Since it came into power, the PTI government has been struggling to boost industrialisation particularly manufacturing. But owing to uncertainties in the business environment the long-term industrial investment in greenfield projects has not picked up to a level to make a difference.

The historical trend of imbalanced development of the country’s three major sectors of the economy remains largely unaddressed, creating hurdles in the path of long-term sustainable economic growth, despite the V-shaped recovery officially claimed last fiscal year.

The fastest expanding services sector accounted in 2020-21 for 68.68 per cent of GDP, agriculture 19.9pc and industry 19.2pc which included large-scale manufacturing (LSM) contribution of 9.73pc, according to provisional data. The year was marked by a notable LSM recovery. And in the service sector, the financial sub-sector alone accounted for 33pc of the GDP.

There is no industrial revolution on the horizon in Pakistan thanks to the policies adopted by clueless policymakers over the last many decades, writes former civil servant Syed Saadat in his latest newspaper article.

Among adverse factors hampering meaningful industrial expansion, spotlighted in recent public debate, is the tardy progress of the China-Pakistan Economic Corridor (CPEC) projects some of which are being stalled because of delays in power purchase payments to the Chinese investors. The Chinese investors are seeking sureties that the new power plants do not get stuck in the circular debt. The government is paying Kibor plus 2pc cost to the sponsors of Chinese power plants that is delayed beyond a certain period.

Approximately 25pc of the companies in the country are zombie firms such as public sector enterprises causing massive revenue loss by declaring losses

“We are trying to save Gwadar power plant, Karot power plant, Kohala power plant and three other projects from the adverse impact of delay in the payment of Rs250 billion to Chinese sponsors,” says special assistant on CPEC affairs Khalid Mansoor.

He however believes that the key to the success of the second phase of the CPEC project lies in Special Economic Zones (SEZs) which, he adds, are being developed on a priority basis. He did not say when the SEZs would be ready with the required one-window facility.

The completion of power projects and Special Economic Zones are vital for bringing foreign investment in industrial joint ventures with domestic partners in efficiency-seeking sectors and technology transfer in order to generate exports and save dollars through import substitution, says an analyst.

Owing to the slow progress of the CPEC

programme, FDI from (foreign direct investment) from China dropped (for the first time in recent years) by 50pc in the first quarter of 2021-22 to $76.9 million, down from $154.9m in the same period of 2020-21.

The country’s total import bill surged by 65pc to $25.1bn during July-October compared to $15.7bn in the corresponding four months of last fiscal year. And exports posted a growth of close to 25pc to reach $9.46bn, up from $7.57bn.

The machinery import bill primarily for the modernisation and expansion projects accounted for $3.71bn, 40.7pc higher than $2.63bn for the same period of last year. And $3bn was spent on food purchases, registering a 37pc increase over $2.2bn.

Pakistan faces a boom and bust cycle owing to a lack of industrial depth and sustainable economic growth hinges on a strong industrial base, says an analyst.

There is only one solution to the economic challenges facing the country, says Chief Executive Officer of Small- and Medium-Sized Enterprises Development Authority (SMEDA) Hashim Raza, and elaborates: “We have to increase our production base and labour capacity.”

Though the SME sector has been accorded a high priority in the official ‘bottom up’ policy, the government has yet to announce the SME Policy 2021-25 to address such issues as easing of the regulatory environment and addressing SME market constraints, both on supply and demand side. On November 15, the Economic Coordination Committee of the Cabinet (ECC) directed that the SMEDA rules should be incorporated in the summary prepared by the Ministry of Industries and Production to provide an enabling environment for SMEs.

It was also decided that the industries minister, the finance advisor and the State Bank of Pakistan governor would further consult among themselves for finalising SME financing.

Yet another historical legacy posing a rising challenge to industrial growth has recently been highlighted by the Federal Board of Revenue (FBR) in its first of its kind report ‘Zombie Firms in Pakistan and Tax Revenue Lag.’

The report estimates that approximately 25pc of the companies in the country are zombie firms such as public sector enterprises causing massive revenue loss by declaring losses.

A zombie firm is defined as a lossmaking entity that has lost the ability to generate enough profits to make interest payments and survives on the repeated refinancing of its loans. This misallocation of credit, the FBR report observes, indicates that reallocation does not always benefit the healthier, innovative and more productive firms. The support to zombie firms impairs competition and is a real challenge for Pakistan’s economic growth.

While appreciating the contribution of banks in hard times to support troubled firms, the FBR experts estimate that roughly some $3bn short-term bank credit flows to the country’s zombie firms annually.

The public sector firms, faced with a high level of debts and overcapacity have created a debt cycle and are often forced to borrow from banks to repay their interest payments. Banks lend to them because they come with a government guarantee, and even keep lending with the non-performing loans.

In view of the FBR experts, the misuse of tax exemptions and tax holidays has remained a festering sore for the Pakistani economy. Zombie firms eat up these incentives and prevent the intended benefit to reach the targeted segments of the economy. The loss of industrial productivity and overall job losses results in an indirect loss of potential taxes.

On the other hand, the spending on the development of social and physical infrastructure, though badly needed to stimulate private industrial investment, is slowing down. In the first quarter of this fiscal year, only Rs46bn has been disbursed from the budgeted Rs900bn PSDP (Federal Public Sector Development Programme) and the annual PSDP size is also being reportedly cut by Rs200bn.

Published in Dawn, The Business and Finance Weekly, November 22nd, 2021