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Losing out to regional competitors

Updated May 13, 2019

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The manufacturing sector’s share in the annual national output — or gross domestic product — has been on the decline since 2008 onwards. It dropped from a high of 14.8 per cent in 2008 to 12.1pc in 2018, implying a reduction in the relative significance of this sector in the economy.

The share of large-scale manufacturing during the same period has dropped from 12.8pc to 9.7pc. The ‘premature’ decline in manufacturing has had a direct impact on new investments in the industrial sector and on the country’s external account as its exports are stagnating and imports rising.

The growth in the manufacturing sector has slowed down since 2015 to an annualised average of 4.9pc compared with 10.5pc in Bangladesh and 8.1pc in India. Little wonder then that our share in global exports has come down to 0.12pc from 0.16pc in 2003.

Manufacturing growth has slowed down since 2015 to an annualised average of 4.9pc compared with 10.5pc in Bangladesh and 8.1pc in India

On the other hand, Bangladesh has increased its exports to 0.2pc from less than 0.1pc and Vietnam to 1.2pc from 0.17pc. Investment as a percentage of GDP has also stagnated at around 14pc compared with 31pc in rival India and Bangladesh, and 37pc in Vietnam.

There are several factors that have contributed to the decline in the manufacturing industry over the last decade. The major factors are said to be the cost and tax frameworks for the industry, which are not competitive regionally with countries having a similar economic and industrial structure.

The cost of energy for industry in Pakistan remains one of the highest globally. The manufacturing sector that forms 12.1pc of the economy pays 58pc of the total tax revenues collected.

However, many agree that one of the most crucial reason behind premature deindustrialisation has been the implementation of extremely liberal import policies and free trade agreements (FTAs), especially with China that have led to the influx of cheaper finished goods.

Furthermore, the failure to secure the country’s borders with Iran and Afghanistan has led to smuggling. These factors indicate that Pakistan has become a net importer and a financier of jobs for other countries.

The local tyre industry, for example, meets only a fifth of the total domestic demand with the remaining market dominated by imported (45pc of the markets) and smuggled (35pc of the market) tyres.

The demand is increasing by 7-9pc a year, showing a huge potential for new investment and jobs in this industry alone. Nevertheless, no foreign or local investor is ready to venture into this segment because of the uneven playing field that gives a massive advantage to smuggled and cheaper imported tyres.

“Many industries have shut down or moved out. The remaining struggle for survival in the face of cheap imports and unchecked smuggling,” General Tyre Rubber Company Chief Executive Officer Hussain Kuli Khan told this correspondent.

“No one is ready to make new investments in the manufacturing sector under the current circumstances. The liberal imports and influx of under-invoiced and smuggled goods means that demand for the domestically produced merchandise has shrunk. Unless demand for the locally manufactured goods is enhanced through a cascading tariff structure that discourages imported finished goods, and borders are secured, we do not see new investments being made.”

On the other hand, India has protected its domestic manufacturing industry and some of its tyre manufacturers have already expanded across the country. Many international brands have set up their manufacturing plants in India, creating thousands of jobs.

Liberal imports and unchecked smuggling not only damages the ability of the local industry to grow, develop and compete internationally, but also causes massive dents to government revenue and leads to an outflow of hard earned foreign exchange.

“Just imagine how many jobs will be created, how much tax revenue will be generated and how much foreign exchange will be saved if we start meeting the entire domestic tyre demand through local manufacturing,” said Mr Khan.

“That is not all, we will also be able to move into export markets and earn much needed dollars to close our huge trade gap. We are not afraid of foreign competition but smuggling and lower import tariffs put us in a disadvantageous position. The high cost of doing business makes us further uncompetitive.”

A similar story is told by ceramic tile manufacturers. “The government has failed to protect this industry against the onslaught of smuggled tiles from Iran and dumping by China,” a senior executive of a local tiles manufacturer said on condition of anonymity.

“China continues to dump tiles into Pakistan despite imposition of anti-dumping duties in October 2017 as the importers got a stay order from the Lahore High Court. The Ministry of Commerce hasn’t even pursued the case at the expense of local manufacturers and foreign exchange reserves.

The government should support the industries, which can help with the revival of the economy through job creation, increased tax contribution and exports. This can be done only by enhancing the demand for locally produced goods, and curbing imports and smuggling that are damaging the country like termite.”

Published in Dawn, The Business and Finance Weekly, March 13th, 2019