Unusually for a developing country with a large population with much of that unemployed or under-employed, the share of the key manufacturing sector of Pakistan continues to be an almost static 17 per cent of the economy. And that happens for want of adequate investment in the second half of the 1990s and the much needed industrial expansion.
That also explains many of the economic problems we face. Steady growth in this sector can increases the value-added in our economy, enhance the tax revenues, improve the balance of payments and provide employment to a large number of persons in a country where unemployment and under-employment are extensive.
The manufacturing sector, which began picking up growth with a 7.8 per cent rise in 2000-2001, after it had dropped to 0.2 per cent growth the year before, is taking heavy knocks again because of domestic factors and external developments. As a result, the first quarter’s growth in this financial year came down to 3.9 per cent and has gone down further because of the fall-out of the Afghan war and the global recession, particularly in the U.S. which imports around 2.3 billion dollars worth of out textiles.
Industrial production went down in the second half of the 1990s as about 4,000 manufacturing units became sick. Along with them, the banks which financed them became sicker, and adequate new investment was not coming forth to create new production capacities, while many of the old units became obsolete.
Along with the came the realization that greater importance should be attacked to small and medium scale industries. But the corporation set up to promote such small and medium units is still to make major headway because of its teething problems, including bureaucratic bottlenecks.
And now a finance corporation is to be set up to finance small and medium industries as the larger banks have not been eager to help the small units without much collateral to offer, and their contribution to the small sector has been less than five per cent of the capital or working finance.
The problem of the industries is also aggravated by the falling demand within the country as a result of the fast spreading 15 per cent general sales tax which enhances the prices of most goods and services. The people are forced to reduce their consumption following the rise in prides as a result of the heavy tax levy.
The problem of Pakistan is it has too many problem industries, beginning with the textile sector. The textile industry faces the gravest challenge as by the end of 2004 the textile quotas for export to the Western countries and Japan would come to an end, and Pakistan would have to complete with all the textile exporting countries which are modernising their industry fast.
Some of the textile manufacturers in Pakistan have become alive to this problem and are modernising their units or adding modern units to the old. The governor of the State Bank of Pakistan Dr Ishrat Husain has been saying that textile magnates have invested a billion dollars in the last two years on modernizing their units and much of that money is from their own resources and not out of bank borrowing. If that be the case that is a happy development, while the textile experts say the industry needs over five billion dollars of investment to face the coming global challenges, including from China which is expanding and modernising its textile sector a great deal.
Meanwhile the textile millionaires have been talking of setting up a Textile Export Zone near Karachi to specialise in this sector. For that matter, many of the major industrial estates in the country are primarily textile producing centres. But this zone will be exclusively for textile exporters who would need special assistance to a highly competitive global trade.
There has been hardly any foreign investment in the textile sector, but now international interest in investing is Pakistan’s textile sector is increasing. Some of the foreign textile manufacturers would like to shift their production to countries where cotton is readily available and labour is cheap.
China is also interested in joint enterprises in Pakistan in this sector and they are said to want to become real partners in such production.
If foreign investment in textile sector has to come and result in large production units, cotton prices in the country should be less volatile and manipulation of the trade by the growers and ginners has to become minimal. The ginners are not content with the policy of letting cotton be exported at international prices and allowing import at world prices. Instead they want high prices which suit them and hence the textile mills are often forced to pay higher than world prices for home grown cotton and that hits their exports. This feature was a seen this year, too, because of the political clout of the ginners and big growers who are not anxious to keep their cotton clean or free of impermissible admixture.
The textile sector has to become far more cost-efficient as from July 1 the average rate of import duty will go down to 25 per cent from 30 per cent, and that may encourage more of the world’s textile producers to export their goods to Pakistan.
Foreign investment in the industrial sector has been too low in the second half of the 1990s and thereafter. But during the last five months ending November 30 there has been a rise of 58 per cent, but the total rose to only 161 million dollars compared to 101 million dollars in the same quarter the year before. But the bulk of the investment went to the oil and gas sector — 63.7 million dollars, along with 27.6 million dollars for power sector and 7.8 million dollars for the transport sector.
Industrial production in the second half of 2001 has to be hit hard as exports in the period increased by only 0.3 per cent. With increase in exports almost nil because of the fall-out of the September 11 terrorists attack in the US and the global recession industrial production in Pakistan in the second quarter of this financial year ending December 31 has to be very poor. But the situation is saved for Pakistan by the fall in imports in the five-month period to the extent of 10.2 per cent primarily because of the fall in world oil prices and the commodity rates.
Along with that Karachi as the principal industrial city of Pakistan is facing severe reverses as also send has a whole. There was a negative industrial growth of 5.66 per cent in Sindh in 1999-2000. In 2000-2001 industrial growth in Sindh was only 2.64 per cent and only 0.8 per cent in the first quarter of this financial year against 3.9 per cent for the whole country.
Textile production in Pakistan as a whole went up in the first quarter by only 2.22 per cent against 5.07 per cent in the same quarter last year, and food, beverage and tobacco increased in the same quarter by 5.45 per cent against 15 per cent in the same quarter last year. The output of petroleum products increased in the first quarter by 30,46 per cent compared to 20.70 per cent in the same quarter the year before, while the output of metal industries registered a negative growth of 3.18 per cent in the first quarter of this year against 19.38 per cent in the same quarter last year. And there has been a distinct increase in the output of electronics in the first quarter along with a 19 per cent rise in production of automobiles in the same quarter because of the liberal availability of bank finance and leasing funds. Engineering items output had a negative output of 13.99 per cent in the first quarter against a growth of 13.46 per cent in the same quarter last year.
When the figures for the second quarter of this financial year ending December 31 becomes available the performance can be even more demoralising.
The sugar industry is plagued by too many problems. On one side is the high price of sugar cane and on the other side the heavy taxes on the industry and heavy bank charges. Sugar cane growers have been demanding prices as high as Rs 65 for 40 kg. So sugar production which normally starts in October has been delayed in many of the mills as late as the middle of November. Only six mills out of 37 in the Punjab have started production even then, while the performance in Sindh with its 21 units was far better. But some of the growers in Sindh have come up with a demand for Rs 65. Otherwise they prefer to feed the cattle with the sugar cane, they maintain. However the government has set up a sugar advisory board to addresses the problems of the industry.
Many of the problems of the industry spring from the fact that while Pakistan is the fourth largest sugarcane growing country in respect of area under cultivation it links the 15th in terms of yield and 11th in terms of sucrose recovery. And the industry has double the capacity which the country needs, and its sugar is too expensive for export without hefty subsidise more so if the sugar cane prices are toe be very high.
The cement industry is another sick industry, while some new units like Lucky Cement, and Bestway Cement are doing well. The cement sector recorded a loss of Rs 1.75 billion in 2000-01 against a profit of Rs 160 million the year before because of the very high prices of furnace oil and higher cost of power. The salvation is to come through the use of coal as a matter of official policy. How soon the process will be completed remains to be seen.
Now following the visit of President Pervez Musharraf to China, Chinese investors are to be given a special industrial zone where they would allowed 100 per cent investment in the units. Previously the government had made such offers to the Japan investors but they did not pick that up. The same offer was made to the South Korean investors, but without positive results. But the Chinese response is likely to be far different and far more positive. And that is to be welcomed.
The urgent need of the times is large scale investment. But foreign investment would follow domestic investment. But domestic investment is too slow in coming and now they are now puzzled by the prospects of an India-Pakistan war and are uncertain about the outcome of the electoral process to be underway in Pakistan this year before October.
Mr Yusuf Shirazi, with his large investment in the automobile, motorcycle and finance sectors says Pakistanis economy has no salvation save through heavily investment. He wants the economic policy to be tailored to step up investment instead of merely following the dictates of the IMF and The World Bank. He also wants the scraping of the policy for closing the valuable vendor industries following the demand of the IMF and World Bank.
Pakistan has touch choices to make instead of doing more of what it has been doing. And it has to draft a policy that goes all out to help the genuine investors instead of punishing them too severely for their small defaults or marginal misadventures.
BABU KHAN OUTPUT: EBR FILE NAME: PROB-27 120 CM