GLOBALLY, the engineering and capital goods industry forms almost three quarters, and the textiles and clothing just around six per cent, of total world trade. In Pakistan, it has always been the other way round with textiles and clothing contributing close to 60pc and engineering products less than 5pc of the country’s exports.
There are several factors that have stifled growth of the domestic engineering goods industry over the decades. The biggest reason is the government policies that have played a crucial role in suppressing the demand for domestically produced engineering and capital goods.
The impact of these policies has been quite widespread during the last two to three decades as reduction in the tariffs on engineering and capital goods, and a free trade agreement with China, have encouraged imports of these products at the expense of investment in local production.
But the new government appears to have realised the fact that the country’s reliance on the textiles and clothing industry alone can’t help boost exports and close the growing trade deficit — the biggest factor responsible for the nation’s balance-of-payments woes.
The new government appears to have realised the fact that the country’s reliance on the textiles and clothing industry alone can’t help boost exports and close the growing trade deficit
The new Engineering Development Board (EDB) management is, therefore, working on a plan that is expected to attract investment in the engineering and capital goods manufacturing industry and make it a part of the global value chain.
“We are making recommendations to encourage investment in engineering and capital goods manufacturing projects. No one will invest in this sector unless the government enhances demand for locally manufactured goods. It can do this by rationalising the existing import tariff regime and giving fiscal and financial incentives to become a part of the global value chain to ensure economy of scales,” EDB board of management member Syed Nabeel Hashmi says.
“Unless the manufacturers are able to sell their products in the domestic market and export, they will have no incentive to invest in this sector. No country has ever achieved accelerated economic growth without supporting and protecting its engineering and capital goods manufacturing industry. Take the example of South Korea, China and India. On the other hand, we have implemented such policies that have exported jobs and precious foreign exchange by encouraging imports.”
A presentation made at the Pakistan Economic Forum organised by the Pakistan Business Council in Islamabad in December last year highlighted that the engineering industry, with automotive assembly and manufacturing being its largest component, contributes $10 billion to the nation’s GDP.
It employs three million people and annually substitutes imports worth $18bn. It pointed out that the industry could more than treble its exports from the existing $1.1bn in five years if given right kind of environment to operate.
The EDB has selected six industries — including surgical instruments and equipment, automotive parts and fans — it plans to focus on for their accelerated development. The government will work on the full value chain of these industries, from import of raw materials to exports.
“One of the quickest and easiest ways of promoting the local engineering industry is to focus on its existing sub-sectors, help them bring down their cost of doing business and upgrade technology, protect them against imports, and link them with the global production systems.
“Secondly, the companies assembling white goods and electronic products here will be encouraged to localise their components. The next budget will be focusing on these suggestions and we are expecting a reduction in tariffs of raw materials and increase in taxes on imported finished goods.
“We are moving in the direction of a cascading tariff structure to promote domestic engineering goods manufacturing, boost exports and create jobs,” Mr Hashmi adds.
One major step in this direction is reconstitution of the EDB’s Automotive Industry Development Committee (AIDC) as Automotive Industry Development and Export Committee (AIDEC).
The purpose is to encourage the automotive industry to get out of its comfort zone, stop looking inward and start thinking of exporting.
“There are a host of issues related to the country’s tax, tariff and regulatory regimes, as well as infrastructure bottlenecks, logistics costs, and lack of access to finance (to SMEs) that are discouraging investments the in engineering industry. These are keeping existing manufacturers from venturing into international market to become part of the global supply chain.
“The EDB and government have just begun addressing these issues. If we succeed in resolving them, change our policies and laws to enhance market and create incentives for technology transfer and up-gradation, we may see substantial growth in the industry in the years come,” Mr Hashmi concluded.
Published in Dawn, The Business and Finance Weekly, April 15th, 2019