Our self-inflicted wounds

January 20, 2020


Rising negative growth in manufacturing and mounting nonperforming loans (NPLs) have prompted 10 banks to set up Pakistan Corporate Restructuring Company Ltd (PCRCL) to revive and rehabilitate sick industrial units.

The proposed company will pick up cases where NPLs can be promptly restructured and sponsors of commercially or financially distressed companies can inject equity. Such companies will be saved from possible corporate deaths and the banks’ assets problem — i.e. NPLs — will be resolved.

The Companies Rehabilitation Act was promulgated in 2016 after being debated within the government for a long time. The need for the establishment of such a rehabilitation firm was being strongly felt now as the shrinking industrial sector continues to face risks of further disruption with cost-push inflation, depressed domestic demand and stagnant exports. PCRCL is the first such company to have secured a licence from the Securities and Exchange Commission (SECP).

Industrial growth has turned negative since June 2018 with a pickup in the continuing trend this year. The manufacturing output recorded negative growth of 6.48 per cent in July-October 2019. The year-on-year drop was more pronounced at 7.97pc in October.

While trade policies are being reoriented towards boosting industrialisation, a tight monetary policy continues to curb domestic consumption

Aware of the worsening situation, the government is also working on a comprehensive policy for the revival of sick industrial units that will be announced ‘soon,’ Prime Minister Imran Khan told a delegation of the Federation of Chambers of Commerce and Industry (FPCCI). PCRCL will help the government implement its policy.

Designed as an instrument of trade rather than revenue collection, the recently announced National Tariff Policy has already been initiated with the setting up of the Tariff Policy Board. The policy aims to provide time-bound strategic protection to the domestic industry in its infancy against foreign competition that will be phased out to make the industry globally competitive. The policy measures recommended by the board, after approval of the cabinet, will be incorporated in 2020-21 budget proposals.

Addressing a seminar last week, State Bank of Pakistan (SBP) Governor Reza Baqir stressed the need to shift away from the inward-oriented economy to the outward-oriented economy that puts a greater emphasis on exports to achieve high and sustained economic growth.

The Ministry of Commerce is working on a trade-related industrial policy for boosting both export-oriented and import-substituting industries. A leading industrialist, Bashir Ali Mohammad, said at the same seminar that the country should not miss the window of opportunity opened briefly by politics around the Army Act amendment to hammer out a charter of the economy.

While trade policies are being reoriented towards boosting industrialisation, the current tight monetary policy continues to curb domestic consumption, resulting in the lower utilisation of industrial capacity. Efforts to create trade surpluses by suppressing domestic demand have not succeeded. Pakistan is not producing enough to boost foreign sales.

A survey by a Paris-based research and consultancy firm shows that consumers fear that the economy is likely to become weaker in the next six months.

Respondents list inflation, job insecurity and additional taxes as the top three worrying issues facing the country. Imports have been curbed, but with no noticeable import substitution activity on the ground to improve domestic supplies of goods and services, curb inflation and create jobs.

Corporate entities turn sick for a variety of reasons. World Bank economist Gonzalo Varela says labour productivity in Pakistan is low and decelerating compared to that of its peers where it is high and accelerating. According to the Global Competitive Report 2020, Pakistan’s ranking in productivity fell to 110th in 2019 from 107th a year earlier.

Devaluation has helped foreign sales of low value-added products in demand in developed economies that help them keep wages of blue-collared workers low. That is why our exports have increased in terms of volume but earned fewer dollars and more devalued rupees. That is one reason why the industry employs cheap labour with low productivity and a segment of the sector thrives on rent-seeking with no inclination to go for innovation and technical upgrade to produce sophisticated goods at globally competitive prices.

We keep on talking about the diversification of goods and export markets but nothing meaningful happens because of prolonged phases of deindustrialisation and brief spurts of industrial activity. The economy suffers from a declining share of commodity production in GDP. Terms of trade are deteriorating as exporters get fewer dollars for supplying more goods, resulting in a huge transfer of resources abroad.

Policies designed to boost exports in the past have created an import-oriented economy in the absence of an effective import-substitution strategy. Stable high growth in exports can be ruled out in the immediate future as the global trade is hit by protectionism and political turmoil.

As the measures to reduce trade and current account deficits are not enough, the reformers are attracting hot money — dollar investments in government securities — to shore up foreign exchange reserves and keep the exchange rate ‘stable’. A fragile stability is being achieved more with borrowings and less by an improvement in fundamentals of the economy.

We have been pursuing an economic model incapable of delivering a sustained high economic growth and huge trade surpluses for exports. Macroeconomic and political instability continues to feed on each other. Apparently, the stabilisation programme has created more problems — sick units, growing NPLs, high food inflation, rising unemployment, unprecedented borrowings, low exports, subdued growth etc — than it has solved. The stabilisation programme has substantially eroded Prime Minister Khan’s political capital.


Published in Dawn, The Business and Finance Weekly, January 20th, 2020