The problem relates not only to Pakistan’s exports but also domestic trade as our products are facing the challenge of cheaper imports through massive smuggling. And that can increase further as more imports come in the name of the Afghan transit trade and eventually find their way into the Pakistani market.
Added to that is the reduction in the average import duty by five per cent to bring it down to 25 per cent from July 1, following a similar five per cent reduction made on July 1 last from the 35 per cent average duty prevailing until then.
If Pakistani industry can neither sell its products at home easily nor export them profitably, the crisis the industry faces is really serious, more so, if that is prolonged. Anyway that would not go away unless major structural changes are made and sustained imaginatively.
The issue is seen officially as one of tariff adjustments and the Tariff Commission is seized with the issue. But what kind of recommendations it will eventually come up with, and how will the government react to them and how does the Central Board of Revenue protects its fiscal territory in safeguarding its dwindling revenues, and what role the ubiquitous IMF plays in this sector remains to be seen.
Pakistani industry had a blanket protection of about 125 per cent import duty some ten years ago along with non-tariff barriers to prevent import of goods manufactured here. But now under pressure from the World Trade Organization and prior to that its predecessor the GATT, it has been stripped of much of the multi-layers of protection and has to do with an average tariff of only 25 per cent from July 1.
No wonder over 4,000 industrial units were declared sick three years ago and only a small number of those units have recovered and resumed normal production. And they include a large number of units in the public sector. In fact, they are the larger defaulters of banks per unit as they are far larger in size, like the Pakistan Steel which showed a loss of over Rs 10 billion on June 30 last.
The public sector units are a part of the large circular debt in this area. As the KESC, for example, does not pay Wapda for the power it gets, Wapda is not able to pay the PSO and the gas companies and the PSO can’t pay the refineries and oil exporters.
These sick units have made the banks, particularly the large public sector banks, sicker, and the total non-performing loans of all the banks as on December 31 was Rs 308 billion or 40 per cent of the overall bank advances, which is a staggering figure.
Disposing off these sick units too is a tough task as there are few takers willing to pay the right price. The Corporate and Industrial Re-structuring Corporation (CIRC) disposed off 36 units for Rs 6 billion in April last year, while 139 units with Rs 33 billion in outstanding debt were returned to financial institutions for further assistance under re-structured programmes. And not under the second phase 431 non-performing units with assets of Rs 56 billion are to be tackled for sale or further re-structured assistance as each case demands.
The reasons for the high cost of production, which afflict the industry, are many. To begin with, it is the high cost of power, request break-downs and unsteady supply make it worse. The industries can set up their own power units. That means larger capital and not everyone would be given far more funds by the banks.
The chairman of Wapda, General Zulfikar Ali Khan, says that power rate in Pakistan are the highest in the region. And yet Wapda and the KESC want far higher rates now.
Higher cost of agricultural inputs like sugar cane and cotton push up cost of production. Earlier cotton was selling at far lower prices than world prices and there was export duty on cotton too to keep domestic prices down. But now for some years Pakistani cotton prices are often higher than world prices, and when domestic prices go down the Trading Corporation of Pakistan is directed to buy cotton to raise the prices.
Far worse is the case in respect of sugar cane whose producers can become too arbitrary. So sugar cannot be exported without very heavy subsidy. And now the TCP is to be made to buy the 200,000 tonnes of surplus sugar with the mill-owners to help them with the new output.
Transportation costs are also heavy due to the devaluation of the rupee which makes car prices high. And not only large containers with export goods are stolen but also oil tankers with thousands of litres of oil. Insurance costs in the country are also rising.
While wages are low in Pakistan labour in terms of productivity is costly. There are too many holidays, and interruption of work due to strikes or hartals is frequent.
And taxation and the overall number of taxes are heavy. According to Sartaj Aziz, former finance minister, the total number of federal, provincial and local taxes were 101 until recently. While the number of provincial taxes has been reduced along with elimination of wealth tax at the centre, the local taxes have not come down except for octroi.
The Tea Association of Pakistan says that while the import duty on tea is 30 per cent, the total of taxes and duties its members have to pay is 67 per cent. So smuggling of tea flourishes of the association has urged reducing the import duty to 15 per cent to eliminate the menace of smuggling.
What all that means is the lot of trade and industry in the fiscal sector, including the bribes they have to pay to the employees of various agencies, is not as easy as the CBR makes out or as other officials assert.
In such an environment, the CBR is to follow up its 15 per cent General Sales Tax on medicines with similar GST levies on tractors, vegetable ghee and edible oil, some of the agricultural inputs of the industry and Information Technology components. Fertiliser, too, is to be brought under GST.
Can industry bear the burden of such levies all around and particularly the circular levies, like the impact of GST on tractors and urea on agricultural production? and the effect of higher agricultural prices on industry?
At a time when countries around the world are lightening the burden on industry, particularly those employing large number of workers, can we afford to increase the burden on industry particularly the circular burden?
In this age of globalization and the pressure from the WTO to reduce non-tariff barriers and lower tariff rates, industry in Pakistan needs a new approach. In is easy for Dr Ataur Rahman, Minister for Science and Technology, to say that soon the IT industry would be larger than textile industry in Pakistan. Does that mean the textile industry would shrink so much that the IT industry would seem far larger?
In a country marked for its increasing crimes and acts of terrorism and rising unemployment suicides, providing employment and better wages should receive top most priority. That means industry in Pakistan needs a new look, a real critical analysis, and new remedies for age old problems and solutions for the new problems which are arising.
We just cannot afford to go on hoping that the problems would eventually find their own solutions or the situation would get brighter by itself. If the salvation of our economy lies in larger exports, we have to be far more sensitive to what is happening in the world and the new challenges coming up, and trim our sails accordingly. There is no place for complacency or a lackadaisical approach to the existing problems or more to come soon.