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Short and long term threats to the economy and finding their solutions

Pakistan is facing multiple problems on economic front. Despite tall claims of the present government about putting the economy on growth track, it is undeniable fact that, poverty level would increase in the coming days as dependence on foreign loans would hurt economy, ultimately pushing more and more people below the poverty line. The country’s ballooning external debt and liabilities continue to further burden the economy. The ruling elite are not ready to give up their luxuries and VIP status in a country where up to 40% of its 170 million population live below poverty line- on less than $1 a day or less.

Pakistan’s economy currently suffers from at least three problems of chronic nature, which are:-

DEBT PROBLEM

The country has virtually come in a debt trap, which is bad omen for the economy. The country witnessed a significant increase in its overall debt in the past three years. The overall debt, estimated at 9.5 trillion rupees in 2013 rose to 12.7 trillion rupees in 2016.

Similarly, the external debt at 73 billion dollars in 2016 increased substantially from 61 billion dollars in 2013.

There is nothing wrong with debt in itself. Private businesses borrow happily, as long as the rate of return on the debt-financed investment is higher than the cost of borrowing. The surging debt is a burden for Pakistan because its Gross Domestic Product (GDP) growth is not faster than the rate at which debt is serviced. The cost of external debt is incurred in foreign currency, hence a surge in the debt burden depletes foreign reserves, triggers devaluation and increases the cost of debt. The external debt service-to-exports ratio at 20 per cent for 2016 was better than the 22.5 per cent in 2015, according to State Bank of Pakistan. The country’s exports are stagnant depicting a decline. The exports were estimated at 27.4 billion dollars in 2016, compared to 31.5 billion dollars in 2013. These estimates show the country’s weakness to service future external debt liabilities.

What is the long-term solution to the country’s debt problem is to bring improvement in the export performance. In short term, the government avoid to borrow from the international lenders and take impressive measures to reduce the ever widening fiscal deficit.

STAGNANT EXPORTS

Pakistan’s textile industry, which accounts for two-thirds of the country’s exports, is currently struggling to revive growth. With high cost of doing business, the country’s overseas sales of textiles are threatened by power outages and law and order situation.

Present government needs to formulate a comprehensive policy to salvage the textile industry. The exporters and manufacturers are really disappointed with the way the government has handled the industry. Despite the country’s textile industry has a potential to double its export from $13 billion to $ 26 billion, yet it is unable to do so due to the higher cost of doing business. The energy tariff in Pakistan is 14 cent as compared to 7.3 percent in Bangladesh, 8.5 cent in China and 9 cent in India. Reduction in cost of doing business can further provide 3.5 million additional employment opportunities in the country.

The country’s share in global textile trade dropped from 2.2 percent to 1.8 percent during last five years. A comparison of Pakistan with other states in the region does not forecast a satisfactory future outlook of the country’s textile industry. The annual textile export growth in Bangladesh is 20 percent, India 12 percent and China 12 percent whereas in Pakistan is 3 percent. In view the growing size of the sector, the textile industry has remained the core source of foreign exchange earnings for the country. The industry, which has a potential to invest $1 billion per annum, demands a congenial environment. Increase in exports is imperative for sustainability of external sector. In this regard, much-needed boost to Pakistani exports may come through US economic recovery and through further gains in EU’s GSP-Plus scheme. The country mainly exports textiles and clothing products to the EU, accounting for over 60% of the total Pakistani exports to the EU, followed by leather products, which account for 13% of the total Pakistani exports. However, structural bottlenecks in the textile sector remains a major risk to exports outlook.

The government must announce a comprehensive and growth-oriented package to help resurrect declining textile exports. It should give priority to the industry in supplies of energy and power and ensure sustainable supplies. It must announce a relief package for the farmers, which have to provide a supportive cotton crop for the industry. The government must immediately lift ban on the new gas and electricity connections for the textile industry besides provision of uninterrupted supply of gas and electricity. It must remove duties and Man Made Fiber (MMF) imports and introduce investment support schemes to the textile sector. It should operationalize the closed capacity by providing uninterrupted energy supply to the export oriented Textile Industry at competitive rates.

The government must announce some immediate incentives including zero rating tax holiday, interest support for new investments in all textile sector should be ensured without excluding the spinning sector, which has lagged behind competitors due to the present inefficient technology.

The government should focus on enhancing the country’s competitiveness and take steps to make this sector competitive in the global market.

Local textile manufacturers have demanded that the government should provide globally competitive interest rate on short and long term loans to the textile value chain to avoid Non Performing Loans in a situation when cotton prices are under pressure world-wide.

ENERGY CRISIS

Energy shortage has adversely affected the industrial output and economic growth of the country. The energy statistics of Pakistan shows that around 50 percent of the need is met by the indigenous gas production and 29 percent by domestic and imported oil and 11 percent by hydro-electricity.

The country’s annual energy requirements are expected to more than double to 177 million tons of oil equivalent by the year 2020. The country’s indigenous energy resources are still untapped and not helping the country to meet its pressing energy needs.

Due to power shortages, industries are unable to operate full-time to increase production and earn maximum profit. Alternate power arrangements increased the expenses of the units forcing them to downsizing to meet their expenditures. The acute energy crisis has virtually suffocated the industry, causing widespread discontentment in the business circles. This could result in closure of more industrial units and increase in the unemployment rate in the war-torn country. The country is losing at least 2% of the GDP growth annually due to the power shortages.

The energy crisis has caused great concern in the textile value chain.

Repeated breakdowns in uninterrupted supply of electricity and gas to the textile value chain units continue to incur production loss.

Chronic energy crisis has forced many textile manufacturers in Faisalabad – the country’s textile hub – to move their manufacturing units to Bangladesh. In view of the comparatively 35% cheaper electricity and 30% higher profit margins in Bangladesh, many industrialists have already moved their factories to Bangladesh and many have opened up additional manufacturing units there. It is feared that a mass exodus of the country’s textile manufacturing base is likely to render the millions of people currently employed by the sector jobless. Uninterrupted power supply, cheaper labor costs, tax-free status for the first ten years and tariff-free access to markets in the European Union and other incentives being offered by Bengali authorities have convinced many Pakistani businessmen to invest heavily in Bangladesh.

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