling block that limited the scope of Pakistani products in and outside the country.

Two major factors that created the cost disparity, according to the PBC, were energy and labour costs. The average energy cost calculated in US cents/KWH in Pakistan is double that of Vietnam and significantly higher than China, India and Bangladesh.

According to the report the minimum wage level in Bangladesh is about half of Pakistan but in all other countries it is equal or higher. They also believe that the currency exchange rate has been kept artificially high, a step that hurts export performance.

The fourth of the PBC’s 8-point business agenda states: “Provide industry access to energy, water and labour at regionally competitive costs. Use the exchange rate tool wisely”.

The current quarterly report of the State Bank took an apologetic view but accepted that the current account did weaken further in quarter one of FY17. In explanation it says: “Mainly due to higher import of machinery (power generation, electrical and construction) on the back of the CPEC-related activities. The overall imports, however, benefited from a significant decline in oil payments during the quarter”.

“Ideally, a country’s rising imports should be funded through export earnings (and other non-debt inflows like remittances and FDI). However, in our case exports are almost half of imports, and have been on a declining path for over two years now”, it added.

Without dissecting the issue of falling exports, the said report moves forward by saying: “Reversing the downward trend in exports has become more daunting due to continued soft demand in traditional export markets (particularly China) and rising popularity of anti-trade sentiments, mainly in developed countries”.

Abdul Ghaffar Khattak, CEO, National Productivity Organisation, said since he assumed charge last year he had been busy streamlining the organisation and intends to energise it to provide guidance and support to the private sector in improving productivity.

On the issue of higher production cost he said, “I need to see the data to make an informed comment. Right now the database is weak. We are working on it as there is no system in place to evaluate human resource performance”.

On the subject of electricity, he admitted that there was an issue of uninterrupted supply at reasonable rates but he doubted the assertion that the minimum wage rate in the country was prohibitively high.

Addressing the exchange rate, he said devaluation may hurt more than help the economy of Pakistan as the country lacks exportable surpluses of quality and standards.

“A fiscal and financial stimulus can provide temporary breathing space but long-term solutions need sustained efforts by the private sector to make their projects lean and green and invest in innovation and diversification of exports in terms of products and destinations”, he said from Islamabad over phone.

“The sorry story of Pakistan’s export performance has persistently been repeated but how imports, dumping and smuggling of a large variety of items of everyday use — from needles and ball pens to packaged food, tea, cigarettes, textiles, toys, tyres etc — have eroded the space in the domestic market for local manufacturers do not get enough press”, commented a group head of a business house when reached over the phone.

Published in Dawn, Business & Finance weekly, January 23rd, 2017

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