Interview with Mr Abdur Rauf – CEO, Shahzad Apparels Pvt Limited
PAGE had an exclusive conversation with Mr Abdur Rauf regarding ‘impact of the rupees depreciation on exports, remittances, investment and cost of doing business in Pakistan’. The excerpts of the conversation are as follows:
Any depreciation in rupee would not yield the desired impact on the declining exports and massive trade balance. Devaluation of currency can only help one time for the non-realization of export proceeds or consignments in pipeline, otherwise, foreign buyers demand for discount due to devalue of Pakistani currency. Depreciation of rupee would ultimately increase the cost of imported raw materials used in manufacturing of exportable goods as export goods have approximately 70 percent impact of imported raw materials such as dyes & chemicals etc.
If we calculate the impact of 5 percent rupee depreciation value on the imported raw material prices will go up by approximately 70 percent due to rupee-dollar parity, the difference shall come 3.5 percent out of which the buyers will take away the advantage of 2.5 percent and exporter will further bear 1 percent loss from his own pocket. Rupee depreciation will also bring an upshot in inflation and the workers will demand salary enhancement making the exporter more unviable as he is already giving high salaries, utilities charges and higher manufacturing cost as compared to the regional countries.
Pakistan’s trade deficit is increasing badly, where it needs to take immediate measure to increase exports by providing a level playing field and conducive environment to the burdened exporters. The country faced $24.27 billion trade deficit, as its imports reached $39 billion in July-February 2017-18 against its exports of $14.85 billion. If government wants to arrest the trade deficit, it should reduce the cost of utilities; including electricity, gas and water which were higher in Pakistan as compared to neighboring countries in the competition. Rates of labor, raw material, transportation cost and other expenses were already higher in Pakistan.
Over the last few decades, remittances became an important and alternative source of financial development for most of the developing countries. The remittances inflows to countries observed a significant growth in the recent few years. According to World Bank statistics, the remittances received by developing countries in 2013 were about $404 billion while expected figures to be received in 2014 and 2016 are $436 billion and $516 billion respectively. The global remittances of high income countries were $542 billion in 2013 and are estimated to be $581 billion in 2014 and are expected to reach a figure of $681 billion in 2016. These were the figures of remittances that were transferred through registered channels worldwide.
The increasing tendency of remittances inflows has led the researchers to know whether remittances inflow leads to enhance the economic growth of the receiving country. The empirical literature shows that remittances inflows tend to have both positive and negative effects on the economic health of an economy. The positive effect, according to most researchers, is due to the fact that the inflow received has been used for the purpose of investment. This positive favorable effect of remittances on economic growth has been concluded by various studies. The negative effect has been reported also. They argued that working abroad and sending money tends to reduce the worker participation in development of the country and may adversely affect the economic growth of that economy.
Pakistan has also has been accounted for one of the largest remittances recipient countries. The Word Bank statistics showed that Pakistan received 19.3 billion dollar inflows of remittances and Pakistan ranks fifth in the world that received the most remittance every year. India is the largest remittance receiving country at an estimated $72 billion, followed by China ($64 billion) the Philippines ($30 billion) and Mexico (26 billion). The sudden increase in inflows is due to the fact that overseas migration has been increased.
According to the bureau of emigration and overseas employment of Pakistan; 7.6 million Pakistani live abroad with the vast majority, nearly 4 million, residing in the Middle East. The second largest community, at around 1.5 million, live in the United Kingdom. According to the UN Department of Economic and Social Affairs, Pakistan has the 6th largest diaspora in the world. In 2017, overseas Pakistanis sent remittance amounting to Rs2137 billion (US$20 billion) according to the data released by the State Bank of Pakistan. The increasing trend in overseas migrations is due to poor economic conditions, unemployment and low individuals.
Remittances also play an important role in economic growth, because after foreign direct investment, remittances are considered another important alternative source of financing that may accelerate the economic growth of an economy.
Pakistan is a country of 200 million populations with an economy as 24th largest economies in the world in terms of Purchasing Power Parity (PPP) and 42nd in terms of nominal gross domestic product. The economy has faced several ups and downs since its birth. Certain factors have been the substantial reasons for the fluctuation of its economy. To have a smooth and improving economy, the country must have terrorism free environment, stable political regime, fruitful economic policies and innovative decisions to make it more progressive. Being a developing country, Pakistan has suffered a lot in many aspects. Terrorism is one of the core reasons that creates havoc and chaos in economic growth. Since 2008, Pakistan has been a severe victim of economic terrorism. Economic terrorism refers to those activities that are particularly led by the group of people to destabilize the economic efficiency and make it dysfunctional.
In context of Pakistan, which is enriched with the natural beauty and is the major source of attraction for tourists, was deteriorated when the terrorists attacked the beautiful terrain of Swat valley (which is used to be called as Switzerland of Pakistan) and several other wretch activities took place after. The repercussions of this act directly affected the country’s economy and there was an economic turmoil in the country.
Since tourism was one of the major factor in economy. GDP that should be increasing with the passage of time, decreased by 0.4 percent because of this economic shocks. In 2008, the GDP of Pakistan was 170.1 billion US dollars while in 2009 it was 168.2 billion US dollars. This terror of economic terrorism left a huge loss of employment of people that were particularly associated with the tourism sector there.
Government has to bear a budget deficit because of this chaos. A large number of IDP’s were brought under government camps. Their food, shelter and basic necessities were provided by government at its own cost. The security cost, the cost of procured land and many other governmental actions taken place for the safety of affected people, which ultimately became the core reason for the downfall of economic activities. Another reason for the dynamics in Pakistan’s economy is political instability. A country is said to have stable political regime if the political party rules for almost 28 years.
Pakistan is a country which has been ruled by both military and civilian governments. If any party comes to power, it sets the economic policies of its own interest and when these policies are about to implement, another political party takes over and changes the policies from top to bottom, despite gaining the applauding output. Pakistan is among those countries whose political instability has badly affected the economic growth. Karachi is the main economic hub of Pakistan and Pakistan produces almost 70 percent revenue from there. Almost all investors had shifted their investment from Karachi because of the political instability.
A retrospective view on Pakistan’s economy reveals that since the birth of country, Pakistan has failed to establish the stable democratic government. It has always been a victim of feudal politics with worst economic policies. These factors have always repudiated the country to have a stable political regime.
In current scenario, there is a huge difference between today’s economy and the economy that was under the era of economic terrorism (almost 300 million US dollars, gross domestic product today). That is because of the several measures undertaken for the eradication of terrorism.
Four years ago, according to the Numbeo International Crime Index, Karachi was said to be the 6th most dangerous city in the world, but today it stands 50th and still falling. Likewise, to have a stable politics, one must choose their vote for the deserving person rather than based on some ethnicity and sectarianism.
China-Pakistan Economic Corridor (CPEC), which is said to be the game changer has also some prolific impacts on Pakistan’s economy, because many foreign countries officials are regularly visiting Pakistan and investments are made enormously. A report prepared by PricewaterhouseCoopers (PwC), a multinational professional network headquartered in London said that Pakistan’s economy will flourish and could become the 16th largest by 2050 based on its Gross Domestic Product (GDP) and Purchasing Power Parity (PPP) and it is expected that the economy will boost up to manifolds. Pakistan’s geo-economic options in the difficult situation that confronts following the easing of sanctions, which added acute balance of payments pressures to its existing ailments of near-stagnant exports, a lower growth trend than in preceding decades, an unattractive climate for foreign investment, and weak social indicators.
The first question explored is whether Pakistan has any opportunity of participating in a regional trade grouping. It is argued that the only conceivable way of achieving this would involve the development of SAARC, which would demand a profound transformation of Indo-Pakistani relations (though one no more profound than that realized in Franco-German relations since the founding of what is now known as the European Union). One benefit of achieving deep integration through SAARC is that this would create the possibility of Pakistan developing a serious engineering industry far more rapidly than will otherwise happen. In the absence of deep integration in SAARC, it is argued that Pakistan’s best option would be a policy close to unilateral free trade, so as to place it in a position to take advantage of whatever the next generation of labor-intensive activities demanded by the world economy proves to be.
Under either of those scenarios, the reestablishment of a dynamic industrial sector will require the maintenance of a competitive exchange rate, something that, it is argued, is not necessarily guaranteed by floating. The paper also discusses the role of inward direct investment in contributing to the export success of East Asia, and considers whether the expatriate Pakistani community might be capable of playing a role comparable to that played by the overseas Chinese in nurturing the Chinese export expansion of the last two decades. It is suggested that such a hope was set back by the extra-legal attempt to renegotiate power tariffs with the independent power producers in the course of 1998, and that Pakistan needs to become a country of laws rather than discretion if foreign investors, including expatriate Pakistanis, are ever to find the country an attractive export platform. While more inward direct investment would almost certainly be beneficial, the same is not true for inward financial investment, where too large an inflow can easily expose a country to very significant risks, as the East Asian crisis showed.
In the long run, Pakistan needs to be prepared to repel excessive capital inflows if they materialize; but its immediate problem is still balance of payments pressure, and this seems to demand targeting a major and sustained improvement in the current account over the next several years. The cost of doing business in Pakistan is prohibitive. Latest figures for the cost of doing business in different countries of the world rank Pakistan at a dismal 138th position, according to the World Bank. When benchmarked to global criteria doing business means ease and cost of doing business in a country. In the last decade there is reported to have been a constant decline in the ease of doing business in Pakistan’s as well as the cost. Pakistan’s ranking on both counts, in comparison to South-East Asia countries, has significantly slid down in 2017 ranking.
However, the fact remains that the ease and cost of doing business in Pakistan is sliding down and not improving. This is evident from declining exports, stagnant foreign direct investments and sluggish industrial growth. The main deterrent in Ease to do Business is a declining level of governance and incompetence, although the government has introduced many reforms and electronic management in a number of cases. But all of this good is being defeated by poor governance and the government needs to address this widespread issue for the stakeholders to draw real benefits from the government’s positive performances.
The major inputs for ‘Cost of doing Business’ is the energy cost, the human resource cost, the raw material cost, the financial costs and similar other expenses. While the other inputs are market driven — the issue is the availability and affordability of energy. The electricity cost in Pakistan is reported to be one of the highest in the region. With the energy mix planned, for the new power plants under construction largely based on coal and LNG, and the tariffs agreed with the independent power producers, the affordability of electricity is not expected to get better and may escalate. On top of this, the mounting circular debt may challenge the availability of power to consumers, even though the installed capacity is significantly enhanced.
Under the China Pakistan Economic Corridor (CPEC) 30 new special economic zones are planned to be established all over the country to spur industrial and commercial activities. Considering that the existing special economic zones remains largely un-populated, it is a real challenge for the government to address the two subjects seriously: The Ease and Cost of Doing Business in Pakistan.