POLICYMAKERS are trying to kick-start labour-intensive, primarily urban-based, economic activities to protect jobs and promote employment. The focus is on small and medium enterprises (SMEs) and the construction industry, particularly on spurring building of houses and allied production facilities.
SMEs employ about 80 per cent of the non-agricultural labour workforce. Roughly 30-35pc of the employment is directly or indirectly affiliated with the construction sector.
Agriculture, which is also labour-intensive and provides nearly 40pc of the country’s labour, is not at the moment on the Coronavirus-related priority agenda.
The country has exhibited the least degree of economic structural changes away from agriculture into industry and services both in terms of employment and value-addition, say labour economists.
By a strange coincidence, all these labour-intensive sectors have not been accorded the official priority they merit in a country where manpower is the most valuable abundant asset and capital is scarce with its formation at a low level.
Even the commercial banks have generally been shy to extend credit to these sectors, because of their risk perception. The problems in regards to bank credit for SMEs persists despite subsidised credit and government’s decision to bear 40pc of first loss to banks on SME loans to prevent layoffs for the period from April 13 to June 30. On May 9, Pakistan Industrial and Traders Association Front Chairman Nauman Kabir said not a single bank branch in Lahore is offering a loan to SMEs on the State Bank’s direction to enable them to avoid layoffs of workers.
On May 11 a State Bank circular, however, said banks have approved Rs47 billion loan applications to help save 450,000 jobs. No loan disbursement figures were given. The banks had so far received requests from 1,440 businesses for the financing of over Rs103bn to support about 1 million employees.
Responding to the feedbacks of businesses the central bank has also been expanding the scope of its Rozgar scheme. On May 11, it decided to finance 100pc of the payroll with an average 3-month wage bill up to Rs500m from Rs200m. The loan can be used for payment of wages and salaries for April, May and June.
Lenders were earlier reported to be seeking piecemeal data for additional information to meet their standard operational requirements while getting conversant with the implications of the new scheme and borrowers’ financial position. They complain that many firms do not have an audited, or any, balance sheet.
One may recall here that a banking expert, addressing the Institute of Bankers in Karachi long time ago, had advised the bank staff to visit the potential client’s premises in the informal sector and assist them in preparation of balance sheets. He said they would be able to make much bigger profits from the SMEs than they make from big corporations, pointing to the then prevailing lower lending rates for big business groups and high-interest rates that were charged from small enterprises.
The problem is of changing mindsets more than risk perceptions. Authorities also may consider linking actual disbursement of loans to underserved segments to risk-free investments in government papers. Bankers are generally of the view that practically payroll finance can only be advanced to SMEs that are already banked.
In this not-so-encouraging scenario, a positive development is that Indus Motors Company (IMC) has announced an interest-free support package for its vendors and dealers. This has been done, says the IMC, while the company suffers from stagnation revenue generation activities and overhead costs including expenses on payrolls and debt servicing. If employees are retained, production can be resumed quickly, which may not be the case if workers are laid off.
In Japan, automobile assemblers provide guarantees to help vendors borrow money from banks and also extend engineering and technical assistance to upgrade their facilities for the production of quality spare parts. Thus the assemblers economise on expenses by keeping two hours’ inventories fed by a continuous supply of quality parts to run their plants for two or three shifts as required.
In the field of investment in house building for which an attractive package has been offered by the PTI government, bankers say mortgage lending has been a challenge for the banking industry due to the extended recovery process in auctioning mortgaged properties. However, they have been encouraged by the recent Lahore High Court verdict empowering the banks to sell mortgaged properties without reference to courts. This, says a banker, will pave the way towards greater bank posture towards mortgage finance. But it may discourage the borrowers, especially from the middle- and lower-income groups.
While welcoming the construction package, leading contractors say that Pakistan should emulate Singapore’s long-term and comprehensive strategy for the development of the construction industry. The country’s vision was lauded by a World Bank study, titled the Development of Construction Industry, which carried out research as far back as November 2007. Singapore has transformed the industry labelled as “dirty, dangerous and demanding to one which is professional, productive and progressive.”
Focusing on a literature review, the study also carries a technical note on ‘Business Environment and Cost of Doing Business.’ Like Singapore, Pakistan needs a long-term strategy and vision to focus on labour-intensive activities not forgetting that workers are both producers and consumers.
Published in Dawn, The Business and Finance Weekly, May 18th , 2020