INDUSTRIES Minister Razzak Dawood wants Pakistani industries based on unrealistic expectations or irrational domestic support to get ready to fold up and make way for better industrial units.

If these units cannot face the challenge of reducing the import tariff to 25 per cent from July 1, after that has come down to 30 per cent this year from 35 per cent, they will not be supported by the government by placing them in oxygen tents with fiscal or monetary support.

It may be hard for these industries, which in the 1960s and 1970s enjoyed an average import duty of 120 per cent and thrived behind steep protectionist walls, to accept the reality of 25 per cent tariff, but that is mandated by the IMF and other international financial institutions on which we depend for increasing external assistance for our economic survival.

In addition, if the import duties do not come down there will be an increase in the volume of smuggling of the heavily taxed items. And as the Afghan transit trade is bound to increase in a big way following a new government in Afghanistan and commencement of its large reconstruction programme smuggling can increase. The need for decreasing the import duties has hence increased.

The industrial units which Mr Razzak has cautioned are a large part of the 4,000 units which became sick three to five years ago and pose too many problems for the country. They are a heavy burden on the economy and truly a national liability. And they are not only poor taxpayers or defaulters but also defaulters of banks, Wapda, and the KESC and the gas companies. They aggravated the unemployment problem after they had thrown their workers out or slashed the employment heavily. What we see is a case of the bad and defaulting industries holding back the good industries. And they are a heavy burden on the consumers who have to pay far more for often sub-standard products.

Mr Razzak wants the industrial structure of Pakistan to be reorganised well before the full regulations of the World Trade Organization becomes effective from January 1, 2005 - after the expiry of the textile quote system which will present serious challenges to Pakistan along with tremendous opportunities for the most competent textile producers and exporters.

On its part the government is coming up with a five-year tariff structure which will come into force in July. Work has started on the new scheme with the first meeting presided over by the commerce minister last week who has asked for the first report on the tariff structure in January.

The tariff structure is to cover customs duties, sales tax and central excise. Whatever happened to the pronouncement of Finance Minister Shaukat Aziz two years ago that by next year there would be only three federal taxes —income tax, sales tax and customs duties? On that basis the federal excise duties should vanish, particularly when many central excise duties are being turned into sales tax. But that does not seem to be happening as the government does not want to give up any source of revenue despite the hefty revenue of Rs 185 billion expected from sales tax this year which makes it the top tax of the day.

Along with it the jungle of 58 SROs in force now is to be reduced to 28, from July 1 which should be very welcome for those in trade and industry.

The country also needs a five-year corporate tax structure if we are to promote industrial investment in a big way, particularly foreign investment. Large scale industries take three to five years to conceive, set up and commence commercial production. If in the meanwhile the taxation policy or tax structure changes the feasibility on the basis of which the investment was made becomes useless and the industry becomes sick as it starts production. We cannot afford any more of this happening in future.

Pakistan has to go an extra mile to attract foreign investment because of the high risk rating Pakistan suffers from foreign investment. The Economic Intelligence Unit of the “Economist” of London recently showed Pakistan as the fifth most risky country in the world in a table of loo countries for investment. Pakistan came after Iraq, Maynmar, Kenya and Indonesia, carrying 40 per cent risk.

Pakistan had also until recently suffered the reputation of being the second, third and fifth most corrupt country in the world. And the Pakistan government is now accusing two of its former prime ministers or their governments of demanding large bribes from foreign investors and obtaining them. The world’s investors cannot ignore all that.

The Economist Intelligence Unit says it takes into account a country’s political structure, economic policies, sovereign debt risk and state of its banking system to determine its risk rating for investors, particularly foreign investors. We have problems in all these areas, while the non-political factors are gradually getting better.

And foreign investment need not go to all countries simply because they are there, and they seek foreign investment and try to offer varied concessions. A report of the United Nations Conference on Trade and Development says that in 1999, 49 poorest economies received only 0.5 per cent of the foreign direct investment and that was after foreign direct investment had risen nine-fold since 1990 which means that in 1990 foreign investment there would have been almost zero.

That makes it all the more imperative for Pakistan to offer attractive environment for foreign investment; but our preference over the years has been foreign aid and now the emphasis is or getting that as grant or long term loans at almost zero interest. If instead we had focused on attracting foreign investment, along with technology transfer, and or more exports than on internal sales we would not have been so heavily burdened with external debt, made far worse by excessive and sustained devaluation of the rupee.

The problem with Pakistan is we have too many problem industries. The major industries are in the troubled zone, except for some units marked for their excellence. The textile industry, particularly spinning, sugar, cement and jute industries come in that class. Many of the engineering industries, not excluding the heavy engineering industries, have been plagued by tough problems. Now we are told the government is coming up with an engineering vision with Mr Razzak Dawood piloting that. Let us see what shape does it take and how rewarding that could be in real terms.

While the whole industrial structure is in the melting pot with its ailing major industrial sectors and its sick banks with one-third advances as non-performing loans, the right industrial policy is one which promotes investment and rapid industrialisation that can promote larger exports and employment as well as earn more revenues. If instead the government wants to earn more and more revenues out of less and less industries or a stagnant industrial structure, it will in reality earn less revenues as has been happening in recent years after sizable investment really stopped.

A rational taxation and tariff policy is essential to make a success of the stalled privatization programme, too. We may not be able to give the total tax-free concessions which the OPIC of the US calls for to promote US investment here but that does not mean we cannot be more accommodative with other foreign investors or not show the kind of realism which Mr Razzak Dawood expects from our own industrialists now.

It is easy for Mr Dawood to ask the industries which cannot be competitive at home or abroad to shut down. If in the process the banks, and WAPDA and KESC also go down as those industries fail to repay the loans and clear other dues and increase unemployment, that will be too bad for the country.

He should instead commission scientific studies of the cost of manufacturing and exporting in the troubled industrial units. If the industries have been hit by erratic official policies he should help them by removing the wrongs. If instead the investors are wilfully mismanaging their factories or hiding their profits or taking too much out of the factories for themselves and their families, he should expose them.

And he and Finance Minister Shaukat Aziz should rationalise the fiscal and monetary policies and reduce the cost of energy to lower the cost of production and exports. This is a time for a scientific and rational approach to our economic and industrial problems, and not for simplistic remedies.