The pandemic inflicted enormous human and economic damage on the world, and Pakistan was no exception. The economy contracted by 0.47 per cent in 2019-20, worse than the government’s initial estimate of -0.38pc. But despite facing the third wave of the pandemic in the previous fiscal year, the GDP expanded by 3.94pc, defying most expectations, including those of the finance ministry and the central bank, thanks to robust industrial and agricultural output.
Although the expansion rate may get revised later, it still shows that the country is back on the growth track. As millions get vaccinated, business activities normalise, and demand for goods and services recover to pre-pandemic highs, Pakistan might witness potentially sustainable recovery.
This might be a good time for the government to consider taking supportive industrial policy actions that lead to broad-based growth in all sectors, including new avenues as well as those industries that have been ignored for far too long.
Strong policy measures will not only bring in FDI, create jobs and make significant contributions to the national exchequer but should also gradually reduce Pakistan’s dependence on imports
The government expects to achieve GDP growth of 4.8pc in the ongoing fiscal year and Shaukat Tarin, the Federal Minister for Finance and Revenue, hopes to increase this to the range of 6pc to 7pc in the next two to three years, the highest in more than a decade. Realising this growth while maintaining the current account deficit within a reasonable range could be an uphill task, especially for a country whose economy relies heavily on imports and foreign loans. But supportive policy measures that drive industrial development and help reduce the country’s dependence on imports could go a long way in helping achieve the seemingly ambitious target.
Some cues can be taken from the mobile manufacturing industry, which is still in the early stages of development but looks poised to play a positive role in Pakistan’s economic growth moving forward. This was virtually a non-existent industry until just a couple of years ago, with a few small operators assembling less than 120,000 smartphones in 2019. In the same year, the Pakistan Telecommunication Authority launched the Device Identification, Registration and Blocking System (Dribs) to curb the import and use of illegal phones which was followed by the introduction of the Mobile Device Manufacturing (MDM) Regulations by the Cabinet in 2020 that encouraged local and foreign companies to set up mobile manufacturing units in Pakistan.
The response was overwhelmingly positive as more than two dozen companies got themselves registered, including some of the world’s biggest smartphone brands such as Samsung and Nokia.
A subsidiary of the Chinese technology company Vivo Communication was the first to set up a mobile phone manufacturing unit in Pakistan in 2021. This space is currently undergoing rapid growth. In the first seven months of this year, more than 12 million phones were manufactured in Pakistan, including almost 5m 4G smartphones. For the first time, more phones were manufactured at home than imported from abroad.
Meanwhile, a local company has already started exporting phones to the United Arab Emirates, putting “Manufactured in Pakistan” devices on the global map. This growth is widely expected to continue, with local and foreign companies lining up to begin commercial operations. Samsung has been working closely with a local partner who will manufacture the South Korean electronic giant’s smartphones in Karachi.
Although the Pakistani and foreign companies are currently assembling, rather than manufacturing, smartphones, this is certainly a big step in the right direction that could pave the way for technology transfer, potentially making Pakistan a true smartphone manufacturing powerhouse. This is the direct result of favourable industrial policies that created an environment that’s conducive to investment and growth.
Oil refining is another industry that looks poised to positively impact the economy in the future. The oil refineries can cut down Pakistan’s dependence on buying expensive refined products, like petrol and diesel, and instead consume the cheaper and lower-value crude oil. Unlike smartphone manufacturing, oil refining is one of the oldest industries in the country, with Attock Refinery dating its roots to pre-partition days. But the industry hasn’t seen any growth or new projects in the past several years, with Byco Petroleum being the last company that brought its second oil refining unit online in 2012.
Most of the plants haven’t seen a major upgrade in a long while. The lack of investment isn’t due to weak demand. On the contrary, the demand for petrol and diesel easily outstrips the domestic supplies and the country has to buy petrol and diesel from foreign companies to fill the shortfall. A lack of a favourable policy framework is one of the main culprits.
Remember, oil refining is a capital-intensive business where project upgrades or expansion may require capital expenditures of hundreds of millions or even billions of dollars. In a tightly regulated environment where the government dictates key aspects of the business and where many industry participants find it difficult to generate healthy returns on a sustainable basis, the existing refineries have shied away from making any big commitments.
Foreign investors have also shown interest in setting up new and state-of-the-art oil refineries and petrochemical plants by investing billions of dollars. But so far, those promises have been on paper.
However, this might change as the government brings in an oil refining policy that gives incentives, including multi-year tax holidays and tariff protection, to local and foreign companies who modernise their plants or install new units.
Pakistan’s oil refining capacity currently stands at around 420,000 barrels per day (bpd) and the actual output is often close to half of that number since the capacity utilisation is often 50pc or lower. But the oil refining policy can lure substantial capital and potentially change the industry’s fortunes.
If the local refineries modernise and the foreign investor from the Middle East and China who have revealed some of their plans also set up facilities and deliver on their promises, then the nameplate capacity could climb significantly to more than a million bpd and utilisation might shoot up to 80pc or higher.
In short, industries like mobile phone manufacturing and oil refining could play a big role in driving Pakistan’s economic growth, allowing the country to achieve ambitious GDP expansion targets, as long as they get the necessary support from the authorities.
There are key lessons to learn here for policymakers that can be applied to other industries. Such measures will not only bring in foreign direct investment, create numerous jobs and make significant contributions to the national exchequer but should also gradually reduce Pakistan’s dependence on imports, as we are now witnessing in the smartphone arena and might see in the oil refining industry in the future.
Sarfaraz Ahmed Khan is a business and economics writer and can be reached at email@example.com
Published in Dawn, The Business and Finance Weekly, September 20th, 2021