KARACHI: THE International Monetary Fund (IMF) assistance is primarily to improve balance of payments position. However, the Fund has laid down some conditions which include improvement in revenue capacity to ensure discharge of internal and external debts. There is also a demand to curtail double digit inflation by increasing discount rates.
Though all this may appear simple, a deeper look reveals that trade and industry will take a direct brunt at a time when it is already confronted with internal and external economic pressures.
The most damaging impact of the IMF prescription is to remove all sorts of exemptions and subsidies which according to the Fund are distorting the market. It has also laid down condition of increasing tax rates where necessary and if required impose additional taxes in the form of excise duty to narrow down budget deficit.
It will prove painful for trade and industry because they will have to pay more taxes at higher rates and even extra taxes in the form of excise duty to enhance revenue collecting capacity of the government.
The other adverse impact the trade and industry had been suffering from is high discount rate which resulted in double digit mark-up rate of banks ranging from 18 to 20 per cent. Apparently all these measures are meant to curtail inflation, currently at 23 per cent (official figure).
The strategy to curb inflation by increasing discount and mark-up rates may be workable under normal economic conditions but when the world is fast heading towards deeper recession and witnessing large-scale closures and layoffs in the western economies, it may backfire.
While analysing the implications of IMF’s support to meet the balance of trade deficit, the business and industry leaders were extremely perturbed over the unfolding developments on the economic front.
Chairman SITE Association of Trade and Industry M A Jabbar said that even if the high mark-up rates were theoretically correct and justifiable, the policymakers should understand that trade and industry had to foot all the inefficiencies and corruption committed on part of the government departments including utility companies providing power, gas, water etc.
When there is prolonged power outages and low gas pressure it aggravates problems for trade and industry struggling to stay viable and efficient. The industry has to generate its own costly power and arrange water which is again has to be treated before allowed to run into the system of plant and machinery.
Mr Jabbar says all this adds to the cost and according to some estimates these hidden costs mean extra burden on trade and industry of around 10 per cent of their total cost of production.
Add to this bank mark-up rates, the total front load on industry comes to 28 to 30 per cent, he said. No where in the world, he added, industry with initial cost of up to 30 per cent could survive or remain viable and competitive.
He feels that high mark-up rates are eroding industry’s capacity to pay back or service financial cost and soon policymakers will witness increasing number of non-performing loans (NPLs). As a result of this a snowball affect will start wherein banking sector, which is already confronted with liquidity crunch, will face yet another adverse impact on not getting their loans back from trade and industry, he warns.
Korangi Association of Trade and Industry (KATI) chairman Mian Zahid Hussain said that with high power and gas tariffs and a mark-up of 20 per cent industry could not survive.
He said 150 spinning and 10,000 weaving units had already closed down across the country. The KATI chief disclosed that in the last three months over 300,000 industrial workers had lost their job in Faisalabad alone.
If no corrective measures are taken to ensure industry’s viability and competitiveness he apprehended that there would be more shutdowns and closures.
When power utility companies shift their line losses and thefts of up to 40 per cent of their generation capacity on industry there is no way it could be absorbed. Furthermore, when industry faces prolonged load-shedding it has to go for self-generation which is even costlier.
Leaders of small and medium enterprises were also highly critical of the IMF support fund which has many strings and conditions that are detrimental to their interest.
Union of Small and Medium Enterprises (Unisame) president Zulfikar Thaver says the SMEs would be total wiped out by extra burden at this juncture when all is not good in global markets.
He said that the IMF is insisting on increasing rate of interest, taxing agriculture sector, ending all subsidies, increasing tax, electricity and other utilities rates are such steps which will prove the last straw that breaks the camel’s back.
He said the SMEs had been seeking bank loans at affordable rates but today the rate had ran into double digits which was out of the reach of such enterprises who survive on meagre means.
If agriculture sector is put under tax net, he said, it will have negative impact on agro-based industries as well as because it will increase input cost and small and medium-sized farmers will not survive.
President Small and Medium Enterprises Alliance (Smea) Zafar Iqbal thinks instead of asking the government to refrain from unproductive expenditures SMEs are being penalised by increasing mark-up and tax rates.
Without exercising austerity at government level, he said things could not improve because there was a limit of putting burden on trade and industry. In the US there are 52 states which are run by not more than 18 ministers at central level. At state level there are no cabinets but only governors run the state, but in our country, the Smea chief said the federal cabinet size is over 70 ministers, state ministers and advisors, besides, there are provincial cabinets.
But it seems that the government instead practicing austerity at its level preferred to shift the burden of the IMF’s conditions on trade and industry little knowing that it will have direct implications on job situation, he observed.
He added that the burden of thefts and line losses of utility companies should be looked into by improving their working and making them efficient and accountable to masses rather than shifting the burden on trade and industry and also make them unviable.