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Conditions for large scale industries getting from bad to worse

The manufacturing sector in Pakistan suffers from some contentious issues. It was expected that the incumbent government would be able to address some of the contentious issue. However, many of the U-turns have added to the concerns rather than providing sustainable solutions. PTI government received the embrace for bringing the change for the good, but ground realities show the contrary.

Let the story begin with approaching International Monetary Fund (IMF). Even while the election campaign was at its peak and political parties were making all sorts of absurd promises, PTI also failed in having a complete comprehension of the ground realities. It also made promises which now appear unachievable. In fact Prime Minister Imran Khan and Finance Minister Asad Umar should have completed their homework. They not only took too long but remained under the false hope that some saviors will come and shower the foreign exchange. They also believed that the world was full of friends of Pakistan but soon this dawned that the saviors were ready to give money only if Pakistan agrees to follow their agenda. They will still face a hostile IMF Board, dominated by the United States, but get the money that could save Pakistan from committing a default. However, after another five years the new government would have to borrow even bigger amount under more stringent conditions.

IMF follows a copy book solution which includes: 1) hike in interest rate, 2) increase in electricity and gas tariff and 3) withdrawal of subsidies. Pakistan is not new for IMF because the country has signed 18 such agreements in the Pakistan. The IMF recipe has not allowed the country to live without the crutches of international donors, including IMF. The next agreement will be the third since 2008. Even a novice is aware that Pakistan suffers from cost pushed inflation. Hike in interest rate, electricity and gas tariffs and withdrawal of subsidy add to the cost of production. As a result agricultural produce, manufactured items become uncompetitive in the global markets. Many of the industrial units shut down and hundreds and thousands of people face rendered jobless. A closer look shows that the percentage of people living below the poverty line is on the rise.

Two of Pakistan’s large scale industries, textiles and cement are highly leveraged industries. The European granted Pakistan GSP Plus status, despite most vocal opposition by India. However, the local industries failed in taking any advantage from this favor because of high production cost. Even the PTI government has agreed to supply gas to textile units on subsidized rate, but experts say it categorically, “Barging about a dozen units, Pakistani textile units use obsolete machinery, continue to produce coarse counts of yarn and low quality fabric, which is exported in ‘unfinished’ state. This on one hand renders Pakistani manufacturers uncompetitive in the global markets, but the ultimate beneficiary of incentives/subsidy are foreign buyers. Over the last quarter of a century, Pakistan’s share in the global textile trade has remained below 3 percent. May be the time has come to scrap about 50 obsolete and inefficient spinning plants and pass on the subsidy to made up manufacturers.”

 

Sugar industry was very efficient till it was run by entrepreneurs/businessmen. During the regime of President Ziaul Haq, permissions for setting up sugar mills were given to politicians as ‘bribe’ and funding was also provided on concessional interest rate. If anyone has the slightest doubt must find out the names of real owners, those running these units are just the ‘front men’. Sugarcane growers are living under constant miseries because they do not receive money for months. According to some farmers they have not received full payment for years, because part payments were made only. The affectees demand that the Chief Justice should also look into the number of cases filed against the mills for not making timely payment.

It is often said that investors suffer from herd mentality that is the reason after a few years one or more than one industry suffers from supply glut. The industries notorious for suffering from supply glut are textile spinning, sugar, cement and automobile assemblers. Spinners are often considered the real textile industry, which is completely false notion; they are just the producers of raw material. They have remained the darling of Ziaul Haq and Nawaz Sharif because they are considered the largest earner of foreign exchange.

The owners of textile units, initially bought state owned cement units, acquired huge loans in the name of balance and modernization. It was true that they initially saved the country from import of cement and also succeeded in exporting clinker/cement to Afghanistan and India. However, they have remained uncompetitive in the global markets. They succeeded in exporting cement only after the government paid them subsidy.

At present and in the days to come growers of wheat, rice, sugarcane and cotton are likely to face worst time due to the shortage of water. Growers face double edged sword, on one hand prices of commodities are on the decline due to fears of trade war between United States and China and on the other hand input cost are on the rise to geopolitical turmoil.

In a bid to save Sui Twins and under the instructions of IMF, the Government of Pakistan has increased gas price for fertilizer manufacturers. One completely fails to understand hike in the prices of energy products. Circular debt of power sector is the outcome of blatant theft of electricity and gas. By increasing the tariff the government is patronizing the ‘thieves’ and penalizing those who make timely and full payment of electricity and gas bills. If the adverse policies continue Pakistan would become a net importer as most of the industries would go bankrupt.

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